Ticker Reports for May 15th
How to Buy the Dip and Sell the Rip on Your Stocks with Options
Investors should be familiar with the expression, “Buy the Dip”(BTD) when it comes to the stock market. It means to buy stocks on a pullback. Traders are also familiar with the expression "Sell the Rip" (STR). It means to sell stocks into the strength.
Fending Off FOMO
Put together, “Buy the Dip, Sell the Rip” (BTD-STR) is what traders and investors should be doing: buying low and selling high. However, that’s not always the case. Unfortunately, it’s all too common for traders to fall into the fear-of-missing-out (FOMO) trap and chase the rip: buying high and selling low. Waiting for a dip to occur can be tedious since it's human nature to chase stocks when they are rising and walk away when they are falling.
The BTD-STR Options Strategy
Using stock options, you can buy the dip with stocks and get paid to do so. You can also sell the dip and get paid a premium once you buy it. The BTD-STR strategy should only be used for stocks you are willing to hold longer. It doesn’t mean you must hold the stock long, but you are comfortable holding it because you are familiar with it and believe it will move higher in the long run.
To administer the BTD-STR options strategy, we can break it down into 2 parts.
Buy the Dip (BTD) with a Cash-Secured Put
Rather than place a good-to-cancel (GTC) limit order on a stock, you can use options to buy the dip and collect a premium for it by selling cash-secured put options.
For example, an XYZ $50/$55 long strangle is comprised of a long 1 XYZ $55 put option and a long 1 XYZ $50 call option.
Sell the Rip (STR) with a Covered Call
Once you are executed on the long position, you can collect income via a premium and appreciation by writing a covered call. Depending on how much appreciation you want, you can opt for a smaller premium for a higher potential price rise. Remember, the strike price is the price you will receive for your stock if it closes above it upon expiration.
Willing to Hold But Won’t Fall for the FOMO
Let’s assume you’re a fan of the consumer staples sector drive-through coffee shop Dutch Bros Inc. (NYSE: BROS). You love the products and selection, especially the sugar-free options and the new protein coffee. Dutch Bros drinks are cheaper than Starbucks Co. (NASDAQ: SBUX) at $3.00 to $4.50 each, and the drive-through makes it a faster experience. The company is planning on opening up to 125 stores this year, and each 950-square-foot store pumps out $2 million in sales annually. Revenues surged 40% YoY in its Q1 2024. You have no problems holding it longer-term but refuse to fall for the FOMO. The future of the company looks strong as it has more room to grow than Starbucks.
Example of a BTDSTR Strategy on Dutch Bros Stock
BROS had a stellar Q1 2024 earnings release, causing the stock to gap and go running up 30%. BROS went into its Q1 2024 earnings around $28.50 gapped up to $30.14, and spiked up to $36.17. BROS is up against a double top resistance level, trading currently around $35.91.
There are 2 gap fill levels at $32.88 and $28.50. Let’s assume you are willing to buy the dip around a 10% pullback to the $32.50 strike level.
Executing the BTD Trade
Since you're willing to buy at the $32.50 level and hold for a longer duration, you can use the $32.50 strike price to sell a cash-secured put. Note that cash-secured means you should have the capital in your account to pay $32.50 per share if you get assigned. Most brokers will only enable you to sell a cash-secured put if you have the funds to pay from the stock.
The July 19, 2024, put option expires in 66 days and pays 70 cents. This lets you complete the BTD portion of the strategy by selling the July 19 BROS $32.50 Put for 70 cents. After you execute the trade, you will be credited $70 in your trading account. If BROS falls under the $32.50 level by expiration, then you will be assigned the stock at $32.50.
Keep in mind that you will still be paying $32.50 no matter how far under that strike price BROS falls. This is the risk when selling puts. There is also potential for early assignment if BROS falls deep-in-the-money (DTM). However, since you're a believer in the stock, you are comfortable holding the shares.
Executing the STR Trade
Once you get filled on the BTD order, you can add the second part of the strategy to your BROS position. To STR, you will write a covered call with an upside strike price for capital appreciation while collecting a premium in the meantime.
