March 22, 2022

Today, I’m adding an American company that develops all-flash data storage hardware and software products, Pure Storage (PSTG).

Market Overview

Before I dive into this week’s idea, I wanted to update Corning (GLW). On Friday our March option expired worthless, leaving us simply with the stock position. Today, as the market is potentially strengthening again, I am going to Sell to Open the GLW April 39 Call (exp. 4/14) for approximately $0.55.

Please note, we are going to keep our stop in at 37 on this position, and should the stock break that level, we will exit GLW.

Moving on …

Despite the negative headlines, the bulls didn’t get the message as they pushed the market substantially higher last week. The Dow gained 5.5%, the S&P 500 surged 6.2% and the tech-heavy Nasdaq skyrocketed 8.2%. Year-to-date the Dow, S&P 500 and Nasdaq are still lower by 4.4%, 6.4% and 11.2%, respectively.

Indeed, it was an incredible rally, and the historical data shows that such a strong week is a VERY rare buy signal, and that the indexes are poised to trade even higher in the year to come. However …

Now the question is, did we just experience a textbook bear market rally, or was that in fact a launching pad for higher prices to come?

Today, I’m adding an American company that develops all-flash data storage hardware and software products, Pure Storage (PSTG).

New Recommendation

The Stock – Pure Storage (PSTG)
Why the Strength
Pure Storage has long been a leader in the storage industry, providing flash-based data storage hardware and software products for data centers, as well as offering storage-as-a-service solutions that combine on-premise data storage with public cloud services. But the company’s transition from a traditional hardware-based business to a subscription and services model is accelerating growth from recurring revenue and leading to higher margins as well.

Additionally, more than half the company’s revenue is now from enterprise clients, with its top 10 customers spending over $100 million annually. In its fiscal Q4 (ended January 31), Pure posted consensus-beating revenue of $709 million that was 41% higher from a year ago, while full-year revenue of $2.2 billion rose 29% and Q4 earnings per share of 36 cents beat by 10 cents in Q4.

The company more than doubled its cash flow from operations, to over $400 million, and ended the quarter with $1.4 billion in cash. Other metrics were equally impressive, with subscriptions and services revenue leaping 42% and remaining performance obligations (which includes committed and non-cancelable future revenue) rising 29%–with both showing accelerating growth from the prior quarter. Subscription annual recurring revenue (ARR) grew 31% to nearly $850 million, and Pure added 470 new customers, bringing the total to more than 10,000.

Management guided for fiscal Q1 revenue to be around $520 million and expects full-year revenue to increase 18%, and for the year, Wall Street sees the top line rising 20%. It’s not changing the world, but Pure Storage’s shift to a recurring, subscription-type model should pay dividends for a long time to come.

Technical Analysis
PSTG has been an on-and-off performer during the past year, with a good run into February 2021, a deep correction into the fall, a nice rally to new highs near year-end but then another sharp dip with the market. Net-net, shares did bupkis for about a year. But PSTG reacted well to earnings three weeks ago and has pushed higher since, testing its old highs near 35 on great volume. Stop—29.5

The Covered Call Trade
Buy Pure Storage (PSTG) Stock at 35.70, Sell to Open April 34 Strike Calls (exp. 4/14) for $2.30 or a Net Price of 33.40 or less

Static Return: $60 per covered call (1.80%)

Breakeven: 33.40

Covered Call Return (if assigned): $60 per covered call (1.80%)

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 33.40 or less. (In this case 35.70 minus 2.30 = 33.40. Or another example is you could pay 35 for the stock and sell the 34 call for 1.60, which also equals 33.40.)

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
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 March 29, 2022.