A Powerhouse for the New Era
The election is changing things. Stocks are being thrust in a new direction. And the implications are dramatic.
The main catalyst is the expectation of stronger economic growth. For much of this year, investors had been wavering between expectations of a slowing economy and rapidly falling interest rates or a still-strong economy and slower rate declines. The latter scenario got a huge shot of adrenaline since the election.
As a result, new sectors have emerged as market leaders. Cyclical sectors have taken off. Financial, energy, and consumer discretionary sectors are leading the market. And this changing dynamic is likely just in the very early stages.
We are in a bull market that began in October of 2022. From the start of the bull market until this past summer, the market was driven higher almost exclusively by technology. Returns in the rest of the market were uninspired. But the rally broadened out in the summer as previously underperforming interest rate-sensitive sectors in utilities and real estate took off.
Since the election, cyclical stocks are taking over. These sectors had not really participated in this bull market and are still relatively cheap, and with new-found momentum. In this issue, I will focus on an opportunity in the financial sector.
Financial stocks, of which banks make up a big part, generally make profits from the spread between the cost of funds, mostly short-term rates, and what they charge for loans. Higher spreads mean more profits. When the Fed raised short-term rates from 0% to 5.5% in about a year and a half, that wasn’t cool. Much higher short-term rates killed the spread. But things are changing.
The Fed has begun a rate cutting cycle that will likely last for two years. Rates may decline more slowly than previously expected, but the trend is unmistakably lower. Banks also need a good economy with strong loan demand. The better economic prognosis after the election is bullish. Plus, there is likely to be a much friendlier regulatory environment for banks and financial companies in the new administration.
For those reasons, finance has been the best-performing market sector since the election. The Financial Select Sector SPDR Fund (XLF), an industry bellwether, is up 8.61% in less than three weeks. Some of the very best financial stocks are up a lot more since the election.
In this issue, I highlight one of the highest-growth major financial companies that will surely benefit from the improving dynamic going forward. It is the leading all-digital bank in the country. Unlike many other industry-leading stocks, it is still well below the high because of a recent temporary stumble, and a price spike should be ahead.
What to Do Now
Portfolio performance has changed since the election. The once-hot sectors in utilities and real estate have pulled back as interest rates spiked higher in the immediate election aftermath. However, these stocks have since leveled off. NextEra Energy (NEE) and Realty Income (O) have both been downgraded to HOLD pending a momentum shift.
At the same time, the cyclical positions have taken off. The main beneficiaries are natural gas exporter Cheniere Energy Partners (CQP), midstream energy company Enterprise Product Partners (EPD), Business Development Company FS KKR Capital Corp. (FSK), and homebuilder Toll Brothers (TOL). All these stocks are up double digits since the election, except for FSK which is up over 7%.
EPD, which has an outstanding covered call, has moved beyond the BUY price and is being downgraded to a HOLD for that reason. The other stocks may continue to ride the current momentum higher in the weeks ahead and are currently the best portfolio stocks to buy now. TOL has moved into territory where we can get a high-priced covered call. However, I’m holding off in hopes that the current momentum drives TOL higher.
The interest rate-sensitive stocks are still worth holding. The prognosis for lower rates got worse and these stocks fell back. However, interest rates are still likely to trend lower in the year ahead and NEE and O are still relatively cheap.
Recent Activity
October 25th
Sold FSK Dec 20th $20.00 calls at $0.95 or better
November 12th
SOLD EPD Jan 17th $29.00 calls at $1.75 or better
November 19th
Sold Alexandria Real Estate Equities, Inc. (ARE) - $104.49
November 26th
Buy Ally Financial Inc. (ALLY)
Enterprise Product Partners L.P. (EPD) – Rating change “BUY” to “HOLD”
Featured Actions
Buy Ally Financial Inc. (ALLY)
Security type: Common Stock
Sector: Financial (Credit Services)
Price: $37.25
52-week range: $26.50 - $45.46
Yield: 3.2%
Profile: Ally is the leading all-digital banking company in the U.S. and specializes in auto loans.
