Cabot Income Advisor 421 - Cabot Wealth Network

Cabot Income Advisor 421

In This Issue

  • Featured Action

    KKR & Co. (KKR)
    U.S. Bancorp (USB)

  • Portfolio Updates

    AGNC Investment Corp. (AGNC)
    Brookfield Infrastructure Partners (BIP)
    Digital Realty Trust, Inc. (DLR)
    Enterprise Product Partners (EPD)
    KKR & Co. (KKR)
    NextEra Energy Inc (NEE)
    U.S. Bancorp (USB)

  • Income Calendar

Cash in on a High Market
The market is still creeping higher and is near the all-time high. But skepticism is rising.

The S&P 500 has risen 28% since the beginning of November and over 80% since the lows of last year. Sure, the likely economic boom ahead, complemented by trillions in stimulus, is a compelling catalyst. But when is that priced in?

The market anticipates. It started flying after the vaccine announcement but before the economy took off. At some point it will anticipate beyond the full economic recovery.

Goldman Sachs recently indicated that the market should soon be looking past the economic peak, which it says will occur in the second quarter. And the firm predicts economic growth will slow every quarter thereafter until the end of 2022. Analysts at Deutsche Bank are calling for a 10% market pullback. And Bank of America analysts have an end of the year 2021 target for the S&P that is 8% below the current level.

Of course, these Wall Street analysts have a habit of being consistently wrong. None of them saw the market boom after the pandemic lows. They always seem to miss a strong market. More ominous is the options market. The put/call ratio reflects investors that don’t expect the market to move higher from here.

The market can’t continue at the recent pace. And a 10% or so correction is possible at any time, especially after such a strong move higher. While the short-term is always unpredictable, I’m still bullish over the intermediate and longer term.

Consider this: Since the lows of the financial crisis in 2009, the S&P 500 is up 511%. There have been five drops of 10% or more including the 34% drop when the pandemic hit last year. Buying the market dips has been an extremely successful strategy for a long time. If the market does fall, it will likely present a good buying opportunity.

With the market looking toppy in the near term, it’s a great time to write covered calls. In this issue, I highlight two call writing opportunities on existing portfolio positions. These calls provide a great way to cash in on a high market without giving away too much upside potential.

What to Do Now
Over the past few months, the portfolio has added several value stocks that have not made big moves higher recently. But the stocks looked promising ahead of the full recovery later this year. It was a good time to buy the stocks and wait for an opportunity to write high-priced calls with the strong possibility of high total returns.

Of the current seven portfolio positions, three have moved higher and offer profitable covered call writing opportunities. We wrote calls on mortgage REIT AGNC Corp. (AGNC) weeks ago and this week we are selling calls on U.S. Bancorp (USB) and KKR and Co. (KKR).

The two financial stocks, USB and KKR, offered strong momentum when they were added to the portfolio about a month ago and have quickly moved higher. Of the remaining four positions, Brookfield Infrastructure Partners (BIP) and NextEra Energy (NEE) have moved higher from the purchase price, but are not yet in the ideal call writing range. The other two, Digital Realty (DLR) and Enterprise Product Partners (EPD), haven’t moved yet and are still near the original purchase price.

DLR, EPD and NEE are still in the buy range and are worth accumulating at current prices if you haven’t done so already. The other four stocks (AGNC, BIP, USB, and KKR) have moved beyond the ideal buy range, but are still worth holding if you own the positions already.

Monthly Recap
March 24
Purchased U.S. Bancorp stock (USB) – $53.47
Purchased KKR & Co. stock (KKR) – $47.98

March 26
VLO March 26 $60 call at $6.50 – Expired
Valero Energy Stock (VLO) – Called

April 1
CVX April 1 $95.50 call at $4.30 – Expired
Chevron Corporation stock (CVX) – Called

April 14
Sell AGNC June 18 $17 call at $0.50 or better

April 28
Sell KKR June 18 $55 calls at $2.50 or better
Sell USB June 18 $57.50 calls at $2.50 or better

Featured Actions

Sell KKR June 18 $55 calls at $2.50 or better
Expiration date: June 18
Strike price: $55.00
Call price: $2.50

KKR & Co. (KKR)
The stock is still trending higher for now. And the rest of the year looks good for the company and the stock. But KKR has spiked 35% higher since late January. The uptrend is slowing. The stock could be near the end of the recent surge, and it tends to pull back after a surge higher. There is a good chance this is a window where we can get a high call premium and possibly keep the stock.

Of course, the stock could continue to forge higher ahead of a great environment. These calls are currently slightly in-the-money as KKR is now at 55.58 per share. The calls are written at a high enough strike price to assure a high total return if that happens. As well, the calls are targeted at a price slightly higher than what is currently offered. It may take a few days for the price to get there.

Here are the three main scenarios.

