Too Soon for Optimism, but Just Right for Income
The market has been terrific lately. The S&P 500 is up about 15% in the last month and a half. Is this the end of the bear market and the beginning of the recovery, or is it just another bear market rally?
I must lean towards the latter. Although anything is possible, it’s difficult to see how the market can generate lasting traction while facing a still-aggressive Fed, high inflation, and a likely recession in 2023. At the same time, it’s true that this bear market will certainly end. And many stocks are at dirt-cheap prices compared to where they will be in couple of years. But we’re probably not out of the woods yet.
While the market indexes may not have yet hit the lows, interest rate-sensitive stocks probably have. Some of the very best stocks to own when the economy struggles became dirt cheap ahead of a likely recession next year. The spike in interest rates caused the selloff. But a recession is likely to pressure longer-term rates lower. In fact, the benchmark 10-year Treasury rate has already started falling.
Several of these more defensive stocks were added to the portfolio after the selloff and have rallied this month. Therein lies the current opportunity.
The recent rally has lifted call premiums to the highest levels in many months as more investors are willing to bet on higher prices going forward. But unless this current rally leads us to the Promised Land of the next bull market, it has probably about had it after 15%. It’s a great time to lock in a high income while premiums are fat, and stocks may be close to a near-term high.
The current market is creating a golden opportunity to get a high income in an otherwise crummy market. Let’s grab it. In this issue, I highlight two call writing opportunities in stocks that have rallied strongly since being added to the portfolio. While I like the prospects of these stocks over the next year, it’s time to err on the side of income.
What to Do now
There certainly has been some optimism about lower inflation and a possible soft landing. The economy is still solid, and inflation has been going up less, at least for a month or so. But there are some very good reasons to question this latest spate of optimism.
Inflation is still way too high. And it remains to be seen how easily and how fast it might come down. It could continue to prove stickier than expected. Plus, the Fed has hiked rates at the fastest pace in decades. And it historically takes a fair amount of time to realize the effect of higher rates on the economy. It will be many more months before the full effect of the Fed’s actions is apparent.
Nobody really knows the extent of the damage done to the economy already. Hopefully, it can escape recession or get away with a very mild one. But there is still a considerable risk that the rate hikes will slow the economy much more than the market currently anticipates. We could be heading into a year of recession and plunging corporate earnings where the length and severity is still unclear.
I hope the optimists are right. They could be. But there is still way too much risk to back up the truck and start buying stocks at this point, especially after the market has rallied 15% from the low. There was a strong opportunity in the interest rate-sensitive stocks that got pummeled in the last selloff. Rates are coming down and those stocks have rallied. That’s why Xcel Energy (XEL), Realty Income (O), and Brookfield Infrastructure (BIPC) were added to the portfolio.
There is also a good opportunity in the midstream energy companies, ONEOK (OKE) and The Williams Companies (WMB). These companies should be resilient in both recession and inflation and the sky-high dividends are quite safe.
But now is a better time to look for income than buy more stocks. This uncertain market has rallied 15% from the low. Call premiums are higher than they have been in some time as many stocks may be near short-term highs. It’s a great time to take advantage of the recent rally and lock in a high income while the getting is good. For that reason, a call sale was highlighted last week and there are two more in this issue.
Monthly Recap
October 26
Purchased Xcel Energy (XEL) - $62.57
November 9
Purchased Brookfield Infrastructure Corp. (BIPC) - $42.43
November 15
Sell OKE January 20 $65 calls at $3.70 or better – Pending
November 23
Sell O January 20 $65 calls at $2.35 or better
Sell XEL January 20 $65 calls at $5.00 or better
Featured Action: Sell O January 20 $65 calls at $2.35 or better
Expiration date: January 20
Strike price: $65
Call price: $2.35
Realty Income Corporation (O)
O is a legendary income stock that went on a fire sale after the fall selloff and has since recovered very nicely. The stock has leveled off and pulled back slightly over the past couple weeks, and the market has gotten choppier. I like this stock going forward but I still don’t trust this market. Let’s assure a strong income return.
Here are the three scenarios.