Let’s assume that you already have a BROS position, and now you will execute the STR leg of the strategy. If your position is at $32.50, you can aim for a round number around the $40.00 strike price. You can write the July 19, 2024, $40.00 covered call for 85 cents. This gives you a $7.50 upside for a potential 18.75% gain and a premium of 85 cents as a credit.
If BROS fails to close above the $40.00 by expiration, then you can keep the premium and write another covered call again. You can continue to write covered calls until you are called out. Keep in mind the farther out your expiration, the higher the premium you get paid for it.
Plan Your Trade and Trade Your Plan
The BTD-STR strategy helps to avoid the fear of missing out (FOMO). FOMO is the all-too-familiar course of action that traders and investors fall into when chasing a hot stock. FOMO is the opposite of BTD because it is more like "Chase the Rip."
Pre-selecting a strike price that you're willing to buy and hold on to a stock avoids impulse trading and lets you plan the trade ahead of time. It also provides you with some income while you wait. If you don't get filled by expiration, just place another BTD leg of selling a cash-secured put at your comfortable strike price levels. Once you get filled, move on to the STR leg of the strategy and trade your plan.
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3 Hot Buyback Plans Supporting Price Action in 2024
Share repurchases are a controversial topic because they often do little more than hide the impact of share-based compensation or amplify (at face value) sluggish earnings growth. However, as with the stocks today, share repurchases can drive shareholder value by reducing the share count. The long and short of it is that X value divided by fewer shares equals more value per share for shareholders than before. However, share repurchases alone are insufficient to impact share prices positively. Investment success requires a solid business and an outlook for sustainable growth.
Gen Digital Ups the Ante With Share Repurchases; Guides for Sustainable Growth
Gen Digital (NASDAQ: GEN) is a consumer-oriented cyber safety and security firm operating brands that include Norton Lifelock and Avast!. The company is among the latest to issue a new or add-on share repurchase authorization, which is a big one. The company upped the ante by $2.5 billion to bring the total back to $3 billion.
That’s worth 20% of the market cap and more than offsets the impact of share-based compensation. The net result of share-based compensation, dilutive actions, and share repurchases reduced the share count by 1% in FQ4/CQ1 and should continue to do so this year.
A dividend compounds Gen Digital's capital return. The stock pays about 2.0%, with shares trading near a two-year high. The payout is reasonably safe, with a payout ratio of 25% and a healthy balance sheet. The company carries some debt and has a moderately elevated 4X leverage ratio, but no red flags are raised. Highlights from the latest report include increased cash, flat assets, debt and liabilities down, and equity flat.
The recent pop in share prices is due to the results, which were better than expected and point to sustained growth with margin expansion this year and next. Eight analysts rate this stock with a consensus of Moderate Buy and a price target of $26, about 6% above the latest close.
Ulta Beauty has a Beautiful Repurchase Program
Ulta Beauty’s (NASDAQ: ULTA) Q4 results and guidance for Q1 did not inspire the market to rally, but the price pullback is an opportune entry point that aligns with the long-term trend. Share repurchases should help support the market at the critical level where a rebound may already be forming. The company authorized a new $2 billion repurchase plan that went into effect this quarter. The $2 billion replaces the $100 million left under the previous allotment and equals 10.5% of the market cap, with shares near a one-year low. Repurchases are significant for this company and offset the lack of dividends. Repurchases in 2023 reduced the average count by 4.27% in Q4 and should remain strong this year.
Analysts moderated their price targets following the last earnings report, but the sell-off was overblown. Marketbeat tracks seventeen revisions from twenty-one analysts since the report, including an upgrade, a downgrade, and numerous price target reductions. The takeaway is that the range of targets is narrowing, and the consensus fell compared to last quarter but is still well within the one-year range; analysts still view this stock as a Moderate Buy and imply a 35% upside for its price.
Darden Restaurants Has Tasty Returns to Drive Shareholder Value
Darden Restaurants (NYSE: DRI) depressed its market, issuing soft guidance for the year, but is still guiding for growth and margin expansion to support its tasty capital return program. The returns include a high-yielding dividend worth 3.5% with shares near the middle of its uptrending channel. The stock provides a value relative to other high-quality restaurant names, such as Texas Roadhouse (NASDAQ: TXRH), and more than double the yield. Regarding repurchases, this company issued a new $1 billion authorization at the end of FQ3, worth 5% of the market cap. Share repurchases reduced the count by an average of 1.7% for the quarter, and another 1.5% to 2.0% reduction is expected by next year.