  • 1. The stock closes above our $55 strike price at expiration.
    • Call premium: $2.50
    • Dividends: $0.135 (payable June 9)
    • Appreciation: $7.02 ($55 strike price minus $47.98 purchase price)
    • Total: $9.66 (total return will be 20% in a little less than three months)
  • 2. The stock price closes below our $55 strike price.
    • Call premium: $2.50
    • Dividends: $0.135
    • Total: $2.64 (total income return of 5.5% in three months)
  • 3. The stock price declines.
    • The decline will be offset by the $2.64 in income. Of course, there is some leeway to work with since the purchase price is $7 per share below the strike price.

Sell USB June 18 $57.50 calls at $2.50 or better
Expiration date: June 18
Strike price: $57.50
Call price: $2.50

U.S. Bancorp (USB)
This call is also slightly in-the-money with a current stock price of 58 per share. Like KKR, USB has been on a furious uptrend since late January, up 35%. But the pace has been slowing lately and the surge is due for a near-term consolidation. This could be close to the near-term high where we can get a strong call premium and lock in a high total return if shares keeps rising.

Here are the three main scenarios.

  • 1. The stock closes above our $57.50 strike price at expiration.
    • Call premium: $2.50
    • Dividends: $0.42 (payable April 15)
    • Appreciation: $4.03 ($57.50 strike price minus $53.47 purchase price)
    • Total: $6.95 (total return will be 13% in a little less than three months) 
  • 2. The stock price closes below our $55 strike price.
    • Call premium: $2.50
    • Dividends: $0.42
    • Total: $2.92 (total income return of 5.5% in three months)
  • 3. The stock price declines.
    • The decline will be offset by the $2.92 in income. Of course, there is some leeway to work with since the purchase price is $4 per share below the strike price.

Portfolio Updates
Open Recommendations Ticker Symbol Entry Date Entry Price Price on
Buy at or
Under Price
Yield Total Return
AGNC Investment Corp. AGNC 01/13/21 15.52 17.36 17.00 8.29% 14.36%
Brookfield Infrastructure BIP 01/13/21 50.63 54.18 53.00 3.80% 8.06%
Digital Realty Trust DLR 1/27/21 149.17 148.23 155.00 3.13% 0.23%
NextEra Energy, inc. NEE 2/24/21 73.76 77.93 80.00 1.98% 6.20%
Enterprise Product Partners EPD 3/17/21 23.21 23.28 25.00 7.73% 0.65%
U.S. Bancorp USB 3/24/21 53.47 57.79 55.00 2.91% 8.89%
KKR & Co. KKR 3/24/21 47.98 55.57 50.00 1.05% 15.82%
Open Recommendations Ticker Symbol Intial
Entry Date Entry
Price on
Buy Under or
Sell Down To
Total Return
AGNC June 18 $17 call AGNC210618C0017000 Sell 4/13/21 0.50 0.51 0.50 3.20%
As of Close on 4/26/21
Security Ticker Symbol Action Entry Date Entry
Sale Date Sale Price Total Return
Innovative Industrial Props. IIPR Called 6/2/20 87.82 9/18/20 100.00 15.08%
Qualcomm QCOM Called 6/24/20 89.14 9/18/20 95.00 7.30%
U.S. Bancorp USB Called 7/22/20 36.26 9/18/20 38.00 3.42%
Brookfield Infras. Ptnrs. BIP Called 6/24/20 41.92 10/16/20 45.00 8.49%
Starbucks Corp. SBUX Called 8/26/20 82.41 10/16/20 88.00 6.18%
Visa Corporation V Called 9/22/20 200.56 11/20/20 200.00 0.00%
AbbVie Inc. ABBV Called 6/2/20 91.04 12/31/20 100.00 12.43%
Enterprise Prod. Prtnrs. EPD Called 6/24/20 18.14 1/15/21 20.00 15.16%
Altria Group MO Called 6/2/20 39.66 1/15/21 40.00 7.31%
U.S. Bancorp USB Called 11/25/20 44.68 1/15/21 45.00 1.66%
B&G Foods Inc, BGS Called 10/28/20 26.79 2/19/21 28.00 4.42%
Valero Energy Inc. VLO Called 8/26/20 53.70 3/26/21 60.00 11.73%
Chevron Corp. CVX Called 12/23/20 85.69 4/1/21 96.00 12.95%
Security In/out money Sell Date Sell Price Exp. Date $ Return Total % Return
IIPR Jul 17 $95 call out-of money 6/3/20 3.00 7/17/20 3.00 3.40%
MO Jul 31 $42 call out-of-money 6/17/20 1.60 7/31/20 1.60 4.03%
ABBV Sep 18 $100 call out-of-money 7/15/20 4.60 9/18/20 4.60 5.05%
IIPR Sep 18 $100 call in-the-money 7/22/20 5.00 9/18/20 5.00 5.69%
QCOM Sep 18 $95 call in-the-money 6/24/20 4.30 9/18/20 4.30 4.82%
USB Sep 18 $37.50 call in-the-money 7/22/20 2.00 9/18/20 2.00 5.52%
BIP Oct 16 $45 call in-the-money 9/2/20 1.95 10/16/20 1.95 4.65%
SBUX Oct 16 $87.50 call in-the-money 10/16/20 3.30 10/16/20 3.30 4.00%
V Nov 20 $200 call in-the-money 9/22/20 10.00 11/20/20 10.00 4.99%
ABBV Dec 31 $100 call in-the-money 11/18/20 3.30 12/31/20 3.30 3.62%
EPD Jan 15 $20 call in-the-money 11/23/20 0.80 1/15/21 0.80 4.41%
MO Jan 15 $40 call in-the-money 11/25/20 1.90 1/15/21 1.90 4.79%
USB Jan 15 $45 call in-the-money 11/25/20 2.00 1/15/21 2.00 4.48%
BGS Feb 19 $27.50 call in-the-money 12/11/20 2.40 2/19/21 2.40 8.96%
VLO Mar 26 $60 call in-the-money 2/10/21 6.50 3/26/21 6.50 12.10%
CVX Apr 1 $95.50 call in-the-money 2/19/21 $4.30 4/1/21 $4.30 5.02%