1. The stock closes above the $65 strike price at expiration.
Call premium: $2.35
Dividends: $1.00 (10-15, 11-15, 12-15. 1-15)
Appreciation: $4.63 ($65.00 strike price minus $60.37 purchase price)
Total: $7.98 (total return will be 13.2% in 4 months)
2. The stock price closes below but near our $65 strike price.
Call premium: $2.35
Dividend: $1.00
Total: $3.35 (total income of 5.55% in 4 months)
3. The stock price declines.
There will be $3.35 in income to offset the decline. Plus, the original purchase price was over $4 per share below the strike price.
Sell XEL January 20 $65 calls at $5.00 or better
Expiration date: January 20
Strike price: $65
Call price: $5.00
Xcel Energy Inc. (XEL)
XEL is a similar story to O. The stock has had a strong recovery from the October lows but has leveled off lately. I love this stock. But this market is still highly unpredictable in the near term. It’s the type of market where it mkes sense to seize income opportunities when they arise and err on the side of being conservative. These calls are well in the money, to the tune of almost $4 per share. But it’s the only way to get a strong premium at a time when the market has rallied nearly 15% from the low.
Here are the three scenarios.
1. The stock closes above the $65 strike price at expiration.
Call premium: $5.00
Dividends: $0.4875 (1-20)
Appreciation: $2.43 ($65.00 strike price minus $62.57 purchase price)
Total: $7.92 (total return will be 12.7% in 3 months)
2. The stock price closes below but near our $65 strike price.
Call premium: $5.00
Dividend: $0.4875
Total: $5.49 (total income of 8.77% in 3 months)
3. The stock price declines.
There will be $5.49 in income to offset the decline. The purchase price is also $2.43 below the strike price.
Portfolio Updates
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Recent Price | Buy at or Under Price | Yield | Total Return |
| Qualcomm Inc. | QCOM | 5/5/21 | $134.65 | $120.20 | NA | 2.42% | -8.14% |
| Visa Inc. | V | 12/22/21 | $217.96 | $206.32 | NA | 0.87% | -4.61% |
| Global Ship Lease, Inc. | GSL | 2/23/22 | $24.96 | $17.33 | NA | 8.66% | -26.38% |
| ONEOK, Inc. | OKE | 5/25/22 | $65.14 | $63.20 | $67.00 | 5.92% | 0.09% |
| Star Buld Carriers Corp. | SBLK | 6/1/22 | $33.30 | $20.20 | NA | 33.28% | -31.67% |
| Intel Corporation | INTC | 7/27/22 | $40.18 | $28.94 | NA | 5.04% | -26.30% |
| The Williams Companies | WMB | 8/24/22 | $35.58 | $33.15 | $38.00 | 5.13% | -5.59% |
| Realty Income Corporaton | O | 9/28/22 | $60.37 | $65.30 | $63.00 | 4.56% | 9.06% |
| Xcel Energy Inc. | XEL | 10/26/22 | $62.57 | $68.68 | $65.00 | 2.85% | 9.77% |
| Brookfield Infrastructure corp. | BIPC | 11/9/22 | $42.43 | $45.71 | $46.00 | 3.20% | 7.73% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| OKE Jan 20 $65 call | OKE230120C00065000 | Sell pending | $2.27 | $3.70 | 5.68% | ||
| O Jan 20 $65 call | O0230120C00065000 | Sell pending | $2.22 | $2.35 | 3.89% | ||
| XEL Jan 20 $65 call | XEL230120C00065000 | Sell pending | $4.91 | $5.00 | 7.99% | ||
| as of close on 11/21/2022 | |||||||
| SOLD STOCKS | |||||||
| Security | Ticker Symbol | Action | Entry Date | Entry Price | 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 | 3.42% |
| Brookfield Infras. Ptnrs. | BIP | Called | 6/24/20 | $41.92 | 10/16/20 | $45 | 8.49% |