Positives
- Online banking is the wave of the future and Ally has a big leg up.
- The company has a proven successful formula that should prevail in the future.
- The stock is cheap after a temporary slip while lesser opportunities are far more expensive.
Risks
- A recession is very bad for auto purchases and would pummel the price.
- Continuing high rates could put pressure on the consumer, reducing purchases and increasing loan defaults.
Ally Financial is the leading all-digital banking company in the U.S. with 3.3 million customers and over $100 billion in loans. The primary revenue source is automotive loans (over 70%), but it is also diversified in auto insurance, commercial lending, mortgage financing, and credit cards.
The company was the financial segment of General Motors (GM) where it developed a 100-year-old, fully developed auto loan business. It was spun off in 2009 during the financial crisis as part of GM’s bankruptcy reorganization. The company has since focused on the online business.
Ally is still a relatively small bank among the big players in the country. But it is becoming very well established in the high-growth, online banking part of the business. It focuses on this area more than established banks and may grow into a much bigger player in the years ahead.
Ally can attract a large deposit base online because it can offer higher rates than traditional banks. It can do this because it is unburdened by the costs associated with physical branches and staffing. The bank has been able to add retail deposit customers for 62 consecutive quarters, including 57,000 in the third quarter.
Ally uses these deposits to make auto and other loans. The bank earns money on the spread between what it pays on deposits and what it charges for auto loans. At the end of the last reported quarter, it had $83.6 billion in retail auto loans and $23.9 billion in commercial auto loans.
Ally has grown the business through online banking. That business is accelerating, and revenues have about doubled since 2017 from $5.8 billion to trailing 12-month revenue of $11.5 billion. Online banking now accounts for 88% of loans compared to 54% in 2016.
Ally has had major success improving its funding structure as the peculiarities of the burgeoning online business become more well-known. The profitability of its deposit base has improved with the more expensive CDs making up a much smaller portion. Continuing improvements in this funding structure mean wider net interest income (NII) margins and better than historical returns going forward.
The bank is also diversifying into other profitable areas like credit cards. These other areas grew revenue 40% in the last quarter from a year ago. It provides some relief when the auto market gets tough and can raise overall margins.
A big reason to buy ALLY now is because it’s cheap, much cheaper than its peers. Despite the recent rally and the market at highs, ALLY sells at just 8.4 times forward earnings and 0.93 times book value, both valuations are well below those of the market averages. But there’s a reason it’s cheap.
Ally is highly leveraged to the auto market where things have been challenging. Consumers are strapped from inflation, and loan rates are still high. The dynamic has led to flattening sales and an increasing number of defaults. ALLY plunged over 20% in early September after the company disclosed that loan defaults were worse than expected.
The percentage of defaults increased to 2.24%, well up from last year. In the third quarter, net charge-offs increased 13.4% over last year’s quarter to $517 million, and the amount set aside for loan loss provisions going forward increased 27% to $645 million. Also, net financing revenues decreased 2.9% from the same quarter last year.
But I believe the market overreacted and the selling is overdone. First, Ally has taken strong risk management steps for loans, which they have proven to be good at. Second, the current issues are just temporarily reducing growth but not killing profitability. Ally still grew revenue 6.9% and earnings were up 14.5% in the third quarter versus the year-ago quarter. Third, things are likely to improve next year.
Inflation is under control. Interest rates are coming down. And the economic prognosis is improving. Although the fourth quarter will likely feature lower earnings growth than previously expected, next year looks good. In fact, analysts are expecting Ally to deliver 40% earnings growth for 2025.
Net interest margins (NIMs) are projected to be 3.2% in 2024, down from 3.32% last year. However, the company expects a medium-term average of 4% NIM margin going forward.
