This stock was one of 2019’s biggest turnaround stories, and while it stalled out in the second half of last year, it’s making waves again thanks to a blowout Q1 report.
Cabot Profit Booster 121
Our positions continue to perform exceptionally well as the market rally of the past month has pushed nearly all of our Covered Calls above our short strike price, and on their way to full profit. That being said, we aren’t going to celebrate any success until the positions expire, and with earnings season ramping up in the coming days there will almost surely be some market and individual stock volatility.
Today’s pick is a stock that has already reported earnings last week and saw a strong stock reaction to its great numbers …
The Stock – Snap (SNAP)
One of 2019’s biggest turnaround stories was Snap, and while it stalled out in the second half of last year, it’s making waves again thanks to a blowout Q1 report. Known for its popular social media app, Snapchat, the company has seen accelerated user growth among the coveted 13-to-34-year-old demographic (it reaches more of that age group than Instagram), with user engagement (and revenue per user) dramatically improving over the past year.
The firm reported sustained communication volumes in Q1 that eclipsed peaks normally seen during major holidays, including a 50% increase in some bigger markets. Widespread adoption of livestreaming contributed to a more than 30-fold increase in daily downloads of Snap Camera, a desktop app used on its videoconferencing services.
All in, Snap’s daily users grew by 20% from a year ago (to 229 million) including up 5% from Q3, with over four billion “snaps” created daily. Its augmented reality “lenses” are Snap’s calling card and daily use of that tool rose 85%. Thanks to all of this, revenue grew 44% in Q1 (up 40% in North America, 61% in Europe and 49% in the rest of the world), and the company produced its first quarter of positive operating cash flow.
Ad budgets are down due to COVID, but given that more people are online (the firm saw a 30% jump in communications over its platform from late January to late March), it’s seeing plenty of benefits, including from so-called direct response advertisers (which prompt customers to respond immediately to the ad). Long story short, the turnaround that began early last year continues as management makes the right moves.
Technical Analysis
SNAP rallied from its post-IPO low of 5 in December 2018 all the way to 18 in July, but that was the top for a while; shares did sneak out to 20 earlier this year but that quickly went by the wayside when the market went over the falls. Frankly, the chart was nothing to get excited about, but the quarterly report changed that—shares exploded from 12.5 to 17 on massive volume and have held most of that move since. There’s still old overhead to chew through, but we’re fine starting small here adding more if SNAP heads higher. Stop - 13.5
The Covered Call Trade
Buy Snap (SNAP) Stock at 17.2, Sell to Open June 18 Calls (exp. 6/19/2020) for $0.85, or a Net Price of 16.35 or less.
Static Return: $85 per covered call (5.19%)
Breakeven: 16.35
Covered Call Return (if assigned): $165 per covered call (10.09%)
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 16.35 or less. (In this case 17.2 minus 0.85 = 16.35. Or another example is you could pay 17 for the stock and sell the call for 0.65, which also equals 16.35.)
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