| Starbucks Corp. | SBUX | Called | 8/26/20 | $82.41 | 10/16/20 | $88 | 6.18% |
| Visa Corporation | V | Called | 9/22/20 | $200.56 | 11/20/20 | $200 | 0.00% |
| AbbVie Inc. | ABBV | Called | 6/2/20 | $91.04 | 12/31/20 | $100 | 12.43% |
| Enterprise Prod. Prtnrs. | EPD | Called | 6/24/20 | $18.14 | 1/15/21 | $20 | 15.16% |
| Altria Group | MO | Called | 6/2/20 | $39.66 | 1/15/21 | $40 | 7.31% |
| U.S. Bancorp | USB | Called | 11/25/20 | $44.68 | 1/15/21 | $45 | 1.66% |
| B&G Foods Inc, | BGS | Called | 10/28/20 | $26.79 | 2/19/21 | $28 | 4.42% |
| Valero Energy Inc. | VLO | Called | 8/26/20 | $53.70 | 3/26/21 | $60 | 11.73% |
| Chevron Corp. | CVX | Called | 12/23/20 | $85.69 | 4/1/21 | $96 | 12.95% |
| KKR & Co. | KKR | Called | 3/24/21 | $47.98 | 6/18/21 | $55 | 14.92% |
| Digital Realty Trust | DLR | Called | 1/27/21 | $149.17 | 7/16/21 | $155 | 5.50% |
| NextEra Energy, Inc. | NEE | Called | 2/24/21 | $73.76 | 9/17/21 | $80 | 10.00% |
| Brookfield Infras. Ptnrs. | BIP | Called | 1/13/21 | $50.63 | 10/15/21 | $55 | 11.65% |
| AGNC Investment Corp | AGNC | Sold | 1/13/21 | $15.52 | 1/19/22 | $15 | 5.92% |
| ONEOK, Inc. | OKE | Called | 5/26/21 | $52.51 | 2/18/22 | $60 | 19.62% |
| KKR & Co. | KKR | Sold | 8/25/21 | $64.52 | 2/23/22 | $58 | -9.73% |
| Valero Energy Inc. | VLO | Called | 11/17/21 | $73.45 | 2/25/22 | $83 | 15.53% |
| U.S Bancorp | USB | Sold | 3/24/21 | $53.47 | 4/13/22 | $51 | -1.59% |
| Enterprise Product Ptnrs | EPD | Called | 3/17/21 | $23.21 | 4/14.2022 | $24 | 11.25% |
| FS KKR Capital Corp. | FSK | Called | 10/27/21 | $22.01 | 4/14/22 | $23 | 13.58% |
| Xcel Energy Inc. | XEL | Called | 10/12/21 | $63.00 | 5/20/22 | $70 | 12.66% |
| Innovative Industrial Props. | IIPR | Sold | 3/23/22 | $196.31 | 7/20/22 | $93 | -51.23% |
| One Liberty Properties | OLP | Sold | 7/28/21 | $30.37 | 8/24/22 | $25 | -12.94% |
| EXPIRED OPTIONS | |||||||
| 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 Jun 18 $17 call | out-of-money | 4/13/21 | $0.50 | 6/18/21 | $0.50 | 3.21% | |
| KKR Jun 18 $55 call | in-the-money | 4/28/21 | $3.00 | 6/18/21 | $3.00 | 6.25% | |
| USB Jun 16 $57.50 call | out-of-money | 4/28/21 | $2.80 | 6/18/21 | $2.80 | 5.24% | |
| DLR Jul 16 $155 call | in-the-money | 6/16/21 | $8.00 | 7/16/21 | $8.00 | 5.36% | |
| AGNC Aug 20 $17 call | out-of-money | 6/23/21 | $0.50 | 8/20/21 | $0.50 | 3.00% | |
| OKE Aug 20 $57.50 call | out-of-money | 6/23/21 | $3.50 | 8/20/21 | $3.50 | 6.67% | |
| NEE Sep 17 $80 call | in-the-money | 8/11/21 | $3.50 | 9/17/21 | $3.50 | 4.75% | |
| BIP Oct 15 $55 call | in-the-money | 9./01/2021 | $2.00 | 10/15/21 | $2.00 | 3.95% | |
| USB Nov 19 $60 call | out-of-money | 9/24.2021 | $2.30 | 11/19.2021 | $2.30 | 4.30% | |
| OKE Nov 26 $65 call | out-of-money | 10/20/21 | $2.25 | 11/26/21 | $2.25 | 4.28% | |
| KKR Dec 17 $75 call | out-of-money | 10/26/21 | $3.50 | 12/17/21 | $3.50 | 5.42% | |
| QCOM Jan 21 $185 Call | out-of-money | 11/30/21 | $9.65 | 1/21/22 | $9.65 | 7.17% | |
| OLP Feb 18 $35 Call | out-of-money | 11/19/21 | $1.50 | 2/18/22 | $1.50 | 4.94% | |
| OKE Feb 18 $60 Call | in-the-money | 1/5/22 | $2.75 | 2/18/22 | $2.75 | 5.24% | |
| USB Feb 25 $61 call | out-of-money | 1/13/22 | $2.50 | 2/25/22 | $2.50 | 4.68% | |
| VLO Feb 25 $83 call | in-the-money | 1/18/22 | $4.20 | 2/25/22 | $4.20 | 6.13% | |