And there’s something else. Financial stocks have been booming over the last year. The Financial Select Sector SPDR Fund (XLF), a sector bellwether, is up 46% over the last year (as of 11-22). Even after the selloff, ALLY is up 44% over the same period. Financial stocks also got a huge further boost after the election as investors anticipate less regulation and higher growth.
ALLY has been trending higher since the September selloff, but other financial stocks continued the torrid pace higher and got a big spike after the election. While ALLY is down 12% since August 30th, Capital One Financial (COF) is up 28% and Discover Financial Services (DFS) has soared 30% over the same period.
As the chart below illustrates, ALLY was blowing away the performance of the XLF and booming right up there with the best of them prior to the September selloff. Since then, several good financial stocks have left ALLY in the dust. Now financial powerhouses like DFS and COF are at nosebleed levels at all-time highs while ALLY is still reasonably priced with a price spike likely ahead of it as things normalize.
The market is high. Many financial stocks are even higher. Chasing stocks into the stratosphere typically doesn’t deliver great returns. Finding a stock that has been temporarily held back and is still cheap is a much better strategy. Finding winners in a high-priced market entails seeking out opportunities like ALLY.
Then there’s the dividend. ALLY pays a quarterly dividend of $0.40 ($1.20 annually), which translates to a highly respectable 3.2% yield at the current price. The payout is well-supported with just a 29% payout ratio, compared to an average of 37% for the financial sector. Ally has also grown the payout by an average of 12% over the last five years. Companies that grow the dividend tend to be great performers over time.
Ally Financial Inc. (ALLY)
Next ex-div date: February 1, 2025, est.
Portfolio Recap
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Recent Price | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp | AGNC | 9/24/24 | $10.47 | $9.74 | $12.00 | 14.78% | -4.69% |
| Cheniere Energy Prtns. | CQP | 7/23/24 | $53.04 | $54.64 | $60.00 | 6.34% | 5.50% |
| Constellation Energy Corp. | CEG | 8/27/24 | $196.14 | $249.89 | $270.00 | 0.56% | 27.60% |
| Enterprise Product Ptnrs. | EPD | 2/27/24 | $27.61 | $32.82 | $30.00 | 6.40% | 25.47% |
| FS KKR Capital Corp. | FSK | 4/23/24 | $19.42 | $21.77 | $23.00 | 12.86% | 20.57% |
| NextEra Energy, Inc. | NEE | 4/25/23 | $77.50 | $76.00 | NA | 2.71% | 2.71% |
| Qualcomm Inc. | QCOM | 5/5/21 | $134.65 | $156.79 | $180.00 | 2.17% | 25.55% |
| Realty Income Corp. | O | 6/27/23 | $60.19 | $57.45 | NA | 5.50% | 3.32% |
| Toll Brothers, Inc. | TOL | 10/22/24 | $148.02 | $157.59 | $170.00 | 0.58% | 6.47% |
| Ally Financial Inc. | ALLY | 11/26/24 | $37.85 | $45.00 | 3.17% | ||
| Open Recommendations | Ticker Symbol | Initial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| CEG Dec 20 $260 call | CEG241220C00260000 | Sell | 9/25/24 | $24.00 | $7.87 | $24.00 | 12.24% |
| FSK Dec 20 $20 call | FSK241220C00020000 | Sell | 10/25/24 | $0.95 | $1.70 | $0.95 | 4.89% |
