Profiting from the iRobot Apocalypse

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This morning, we’re recommending a bullish trade on iRobot Corporation (NASDAQ:IRBT).

IRBT is undervalued right now, and we want to sell puts on the stock.

It dropped after the extreme reaction to its last earnings announcement on April 24. We feel the stock was severely oversold at the time.

Despite exceeding top- and bottom-line growth expectations for the quarter, traders responded to concerns about tariffs and the potential loss of market share to new competitors.

To a certain extent, some bearishness was warranted. Margins had declined, and IRBT is dealing with a tougher competitive environment. Sellers have targeted other manufacturers for similar reasons in this market.

But the overreaction to IRBT’s last earnings report sets the stock up for buying before its next report in July.

Why is IRBT Undervalued?

There are two main reasons investors have undervalued the company despite its recent fundamental trends.

First, investors tend to underestimate the value of IRBT’s non-U.S. sales, which are unaffected by tariffs. Despite competition, IRBT still comprises more than 60% of similar home automation devices in Japan and Europe — along with 82% inside the U.S.

Exports to both Europe and Japan aren’t affected by the tariffs from China, making IRBT more resilient to the trade conflict.

And IRBT adds more connected devices (mops, lawn mowers, etc.) to its product line all the time. That will help it increase and maintain its market share.

Second, IRBT’s sales patterns tend to be “lumpy.” Sales trail off in the second quarter before peaking again in the third and fourth quarter.

Investors might be overly concerned about a short-term decline in sales. We want to focus on IRBT’s full-year growth forecast of 17%-20%.

A Conservative Put-Write Strategy

If we turn to the daily chart below, we can see the $90 level has acted as a key inflection point over the last two years. From a technical perspective, we expect the range around $90 to hold as support.

However, we aren’t confident the stock can close the April gap yet, so selling a put at this point makes sense as a more conservative entry strategy.

Daily Chart of iRobot Corporation (IRBT) — Chart Source: TradingView

IRBT’s next earnings report is on July 23, 2019, after the market close. As we mentioned, the selloff in late April has set the stock up for a jump in July. Because $90 has been such an important level for the stock, we recommend using that as a strike price.

Ideally, any put write we sell would expire worthless. Still, we like IRBT for all the reasons mentioned above. If it does drop below the $90 strike, we wouldn’t mind being put the stock.

To find out which IRBT puts we’re selling — and to get access to our full portfolio of income-generating trades — consider signing up for risk-free trial subscription to Strategic Trader today. 

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of, as well as the co-editors of Strategic Trader.

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