| EPD Apr 14th $24 call | in-the-money | 3/2/22 | $1.25 | 4/14/22 | $1.25 | 5.69% | |
| FSK Apr 14th $22.50 call | in-the-money | 3/10/22 | $0.90 | 4/14/22 | $0.90 | 4.09% | |
| XEL May 20th $70 call | in-the-money | 3/30/22 | $3.00 | 5/20/22 | $3.00 | 4.76% | |
| SBLK July 15th $134 call | out-of-money | 6/1/22 | $1.60 | 7/15/22 | $1.60 | 4.80% | |
| OKE Oct 21st $65 call | out-of-money | 8/24/22 | $3.40 | 10/21/22 | $3.40 | 5.22% | |
| QCOM Sep 16th $145 call | out-of-money | 7/20.2022 | $11.75 | 9/16/22 | 11.75 | 8.73% | |
Brookfield Infrastructure Corporation (BIPC)
Yield: 3.20%
The infrastructure company reported terrific earnings early this month. It soundly beat expectations with funds from operations (FFOs) growth of 24% for the quarter. That’s impressive considering BIP had fallen more than 20% from the high over the past couple of months. Rising interest rates soured investors as fixed rate alternatives became more attractive.
But the selling was unjustified as Brookfield’s crucial assets will continue to deliver steady earnings through a recession, it has inflation adjustments built into its contracts, the dividend is solid, and the stock is cheap now. Although BIPC has gotten a big bump since being added to the portfolio last week, it still sells at a great value ahead of a likely period of relative outperformance. BUY
Brookfield Infrastructure Corporation (BIPC)
Next ex-div date: November 29, 2022
Global Ship Lease, Inc. (GSL)
Yield: 8.7%
This container shipping company stock had been trending higher since late September. But it got knocked back over the past week and a half because of renewed Covid problems in China and fear that it will negatively affect shipping volumes. We’ll see if the negative pressure continues. At the same time, the longer-term trajectory looks excellent as shipping has a very favorable supply/demand dynamic and the industry is likely in a cyclical bull market. HOLD
Global Ship Lease, inc. (GSL)
Next ex-div date: November 21, 2022
Intel Corp. (INTC)
Yield: 5.0%
This stock may well have bottomed out. INTC had been trending higher since the low of October but has been knocked back a little bit this past week. Intel is still a powerful brand and the stock is dirt cheap, selling near book value. It also has promising developments for the future. It is rapidly growing the foundry business that should be further aided by government subsidies. The company is also restructuring and making inroads into other high-growth businesses. The long term is promising. It’s the short term that is still a question. HOLD
Intel Corporation (INTC)
Next ex-div date: February 4, 2023, est.
ONEOK, Inc. (OKE)
Yield: 5.9%
This midstream energy stock had been trending sharply higher since late September but has been consolidating somewhat this past week. It tends to move along with the energy sector in the near term even though it has little commodity price exposure. But unlike much of the sector this company is extremely resilient in a recession and natural gas volumes should remain solid because of huge demand in Europe and Asia. The huge dividend is another feature that should be in demand in the market going forward. BUY
ONEOK, inc. (OKE)
Next ex-div date: January 31, 2023, est.