AGNC Investment Corp. (AGNC)
Yield 8.3%
The mortgage REIT announced earnings on Tuesday that beat expectations and the stock was up almost 3% at midday. It came out with earnings of $0.76 per share (calculated by net spread and dollar roll income) versus an expected $0.57. Average asset yields were higher, as the yield curve steepened, and prepayments were down from last quarter. It’s good news for the stock and it reaffirms the rationale for buying it. HOLD


Brookfield Infrastructure Partners (BIP)
Yield 3.7%
On the one hand, BIP isn’t giving us much to write home about. It broke 50 per share in early November and still hasn’t found its way above 55. On the other hand, BIP is still very much in an uptrend that began over a year ago. It’s just climbing at a snail’s pace. It would look a lot better on a relative basis if the market hadn’t been so hot. And the prognosis is good. Earnings should grow as new projects come online and its transportation assets rebound. HOLD


Digital Realty Trust, Inc. (DLR)
Yield 3.1%
This data center REIT has been looking better of late and has rebounded to the higher point since October. It’s been out-of-favor, first as a pandemic beneficiary and then as a defensive stock during the cyclical stock rally. It’s in a growing business and should get hot again at some point. Digital announces earnings this Thursday. Hopefully, the earnings announcement can get it moving. It’s also worth noting that DLR has a beta of just 0.08, which means it’s less than one-tenth as volatile as the overall market, and a great stock to have in the portfolio in case the market turns south. BUY


Enterprise Product Partners (EPD)
Yield 7.8%
This undervalued energy infrastructure giant is still trending higher, but at an obnoxiously slow pace. It is up over 40% since early November, but the stock is still stuck around the highs of mid-January despite the strong energy rally early this year. The stock sells at a great value (still well below the pre-pandemic level) with a stratospheric and safe yield ahead of what is likely to be a booming energy market in the months ahead. It is likely to trend higher the rest of the year, and earnings will be announced next week. BUY


KKR & Co. (KKR)
Yield 1.1%
Business is good and getting even better. Markets are booming and institutions are piling into alternative assets to diversify away from traditional stock and bond investments. The financial sector is hot and will likely stay that way the rest of the year. As a result, KKR stock keeps rising, albeit slowly. The asset manager announces first-quarter earnings next week.

Although the future looks promising, the market is high and the future is always uncertain. Shares are already up over 15% from when they were added to the portfolio about a month ago. It’s an excellent situation in which to write a profitable covered call and secure a high income. HOLD


NextEra Energy  Inc, (NEE)
Yield 2.0%
NextEra reported earnings last week that soundly beat estimates with 14% year-over-year earnings growth. We picked up the stock after a rare hiccup during the market’s cyclical stock bender. But NEE has been trending higher since mid-March. It’s a defensive utility with an exciting growth twist with its alternative energy business. And it should also enjoy tax breaks, incentives and subsidies in the Biden Administration. I’m still waiting for the stock to move higher to write calls. BUY


U.S. Bancorp (USB)
Yield 2.9%
This giant regional bank is well poised for the strong recovery as loan demand increases and interest rates like trend higher. The stock has been on a strong uptrend since late January that appears to be running out of gas a little bit this month. The positive prognosis along with the strong trend creates high call premiums. And the increasingly tenuous nature of the up move suggest a near term top. It’s a ripe situation to write a covered call. HOLD


Existing Call Trades
Sell AGNC June 18th $17 call at $0.50 or better
The stock went up over 2.5% after the earnings beat. That’s a big move for this stock and these calls are all the way up to 0.80 per call from the original 0.50. It’s a great time to write the calls if you haven’t done so already. The originally priced calls provided the equivalent of more than five months of dividend. The current price provides the same income of almost seven months.

Income Calendar
Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Income Advisor for an explanation of how dates are estimated.
CIA 521 May Calendar

CIA 521 June Calendar

The next Cabot Income Advisor issue will be published on May 26, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

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Chairman & Chief Investment Strategist: Timothy Lutts
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