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Profit Booster
Make Money 3 Ways from Great Growth Stocks

Cabot Profit Booster 185

The overall market continues to be, well, wobbly. After a 2.1% loss last Monday, the sharpest decline in roughly 10 months, the bulls took charge at the opening bell last Tuesday and have yet to give up. Last week, the S&P 500 climbed 1.92%, the Dow advanced 1.07% and the Nasdaq surged 2.76%.

Cabot Profit Booster 185

The overall market continues to be, well, wobbly.

After a 2.1% loss last Monday, the sharpest decline in roughly 10 months, the bulls took charge at the opening bell last Tuesday and have yet to give up. Last week, the S&P 500 climbed 1.92%, the Dow advanced 1.07% and the Nasdaq surged 2.76%.

Could the current rally could be sparking a classic case of Fear of Missing Out (FOMO)? There is no doubt it’s been an impressive showing by the bulls of late, but it should be pointed out the recent move has come on progressively weaker volume.

But FOMO is real, as retail investors, and more importantly hedge funds/institutions, feel underinvested in a market making new highs. This “fear” could potentially trigger a squeeze as hedge funds and institutions need to buy quickly and catch up to the returns of the indexes.

Regardless, no one has a crystal ball. Certainties don’t exist in the market, which is why we continue to stay focused on the factors (diversification, etc.) that have led to our long-term success.

This week I will be adding social media company Snap (SNAP) to the portfolio following the company’s blowout earnings report.

The Stock – Snap (SNAP)
Why the Strength
A massive Q2 earnings beat and outlook brought in the buyers and now Snap looks like a leader again.

From a big-picture perspective, there are many reasons Snap is strong today and should remain so for a long time to come: First, the company continues to expand its core camera offering (see more in our July 6 write-up) to attract and deepen engagement among both younger users (75% of 13-to-34-year-olds in the U.S., U.K., Australia, France and the Netherlands use Snap!) and others, with Q2 seeing 293 million global active users (up 18% from a year ago despite lapping the pandemic boost a year ago), including 95 million in North America.

Second, revenue per user continues to skyrocket (up 116% in North America in Q2) thanks to better ad tools and the fact that money is shifting to online advertising (and not just to Facebook and Google) in a big, big way. (Management thinks it could be making inroads into the huge online travel ad market now.) Despite this up move, revenue per user is just a fraction of its peers (in the U.S., $22 for Snap, $59 for Twitter, $233 for Facebook), and management has been clear that it thinks this can be a driver of rapid growth for many years.

These factors led to a blowout Q2 report—not only did revenues soar 116% from the pandemic-impacted quarter of a year ago, but they surged 28% from Q4(!), crushed estimates, and the profit of 10 cents per share was 28 cents better than expectations. Overall, the top brass thinks the top line here can grow at 50%-plus rates for many years, and the Q2 report backs that up. We like it.

Technical Analysis
SNAP had a deep correction like other growth stocks in the spring, but it actually showed some relative strength, holding well above its 40-week line unlike many peers.

And then it approached its highs around Independence Day, which looked good.

However, the dip from there was a doozy (from over 70 to under 58 in less than two weeks!), but now that looks like the final shakeout—SNAP gapped to new price highs on six times average volume on Friday. Yes, near-term wiggles are possible (even likely), but we think you can buy SNAP here or on minor weakness. Stop — 68

CPB_Issue_07-27-21_SNAP

The Covered Call Trade
Buy Snap (SNAP) Stock at 76, Sell to Open August 78 Strike Calls (exp. 8/20) for $2.70, or a Net Price of 73.3 or less

Static Return: $270 per covered call (3.68%)

Breakeven: 73.3

Covered Call Return (if assigned): $470 per covered call (6.41%)

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 73.3 or less. (In this case 76 minus 2.70 = 73.3. Or another example is you could pay 75.8 for the stock and sell the call for 2.50, which also equals 73.3)

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.

Stock Name and SymbolPrice BoughtCurrent Stock PriceStopOption - Price of Call SoldCurrent Option Price
Nutanix (NTNX)39.1536.7032.5August 40 -- $2$0.25
Ford (F)14.1314.0012.6August 15 -- $0.48$0.25
L Brands (LB)75.5076.4065.5August 77.5 -- $4.30 $3.00
Marvell Technology (MRVL)55.2558.5048.5August 55 -- $2.30$4.00

The next Cabot Profit Booster issue will be published on August 3, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
Cabot Heritage Corporation, doing business as Cabot Wealth Network
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