Realty Income Corp. (O)
Yield: 4.6%
Earnings for this legendary income REIT surpassed estimates as it declared its 100th consecutive quarterly dividend increase. Revenue soared 80% as results continue to reflect the merger with VEREIT that was completed a year ago. Normalized funds from operations per share rose 9% compared to last year’s third quarter and 7.7% from the last quarter. Realty’s typical tenants of drug stores, convenience stores and supermarkets enabled it to continue raising the dividend through the pandemic and should prove resilient in this recession. This is a great safe dividend stock that got oversold in the last downturn and has been trending higher since the middle of last month. BUY
Realty Income Corp. (O)
Next ex-div date: November 30, 2022
Star Bulk Carriers Corp. (SBLK)
Yield: 23.9%
Most of what I said about GSL above is also true for SBLK. The stock hit the highest level since September but has sputtered over the past couple of weeks as the China Covid situation prompted worries of a shipping slowdown. The third-quarter earnings were however significantly lower than last year’s quarter as shipping volumes and rates have decreased in the slower economy, unlike GSL.
But slowing business has already been factored into the price as the stock is down 40% from the high. It is well worth noting that Star Bulk declared a $1.20 quarterly dividend and trades ex dividend on November 29. The dividend changes almost every quarter according to profits. Although lower than last quarter’s $1.65 payout, the next dividend is still 6% of the current stock price. We’ll get the dividend and then reevaluate. HOLD
Star Bulk Carriers Corp. (SBLK)
Next ex-div date: November 29, 2022
Qualcomm Corp. (QCOM)
Yield: 2.4%
It’s been a bad year for QCOM and technology in general. QCOM is down over 30% YTD. The company also forecasts lower guidance and anticipates a significant slowdown in profit growth in the quarters ahead as comparisons get tougher and a weaker economy is hurting smartphone demand. That’s the bad news. The good news is that the bad news is already in the stock price. QCOM now sells at just 11 times forward earnings despite having moved up about 20% from the low. The stock may have already bottomed out, setting up for huge returns when things turn around. HOLD
Qualcomm Inc. (QCOM)
Next ex-div date: November 30, 2022
Visa Inc. (V)
Yield: 0.9%
This stock soared about 18% in the last five weeks. Visa reported earnings that once again killed it. Revenue spiked 22% and earnings were up 27% from last year’s quarter. The payments processing giant continues to benefit from the end of Covid restrictions despite the slower economy. V got a nice bump after earnings. But the situation is murkier going forward as the U.S. and global economies continue to deteriorate. The recent market rally is more evidence that V quickly benefits when the market turns. It’s been on a roll that hopefully lasts longer. HOLD
Visa Inc. (V)
Next ex-div date: February 9, 2023, est.
The Williams Companies, Inc. (WMB)
Yield: 5.1%
This midstream energy company has been quietly hot, soaring 20% from the recent low. WMB has leveled off in the past couple of weeks but hasn’t really pulled back. It continues to outperform its midstream energy peers and the overall market. It seems to hold up even when the sector hits a bump. A big reason for the solid performance is strong earnings amid resilient natural gas demand, something that is likely to endure through the recession based on shortages overseas. BUY
The Williams Companies, Inc. (WMB)
Next ex-div date: December 8, 2022
Xcel Energy Inc. (XEL)
Yield: 2.9%
This clean energy utility stock has been very bouncy for a conservative dividend stock. After hitting a new high in September, XEL got clobbered in the fall selloff as rising interest rates created more attractive alternatives to dividend stocks. But the selling was overdone, interest rates have moved lower as the economy slows, and XEL is an excellent recession stock. The stock has soared 17% from the low in the last five-plus weeks. The near term is shaping up well and the longer-term prognosis is also excellent. BUY
Xcel Energy, Inc. (XEL)
Next ex-div date: December 14, 2022, est.
Existing Covered Call Trades
Sell OKE January 20 $65 calls at $3.70 or better
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.
The next Cabot Income Advisor issue will be published on December 28, 2022.
