Organic food is a nearly $50 billion-per-year industry in the U.S., comprising 6% of total food sales in 2018, and it’s growing at 6% annually. Whole Foods is the obvious, well-known chain that’s capitalizing on this trend, with Trader Joe’s being another that’s popular in certain areas of the country. Less famous, but with a bright future, is this U.S. supermarket chain specializing in natural and organic foods, focusing on fresh produce, bulk foods, vitamins and an array of household wares.
Cabot Profit Booster 118
The market surged higher yesterday which again helped our many Covered Call positions (check out ETSY the last three days!). That being said, because I would expect the market to remain volatile and sector rotation to be fierce, I am going to continue to keep the portfolio diversified with some hype growth stocks, along with others stocks that are “slow and steady”. Which brings us to todays idea …
The Stock – Sprouts Farmers Market (SFM)
Organic food is a nearly $50 billion-per-year industry in the U.S., comprising 6% of total food sales in 2018, and it’s growing at 6% annually. Whole Foods is the obvious, well-known chain that’s capitalizing on this trend, with Trader Joe’s being another that’s popular in certain areas of the country. Less famous, but with a bright future, is Sprouts Farmers Market, a U.S. supermarket chain specializing in natural and organic foods, focusing on fresh produce, bulk foods, vitamins and an array of household wares.
Sprouts has 320 (mostly small box) stores, mainly in the southwest though it’s expanding quickly into the southeast and elsewhere; the firm is aiming to open 30-ish stores annually going forward as it looks to grab market share. In contrast to many other organic stores, Sprouts offers healthy foods at prices the average consumer can afford (its motto is “Healthy Living for Less”), though that hurt for a bit; while sales have cranked ahead at a decent rate for a grocer, margins have been under off-and-on pressure for a while. But Sprouts has ironed some things out (including finally settling on a new CEO), and it’s benefiting from the recent run on food, toiletry items and the like during the coronavirus pandemic, which is likely to further boost sales and cash flow.
In Q4, sales were up 8% compared to a year ago and gross profit increased 11%, while earnings were up 42% year over year. Analyst estimates aren’t anything to write home about, but Sprouts is betting future growth will come from its expanding home delivery program (up 150% in 2019; all of its stores are now live with that feature) and the aforementioned belt tightening. This is a defensive, cookie-cutter story that has a near-term catalyst due to the virus.
Technical Analysis
SFM isn’t our normal recommendation in Top Ten, with a downtrend starting way back in late 2018. But the recent action is very interesting, with huge-volume support beginning in February and then even larger institutional buying after earnings three weeks ago. Moreover, relative to the market, SFM sits at one-year highs. Long story short, the stock looks to be transitioning to an uptrend; it’s worth watching or, if you want to take a stab at it, you can pick up a few shares around here. Stop - 16
The Covered Call Trade
Buy Sprouts Farmers Market (SFM) Stock at 19.5, Sell to Open May 20 Calls (exp. 5/15/2020) for $0.80, or a Net Price of 18.7 or less
Static Return: $80 per covered call (4.27%)
Breakeven: 18.70
Covered Call Return (if assigned): $130 per covered call (6.95%)
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 18.70 or less. (In this case 19.5 minus 0.80 = 18.7. Or another example is you could pay 19.40 for the stock and sell the call for $0.70, which also equals 18.70)
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 …
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