How I Got a Bargain on This Surging Small-Cap Stock
I was looking for a lower entry point on this name after numerous analyst upgrades and other recent positives. Here's the strategy I used.
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My regular readers know by now I make extensive use of covered call positions within my portfolio. They make up the largest part of my current portfolio allocation, which also includes a big chunk of short-term Treasuries given my pessimistic view on the overall market.
Covered call orders allow me to make solid returns in flat or even slightly declining markets. They also have allowed me to continue to be engaged profitability in the small-cap biotech sector, which has been range bound for over a half-decade now.
A simple covered call strategy can be utilized for many purposes. They provide downside protection, and they can give an investor some confidence to act upon a significant pullback in a stock as I outlined in my column on Friday around Intellia Therapeutics NTLA.
Covered calls also can be used when I find stock and story I like, but I don’t want to chase the recent rally in the shares. However, I don’t want to totally miss out should the shares rise further, and I wouldn’t mind establishing a longer-term position but at a significantly lower entry point.
Such a scenario exists around Ibotta, Inc. (IBTA), which I have executed covered call orders around over the past two weeks. The stock debuted on the market in April 2024 at just over $100 a share. The stock then promptly gave up 60% of its value and bottomed in August in the low $40s. However, the shares have since been "en fuego" and now trade in the low $70s thanks to numerous analyst firm upgrades and other recent positives.
Ibotta operates a digital promotions platform, connecting ~2,400 consumer packaged goods brands with over 200 million consumers from its direct-to-consumer and white-label offerings on its Ibotta Performance Network (IPN). Consumers have received $1.8 billion in savings (primarily on non-discretionary categories, such as grocery) through IPN since its launch in 2012. A nice little niche to have given the inflation of the past few years.
After the stock's recent rally, Ibotta has a market cap of aroud $2.1 billion. It ended the first half of 2024 with about $320 million in cash and marketable securities against no long-term debt. The company produced nearly $50 million worth of free cash flow in the first half of 2024. Revenue growth next year should be north of 20% and the company also recently announced a $100 million stock buyback authorization.
Ibotta has a sound business model that has potential to grow meaningfully beyond its grocery store niche into general merchandise and other verticals in the future. This is one reason Bank of America initiated the shares with a new Buy and $110 price target two weeks ago and Goldman Sachs upgraded the shares to a Buy last week.
The stock trades at just over 25 times forward earnings estimates even with the recent rise in the shares. Not terribly expensive, but I'd rather get a lower entry point or pick up a nice return if the shares flat line or pull back a bit. I plan to accomplish this via a simple covered call trade.
Option Strategy
This is how one can initiate a holding in IBTA with a covered call order. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the June $60 call strikes, fashion a covered call order with a net debit in the $51.50 to $52.00 a share range (net stock price - option premium).
This strategy provides significant downside protection of nearly 30% with upside potential of 16% even if this stock falls more than 15% during the option duration.
At the time of publication, Jensen was long IBTA and NTLA.
