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Profit Booster
Make Money 3 Ways from Great Growth Stocks

Cabot Profit Booster 119

This industry is very recession-resistant (sales grew steadily even through 2008-2009) and this stock is leading the charge to its move online (25% of sales online by 2022, up from 14% in 2017) thanks to its product selection (45,000 of them!) and fulfillment (can reach all of the U.S. within two days).

Cabot Profit Booster 119

This Friday is expiration of April options. We have four Covered Call positions (TEAM, NUAN, DDOG, AAPL) that fall in that category and that we will address as we get closer to Friday. Be on the lookout for an email and instructions for those positions.

In addition, MS will report earnings on Thursday, and I would anticipate selling a new covered call against our stock position ahead of Thursday in order to lower our risk, and cost basis, on our stock position.

Of note, while the sharp 35% decline in the market last month was painful for 99% of stocks, the rally back in the last several weeks have healed those positions that were hurt, and our last five stock ideas are all working very well. Now on to today’s idea …

The Stock – Chewy (CHWY)

Chewy looks like rare merchandise because it combines defensive characteristics with an excellent short- and long-term growth story; the firm is effectively the Amazon of pet supplies, selling everything from food to toys to crates to meds and more.

This industry is very recession-resistant (sales grew steadily even through 2008-2009) and Chewy is leading the charge to its move online (25% of sales online by 2022, up from 14% in 2017) thanks to its product selection (45,000 of them!) and fulfillment (can reach all of the U.S. within two days). Growth trends have been excellent, both on the top line (sales up 35% when accounting for 2018’s extra week) and many sub-metrics—Chewy ended the quarter with 13.5 million active buyers (up 27% from a year ago), while sales per customer were up 10%. Best of all, autoship sales made up 70.4% of the total, representing a powerful stream of recurring revenue. (In fact, nearly three-quarters of revenues are staples-like consumables.)

Earnings remain in the red, but the company was basically free cash flow neutral for 2019 as a whole, and management said the virus has accelerated business of late as people shift buying to online. The valuation is high for sure, but analysts see revenues growing 34% and 24% this year and next (respectively), with years of 20%-ish growth possible beyond that. It’s a great story.

Technical Analysis

chwy

When we last wrote up CHWY, it had shown massive-volume support in early March and catapulted to multi-month highs soon after. Shares actually tested new-high ground after that before pulling back for a few days, but late last week, it let loose again, soaring on huge volume to new highs. Further dips are possible, but we’re OK nibbling here or on dips. Stop - 32

The Covered Call Trade

Buy Chewy (CHWY) Stock at 42, Sell to Open May 43 Calls (exp. 5/15/2020) for $2.25, or a Net Price of 39.75 or less

Static Return: $225 per covered call (5.66%)

Breakeven: 39.75

Covered Call Return (if assigned): $325 per covered call (8.17%)

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 39.75 or less. (In this case 42 minus 2.25 = 39.75. Or another example is you could pay 41.5 for the stock and sell the call for 1.75, which also equals 39.75)

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

open trades