Trade Alert: Never Enough Data
As companies increasingly shift toward centralized data storage, cloud-based data-center traffic is projected to grow 30% annually through 2020. That means more and more server farms will be needed to store and harvest all that data.
The Big Data mega-trend isn’t just for aggressive growth investors. It’s also providing opportunities for income investors via data-center REITs (real estate investment trusts).
Unlike other REIT subsectors, which are currently working through excess supply, demand for data storage continues to outpace supply, particularly as tech continues to push into new data-intensive areas such as artificial intelligence and augmented and virtual reality.
CyrusOne (NSDQ: CONE) is a fast-growing REIT with 45 data centers worldwide. And its pending acquisition of Zenium Data Centers will expand its reach to include footholds in two of Europe’s largest data-center markets.
The $5.3 billion REIT is projected to grow funds from operations per unit by 10.2% annually over the next three years.
There are risks to consider, however.
Hyperscale cloud services are dominated by tech giants, with 24 companies accounting for about two-thirds of the market.
That means data-center REITs tend to have significant customer concentration, and CyrusOne is no exception. The REIT receives more than 40% of annualized rent from its top-10 customers, and its largest customer accounts for 18% of total rent.
And CyrusOne’s rapid growth also means that leverage is relatively high, though not as high as some of its peers.
Lastly, rising U.S. Treasury yields have been weighing on REIT unit prices. While this week has seen a massive short squeeze in the Treasury space, yields will eventually retake their former highs.
The good news about the timing of this trade is that the rally in Treasuries this week gives us more of a buffer between the current price and the strike price.
Additionally, this contract expires nearly two weeks before the company is expected to next report earnings. It’s never a bad thing if the timing of a short-term trade can eliminate the possibility of any earnings-related surprises, especially since right now the market can’t even handle good news, at best.
This trade will generate immediate income of at least $70 per contract now, with the possibility of buying CyrusOne at a nearly 7% discount to where it currently trades if the stock gets put to you. Investors should set aside $5,000 per contract sold to buy the stock in case the option expires in the money.
Regardless of how many contracts you sell, it’s absolutely critical that you follow the instructions below, particularly when it comes to setting the limit order.
How to Make the Trade:
- Trade: Sell to open the July 20, 2018, $50 Put on CONE.
- Allocation: Sell one put for every 100 shares you would be pleased to buy at $50 per share.
- Current Stock Price: $53.75
- Limit Order Price: a credit of $0.70 or more.
- Tell your broker: “I want to sell a put on CyrusOne (NSDQ: CONE) stock. Specifically, I want to ‘sell to open’ one July $50 Put for a credit of $0.70 per share or more.”
- Further Instructions Regarding the Trade:
- If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least $0.70 per share or more.
- Place your limit order on a “good ‘til canceled” (GTC) basis and be patient.
The Win-Win Situation:
For every put contract you sell, you will collect $70 that’s yours to keep no matter what happens in the future.
If the put expires worthless, meaning the stock price is above $70 per share at expiration, then we’ll do another trade to create another instant payment.
If the stock is trading at or below the strike price upon the contract’s expiration, then you’ll be buying CyrusOne at a 7% discount to the current market price, while locking in a yield of 3.7%—plus the premium you pocketed when you sold the put.
Then we’ll collect the dividend while creating more instant payments by selling covered calls against the stock.