Darden’s balance sheet is still recovering from Ruth’s Chris acquisition but is in fine shape. The cash and current assets are down, but total assets are up, long-term debt is well-managed, and equity is flat. The salient point is that the company is well capitalized, has positive and growing cash flow, and has a low leverage ratio below 1X equity. The company can continue increasing its distribution and repurchasing shares.
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Stocks With Subscription Based Revenue Offer Inflation Protection
Despite the U.S. economy suffering from stagflation, defined as low economic growth with high inflation, consumers still find a way to fit these subscriptions into their budgets. Because of this tendency, investors could consider such businesses part of the consumer staples sector rather than the consumer discretionary group.
Knowing that consumers will likely keep paying for their subscription memberships, investors highly value revenue for such businesses, especially amid an uncertain economic environment. Stocks like Spotify Technology (NYSE: SPOT), T-Mobile US Inc. (NASDAQ: TMUS), and even Netflix could prove outperformers in the coming quarter.
Inflation Protection? Yes Please
Subscription-based businesses not only achieve predictable cash flows, making them easier to value for Wall Street analysts and more attractive for investors, but they are also able to quickly shrug off the effects of high inflation by raising prices across the board.
With 269.6 million global subscribers, Netflix could raise prices by $1 and immediately add nearly $270 million to the top line. Likewise, Spotify’s 239 million users could have the same effect on the company’s financials, especially knowing users will try to avoid the pain of vibe-cutting advertisements.
Whether the economy is booming or busting, people will likely always find a way to pay their phone bill because consumers won’t be able to prospect for jobs without a phone (in the case of a bad economy).
With 119 million users as of the fourth quarter of 2023, T-Mobile could justify a few extra million in revenue by merely keeping up with inflation.
All three of these stocks can protect their investors from inflation just by raising monthly subscriptions to their users. Because of the quality and reliability of these revenues, markets are willing to pay a premium valuation for these stocks, measured on a price-to-sales (P/S) basis.
It’s All About Growth, Steady Growth
Compared to its peers in the communication industry, T-Mobile stock commands a premium of 50% through its 2.4x P/S versus the sector’s 1.6x average.
Spotify follows suit by trading at a 3.9x multiple, which is 290% above the radio and broadcasting industry’s average P/S valuation of 1.0x. Last but not least, investors can see this trend in Netflix’s 7.9x P/S multiple, which is 192% above the streaming industry’s 2.7x.
Markets value these companies at a premium for their steady revenue sources and their future expected growth rates. Based on an earnings per share (EPS) basis, analysts believe Netflix's stock could deliver up to 21.2% growth in the next 12 months.
Spotify could be set to deliver 41.4% EPS growth this year, which gives investors a leg up above inflation in the U.S. and ensures that this potential investment could outperform the nation's lackluster GDP growth of 1.6% in the past quarter.
In another double-digit growth clip, T-Mobile expects to deliver 24.8% EPS growth despite the inflation-choked U.S. consumer.
Consumer sentiment declined in April, bringing the index halfway to its all-time low. However, consumers still find enough reasons to keep these companies flowing with steady cash flows, which is why Wall Street keeps them in high regard.
Wall Street’s Take
Spotify shares trade at 91% of their 52-week high, showing investors that bullish momentum still rules the media company. Analysts at Bank of America see a valuation for Spotify up to $370 a share, calling for as much as 27.5% upside from where the stock trades today.
The optimism spills over to Netflix now that the stock has pushed back up to 96% of its 52-week high after a recent earnings hiccup. Recovering its bullish beat, the stock earned an $800 price target from Pivotal Research. To prove these valuations right, the stock must rally 30.5% from where it sits today.
Who knew phones could be this exciting? Analysts at TD Cowen see a valuation of $202 for T-Mobile stock, or 25% upside from today’s price. Of course, trading at 96% of its 52-week high helped analysts feel more comfortable backing this winner.
The one theme investors need to focus on is predictable revenue; analysts and markets aren’t afraid to bid companies like these up, particularly since nothing else is lining up to beat stagflation.
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