This is the type of stock I have been avoiding like the plague throughout this year: A name that is delivering stellar revenue growth, but has not achieved profitability yet.
It's SmartSheet (SMAR) -- and now I've got a covered call idea for the stock.
Let me explain. As interest rates have spiked in 2022, growth stocks similar to SmartSheet have been absolutely pummeled. But with interest rates starting to moderate and valuations for this type of equity much, much lower than where they started the year, I am slowing pivoting. This type of risk/reward profile is becoming more attractive. This is especially true as I can substantially reduce downside risk via this simple option strategy while still targeting a lucrative potential return.
Seattle-based SmartSheet is subscription as a service company that offers an easy-to-use project portfolio Management, or PPM software platform. It promises to make workflow management easy and efficient. It has effectively expanded its capabilities over the years and gets approximately 85% of its overall revenues from subscription fees.
Despite the tough economy, the company posted 40% revenue on its last quarterly earnings report. Clients spending at least $100,000 annually on the platform jumped by more than 60%. Despite posting a net loss of $13.5 million for the quarter, the company had positive cash flow. In addition, SmartSheet has no debt and approximately $450 million of cash and marketable securities on its balance sheet. Therefore, it has absolutely no need for dilutive additional financing, an important trait in the current market.
This is probably a key reason very little of the outstanding float is currently held short, unlike many unprofitable growth stocks. The stock is down over 60% so far in 2022 but the shares do seem to be trying to put in a technical floor right under the $30 level. Four analyst firms reiterated Buy ratings after the company's last quarterly report with price targets ranging from $46 to $54 a share.
Now seems an appropriate time to start to slowly accumulate a stake in this fast-growing name that appears to be "on sale" from a long-term perspective. Especially if I can significantly mitigate further downside risk via the covered call trade outlined below.
This is how one can execute a covered call position in SMAR. For this trade, I am going to pick a strike price significantly under the stock's current trading levels. This provides more downside protection and sets up a good return. Also, the liquidity at this strike price is promising.
Using the June $25 call strikes, fashion a covered call order with a net debit in the $20.50 to $20.75 a share range (net stock price - option premium). This strategy provides downside protection of over 25%. In addition, even if the stock declines a bit over 10% during the option duration, I am locking in a just over 20% potential return.