Aided by a strong week for the market following the Federal Reserve interest rate cut, our three September covered calls (SFM, CPNG, SG) expired for profits ranging from 4.62% - 6.25%.
This week we turn our attention to the October expiration cycle via a covered call sale in a grocery delivery play that is breaking out to new highs.
The Stock – Maplebear (CART)
Online grocery shopping is a convenience-driven business, something that Instacart, Maplebear’s sole business, caters to extremely well. More than 70% of groceries ordered online are through Instacart—Amazon and Walmart are two of the larger competitors in that 30% slice—and the online grocery sector as a whole is growing. The percentage of grocery stores in North America with some sort of available online ordering component is now 87%, up from 85% to start the year, though online ordering by customers makes up something like 4% of the $1.5 trillion Americans spend on groceries annually, suggesting there is plenty of room for growth.
Importantly, it’s not as simple as setting up a website: A single grocery store has thousands of items, making finding and buying in-stock items online a big fulfillment challenge, but one Instacart does well. It integrates with grocery systems to not only reliably tell a shopper what is available but to also allow them to build a single order from multiple stores. In many cases the app can tell them where a product is physically located in a store, too, in a nod to those who want to put it in their physical shopping cart.
Online grocery sales overall are seen growing 13% annually, slowly gaining share and reaching about $77 billion by decade’s end. Instacart makes money by taking a 5% to 6% cut of total sales, plus fees for speedy deliveries, as well as selling advertising on its app and using big data capabilities to help marketers track and reach customers on other platforms, like streaming TV.
Maplebear senses opportunities to expand the Instacart business beyond groceries, recently adding Uber Eats into its ecosystem in response to its customers wanting ways to get prepared dinner on the table, too. Though there were fears business would slow as the pandemic further recedes into memory, Instacart’s growth has been accelerating: Maplebear has reported two straight quarters of double-digit merchandise volume growth and is projecting a third for the current Q3. While earnings are erratic, EBITDA is the better profit metric here, and it (up 89% in Q2, estimated up 29% in Q3) and cash flow are solidly positive and growing nicely. It’s a good story.
Technical Analysis
CART was wild after its IPO a year ago, with a huge initial spike, followed by a dip and months of bottom-building before a rally back to its post-IPO highs in March. After that, the stock constructed a reasonable launching pad, with a 25% maximum correction and five months of back-and-forth action. But shares found support during the market’s August dip near its 40-week line, and after one more (relatively modest) dip after Labor Day, has now come alive, with CART mushrooming to new highs on increasing volume. Stop – 35
The Covered Call Trade
Buy Maplebear (CART) Stock at 40, Sell to Open October 40 Strike Calls (exp. 10/18) for $1.20, or a Net Price of 38.8 or less
Static Return: $120 per covered call (3.09%)
Breakeven: 38.8
Covered Call Return (if assigned): $120 per covered call (3.09%)
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 38.8 or less. (In this case 40 minus 1.20 = 38.8. Or another example is you could pay 39.5 for the stock and sell the call for 0.70, which also equals 38.8)
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 |
| Rocket (RKT) | 20.55 | 19.15 | 16.4 | October 20 -- $1.80 | $0.65 |
| Samsara (IOT) | 46.9 | 49 | 38 | October 45 -- $3.70 | $5.00 |
| Doximity (DOCS) | 40.4 | 41.65 | 32.5 | October 40 -- $1.80 | $2.30 |
The next Cabot Profit Booster issue will be published on October 1, 2024.
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