The stock market enjoyed a big upside reversal last week, snapping back strongly from the recent slump. The DJIA rose 3.9% for the week while the S&P 500 gained 4.6%. Big-tech stocks reasserted a leadership role thanks in part to blow-out earnings from Amazon (AMZN) and Alphabet (GOOGL), propelling the Nasdaq to a 6% advance for the week.
Cabot Profit Booster 161
NOTE: Because of President’s Day, our offices will be closed next Monday, February 15 — so your next Cabot Profit Booster issue will be published Wednesday, February 17.
The stock market enjoyed a big upside reversal last week, snapping back strongly from the recent slump. The DJIA rose 3.9% for the week while the S&P 500 gained 4.6%. Big-tech stocks reasserted a leadership role thanks in part to blow-out earnings from Amazon (AMZN) and Alphabet (GOOGL), propelling the Nasdaq to a 6% advance for the week.
This market strength last week was felt in the Cabot Profit Booster portfolio, as all six of our positions are in terrific shape.
This week’s Cabot Profit Booster recommendation, is a software stock that is Mike’s Top Pick this week. Here is the stock, and our covered call trade:
The Stock – Dynatrace (DT)
Why the Strength
As cloud migration continues to pick up steam, it’s imperative that companies keep their critical applications up and running without a hitch. Dynatrace’s infrastructure monitoring services meet this need by targeting hardware and software problems using real-time analytics of every aspect of a firm’s tech assets. One big advantage is that its platform consolidates several metrics into a single dashboard, so clients don’t have to integrate a bunch of separate offerings to monitor all their wares.
Dynatrace’s early investments in automation and intelligence capabilities that facilitate digital transformation, along with an increase in its sales organization, are paying off. The bubbling demand for the company’s platform was clearly shown in the latest quarterly report, where the top line rose a consensus-beating 28% to $183 million. Dynatrace’s recent transition to a subscription model is producing dividends, with Q3 2021 subscription revenue jumping 33% to $170 million. Further highlighting the strength was a 35% increase in the key annual recurring revenue (ARR) metric, driven in part by a same-customer revenue growth rate of 20%.
All told, Dynatrace exited the quarter on a high note, adding 189 customers (up 9% from a year ago and bringing the total to 2,794). The bottom line, meanwhile, blew past estimates and increased 70% to 17 cents per share. Looking ahead, Dynatrace guided for fiscal Q4 revenue to be $191 million, up 27% at the midpoint, along with a 33% gain in subscription revenue, which is likely conservative. The company believes ARR per enterprise customer north of $1 million is achievable and has a huge target market (15,000 global enterprises). There’s no reason Dynatrace can’t enjoy a long period of rapid, reliable growth.
Technical Analysis
From its low of 17 last March, DT launched a powerful rebound which saw shares hit 44 by late June. But that was the top for a while, as shares then went sideways for several months before testing long-term support at the 40-week line in November and again in January. Last week’s liftoff after earnings looks powerful, and we like the two days of upside after earnings, too. You could start a position here or (preferably) on dips. Stop — 47.50
The Covered Call Trade
Buy Dynatrace (DT) Stock at 56, Sell to Open March 55 Strike Calls (exp. 3/19/21) for $4.50, or a Net Price of 51.50 or less
Static Return: $350 per covered call (6.79%)
Breakeven: 51.50
Covered Call Return (if assigned): $350 per covered call (6.79%)
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, of 51.50 or less. (In this case 56 minus 4.50 = 51.50. Or another example is you could pay 55.50 for the stock and sell the call for 4.00, which also equals 51.50)
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 February 17, 2021.