I'm Adding Tech Exposure With This Former Wall Street Darling
The stock down more than 20% from its post-election high. Here's my simple strategy for building a position.
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Stocks spit the bit to end the trading week on a very sour note Friday. Two triggers for the pullback were a PCE reading that showed inflation running hotter than expected, and the University of Michigan’s final report on consumer sentiment for March coming in with the highest long-term inflation expectations since 1993. Tariffs also remained a continuing concern, which I discuss here.
The Nasdaq dropped by nearly 2.8% Friday, while the Dow fell more than 700 points, the S&P 500 was off 1.9%, and the Russell 2000 slid 2.05%.
After a brief respite, the S&P 500 declined just over 1.5% on the week. That's the index’s fifth negative week out of the past six and it's quickly approaching "official" correction territory again.
Looking on the Bright Side
Looking for the bright side in recent market action, at least investors have lower entry points to put new funds to work. Indeed, after avoiding the sector for the most part over the last year due to valuation concerns, I have slowly started to increase my exposure to technology in recent weeks.
One name I am building a position in via covered call orders is Akamai Technologies (AKAM). This name was a Wall Street darling during the internet boom of the late 20th century, but has never regained its luster since that era went bust.
That said, Akamai is making good progress moving away from its mainstay content delivery business model to becoming more of a security and cloud computing concern. The goal of this transition is to be able to deliver steady 10% annual revenue growth as well as EBITDA margins in the mid-40s.
Akamai’s Security division has recently surpassed over half of overall revenue aided by the growing number of cybersecurity threats and other secular tailwinds. The Compute division leverages Akamai’s infrastructure to enable developers to deploy and distribute code at the edge and competes with the likes of Microsoft’s MSFT Azure. It has rapidly grown to more than 15% of overall sales. Meanwhile, Akamai's bread and butter Content Delivery division now makes up only a third of overall revenues and will continue to shrink as far as importance in the years ahead.
The company has seen some hiccups during its transition but is making overall progress.
The balance sheet is in decent shape and the company does consistently buy back its own shares. Akamai's CEO purchased some $3 million worth of equity at the end of February. There have been sporadic rumors about private equity kicking the tires as far as a potential buyout, but so far there has been little fire with that smoke.
The stock is down over 20% from its post-election high but seems to be trying to form a bottom at current trading levels around $80. It is reasonably priced trading at under 12.5 times trailing earnings. I can also get a solid return or lower entry points using the simple covered call strategy highlighted below.
Option Strategy
This is how one can initiate a holding in AKAM with a covered call order. As a reminder, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the November $75 call strikes, fashion a covered call order with a net debit in the $66.70 to $66.90 a share range (net stock price - option premium).
This strategy provides downside protection of 16% with upside potential of 12% even if this equity trades down some 6% over the option duration.
At the time of publication, Jensen was long AKAM.
