From its modest beginning as an online textbook hub, this recommendation grew into a multi-pronged educational platform.
Cabot Profit Booster 123
Expiration of our May Covered Calls is this Friday, and the good news is that four of our positions are likely to expire for full profit (DDOG, SFM, GOLD, JD), and in the case of two positions (CHWY, MS) the calls that we sold will expire worthless as the stocks are little changed for the month. These are two great outcomes. Expect a full breakdown on these profits, as well as how we will manage the two positions that will need further adjusting Friday morning.
Moving on to this week’s idea …
The Stock – Chegg (CHGG)
From its modest beginning as an online textbook hub, Chegg grew into a multi-pronged educational platform. The company still offers textbooks (and e-textbooks) and allows students to buy/sell them online, but that’s a small part of its business and it operates it at breakeven. The real growth driver is the company’s student learning platform, which offers online tutoring and test prep, homework help (including a library of 37 million pieces of content and 31 million expert Q&A answers) and an online internship and job search platform.
With the face of education markedly changing around the world due to the virus, Chegg is in the right place, at the right time, with a market estimated at 36 million U.S. university and high school students, as well as 18 million in Canada, Australia, and the U.K. And its reviews are fantastic, with 90%-plus of its users saying the company helps produce better grades.
Revenues for Chegg’s first quarter were up 35% to $132 million, boosted by 33% growth in its services segment (which accounts for 76% of sales) and easily beating estimates of $123 million. Earnings grew 40%, to $0.22 per share, surpassing estimates of $0.16, while total subscribers soared by 35%, to 2.9 million.
While Chegg did pull guidance for 2020 as a whole (back to school season is a big unknown at this point), the good news is that they see the current second quarter coming in very strong, with analysts expecting sales to perk up 45% and earnings rising even faster than that. Chegg has always had a great story, and the current reality has quickened adoption of its platform.
Technical Analysis
Chegg is another stock that went nowhere for the last year (it effectively topped out in March 2019 near 42), had a couple of huge declines (to 28 in September and October last year, and as low as 26 in March of this year) but now looks like a new leader. The recovery from those March lows was pretty solid, but it was last week’s gargantuan move to new highs after earnings that really changed the landscape. Yes, it’s extended, but such a powerful earnings move out of a big base bodes well. Stop - 50
The Covered Call Trade
Buy Chegg (CHGG) Stock at 61, Sell to Open June 65 Calls (exp. 6/19/2020) for $2, or a Net Price of 59 or less
Static Return: $200 per covered call (3.38%)
Breakeven: 59
Covered Call Return (if assigned): $600 per covered call (10.16%)
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 59 or less. (In this case 61 minus 2 = 59. Or another example is you could pay 60.5 for the stock and sell the call for 1.50, which also equals 59)
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
