It has been a volatile few weeks for the market, with the Nasdaq under consistent selling pressure and more than 7% off its February high, while the S&P 500 hit new all-time highs last week.
Cabot Profit Booster 168
It has been a volatile few weeks for the market, with the Nasdaq under consistent selling pressure and more than 7% off its February high, while the S&P 500 hit new all-time highs last week.
The Cabot Profit Booster portfolio has had some ups and downs as well, as weakness in growth stock Dynatrace (DT) has been offset by strength in our cyclical, “reopening” stocks, including Abercrombie & Fitch (ANF), Summit Materials (SUM) and TripAdvisor (TRIP).
Speaking of DT, the stock broke my mental stop yesterday on the close as traders continued to sell growth stocks into quarter’s end on Wednesday. Because of that, today we are going to exit our DT position. To do this you need to:
Sell DT Stock
Buy to Close the April 55 Call
This will leave us without a DT stock or option position.
Moving on to fresher ideas, this week’s stock has held up spectacularly amidst the recent Nasdaq sell-off. Here is the stock, and our covered call trade:
The Stock – ZoomInfo (ZI)
Why the Strength
Technology stocks are clearly not where it’s at in this market environment, but ZoomInfo has the story, numbers and (with a little more work) chart to be a leader once the sector (and growth stocks as a whole) kick into gear.
In a nutshell, the company looks like a follow-on opportunity in what’s become a massive customer relationship management (CRM) sector—while CRM (usually cloud-based) software has become more common, the usefulness of it depends on the data imbedded in it. That’s where ZoomInfo comes into play: The firm has a best-in-class “intelligence platform” that uses AI and machine learning of publicly available data (plus information sharing among clients) to dynamically update its contact data.
In practice, that means the firm can do a lot of the initial screening and legwork, allowing salespeople more time to sell and develop leads. ZoomInfo is the clear leader in the field, monitoring millions of websites and potential sales targets (something like 100 million businesses!), while being integrated into many top CRM platforms already. And it’s also broadening its reach, including a recent solution (dubbed Targeted Audiences) that businesses can use to shape their digital campaigns to other firms.
Growth has been both rapid and reliable, and earnings are already ramping in a big way, with Wall Street seeing 40% and 31% earnings gains this year and next, respectively. (Indeed, Goldman upgraded the stock last week, seeing a long runway of growth ahead.) We like the story, as do big investors—240 mutual funds already own shares, up from 185 at the end of September.
Technical Analysis
ZI came public last June, rounded out a big post-IPO base and looked like it was ready to get going in February, but the market had other ideas—the growth stock meltdown saw the stock rejected at resistance near 60, with the sellers keeping at it until shares dipped into the low 40s. However, the stock steadied itself from there and actually got back into the high 50s late last week before backing off. ZI still has some work to do (some quiet trading would be nice) and remains very choppy, but you can either nibble here or just keep an eye on whether it can tighten up. Stop — 44
The Covered Call Trade
Buy ZoomInfo (ZI) Stock at 49.50, Sell to Open April 50 Strike Calls (exp. 4/16) for $1.80, or a Net Price of 47.70 or less
Static Return: $180 per covered call (3.77%)
Breakeven: 47.70
Covered Call Return (if assigned): $230 per covered call (4.82%)
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 47.70 or less. (In this case 49.50 minus 1.80 = 47.70. Or another example is you could pay 49.25 for the stock and sell the call for 1.55, which also equals 47.70)
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 …
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on April 6, 2021.