Please note, next week is one of our two scheduled weeks off for the year. Have a great Thanksgiving!
Moving on …
Despite some early-morning sell-offs nearly every day last week, the bulls stepped up each time and by week’s end the S&P 500 had gained 1.6%, the Dow had rallied 2%, and the Nasdaq had added 1.55%.
The Stock – Kyndryl (KD)
As companies across multiple industries increasingly adopt generative artificial intelligence (GenAI), consultancy and IT infrastructure service providers are critical to the implementation and integration process. This is where Kyndryl (the result of a 2021 spinoff of IBM’s infrastructure services business) comes in, as the New York-based firm is the world’s largest IT infrastructure provider and fifth-largest IT consulting provider.
It designs, builds and manages mission-critical technology systems that the world depends on every day, with capabilities in artificial intelligence as well as data and analytics. (More than 60% of the world’s managed mainframes are run by Kyndryl, and it counts most Fortune 100 companies as customers, with a 95% client retention rate and most averaging a 10-year relationship with the firm.)
While the numbers are a bit funky given the spinoff, fiscal Q2 (ended September) saw Kyndryl’s revenue of $3.8 billion off 7% year-on-year while earnings of a penny beat estimates by four cents, but investors focused on the significant strength in the Consult segment. In recent years, Consult revenue (19% of annual sales) has been consistently growing by double digits on a yearly basis, and that segment delivered double-digit growth in Q2 (up 23%) and over the last 12 months, with Consult signings increasing 81% in the quarter. Total signings in Q2, in fact, were a record $5.6 billion, up 132% (and up 33% on a 12-month basis), which is a big sign of future growth. The sanguine results prompted the company to announce a $300 million stock buyback (4% of shares outstanding and a reason for the stock’s strength).
Further out, Kyndryl guided for earnings of at least $1.2 billion for fiscal 2028, which would be up many-fold from current levels, and sees the company entering a “new era of profitable growth” driven by ongoing GenAI and cloud migration trends, technology skill shortages and cybersecurity risks as enterprises modernize hybrid estates. Wall Street sees the bottom line booming over the next several years.
Technical Analysis
KD was spun off in 2021 and, after going down the chute in the bear market, has been making its way back during the past couple of years, albeit with some long, deep-ish corrections along the way. The latest of those consolidations began in May and took 25% off the stock, but KD found repeated support near the 40-week line and now shares have changed character, first on earnings and then after the company’s long-term outlook was released last week. Stop – 27.5
The Covered Call Trade
Buy Kyndryl (KD) Stock at 34, Sell to Open December 34 Strike Calls (exp. 12/20) for $1, or a Net Price of 33 or less
Static Return: $100 per covered call (3.03%)
Breakeven: 33
Covered Call Return (if assigned): $100 per covered call (3.03%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 33 or less. (In this case 34 minus 1 = 33. Or another example is you could pay 34.15 for the stock and sell the call for 1.15, which also equals 33)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| Toast (TOST) | 38.7 | 43.5 | 30.5 | December 38 -- $2.45 | $5.50 |
| Norwegian Cruise Line (NCLH) | 25.8 | 27.25 | 22.5 | December 26 -- $1.25 | $2 |
The next Cabot Profit Booster issue will be published on December 10, 2024.
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