| EPD Jan 17 $29 call | EPD250117C00029000 | Sell | 11/12/24 | $1.75 | $4.05 | $1.75 | 6.34% |
| as of close on 11/22/2024 | |||||||
| SOLD STOCKS | |||||||
| X | 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 | 4/14/22 | $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% |
| ONEOK, Inc. | OKE | Called | 5/25/22 | $65.14 | 1/20/23 | $65 | 2.66% |
| Xcel Energy, Inc. | XEL | Called | 10/26/22 | $62.57 | 1/20/23 | $65 | 4.67% |
| Realty Income Corp. | O | Called | 9/28/22 | $60.37 | 2/17/23 | $63 | 5.41% |
| Medical Properties Trust | MPW | Sold | 1/24/23 | $13.22 | 3/21/23 | $8 | -38.00% |
| Brookfield Infrastructure Cp. | BIPC | Called | 11/9/22 | $42.43 | 7/21/23 | $45 | 8.72% |
| Star Bulk Carriers Corp. | SBLK | Sold | 6/1/22 | $33.30 | 8/8/23 | $18 | -31.38% |
| Visa Inc. | V | Called | 12/22/21 | $217.16 | 8/18/23 | $235 | 9.16% |
| Global Ship Lease, Inc. | GSL | Sold | 2/23/22 | $24.96 | 8/29/23 | $19 | -13.82% |
| ONEOK, Inc. | OKE | Called | 3/28/23 | $60.98 | 9/15/23 | $65 | 9.72% |
| Hess Corporation | HES | Called | 6/6/23 | $132.25 | 10/20/23 | $155 | 17.87% |
| Tractor Supply Company | TSCO | Sold | 9/26/23 | $203.03 | 11/28/23 | $200 | -1.02% |
| Digital Realty Trust | DLR | Called | 7/18/23 | $117.31 | 1/19/24 | $135 | 17.16% |
| Intel Corporation | INTC | Called | 7/27/22 | $40.18 | 1/19/24 | $43 | 9.76% |
| AbbVie Inc. | ABBV | Called | 7/25/23 | $141.63 | 3/15/24 | $160 | 15.11% |
| Marathon Petroleum Corp. | MPC | Called | 10/24/23 | $149.45 | 3/28/24 | $165 | 12.06% |
| The Williams Companies, Inc. | WMB | Called | 8/24/22 | $35.58 | 5/17/24 | $35 | 7.14% |
| Main Street Capital Corp. | MAIN | Called | 3/26/24 | $46.40 | 9/20/24 | $49 | 10.91% |
| Brookfield Infrastructure Cp. | BIPC | Called | 2/27/24 | $32.64 | 9/20/24 | $35 | 11.00% |
| American Tower Corp. | AMT | Called | 1/23/24 | $202.26 | 9/20/24 | $210 | 5.43% |
| ONEOK, Inc. | OKE | Called | 8/27/24 | $79.59 | 10/18/24 | $88 | 11.18% |
| Alexandria Real Estate Eq. | ARE | Sold | 12/19/23 | $129.54 | 11/19/24 | $108 | -12.82% |
| 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 | 9/1/21 | $2.00 | 10/15/21 | $2.00 | 3.95% | |
| USB Nov 19 $60 call | out-of-money | 9/24/21 | $2.30 | 11/19/21 | $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% | |
| OKE Jan 20th $65 call | In-the-money | 11/25/22 | $3.70 | 1/20/23 | $3.70 | 5.68% | |
| XEL Jan 20th $65 call | in-the-money | 11/25/22 | $5.00 | 1/20/23 | $5.00 | 7.99% | |
| O Feb 17th $62.50 call | in-the-money | 12/28/22 | $3.00 | 2/17/23 | $3.00 | 4.97% | |
| QCOM Sep 16th $145 call | out-of-money | 7/20/22 | $11.75 | 9/16/22 | $11.75 | 8.73% | |
| V Mar 17th $220 call | out-of-money | 1/24/23 | $12.00 | 3/17/23 | $12.00 | 5.51% | |
| OKE May 19th $65 call | out-of-money | 4/11/23 | $2.70 | 5/19/23 | $2.70 | 4.43% | |
| V Jun 2 $230 call | out-of-money | 4/21/23 | $10.50 | 6/2/23 | $10.50 | 4.82% | |
| BIPC $45 July 21st call | in-the-money | 5/23/23 | $3.25 | 7/21/23 | $3.25 | 7.66% | |
| V $235 Aug 18th call | in-the-money | 7/11/23 | $9.00 | 8/18/23 | $9.00 | 4.13% | |
| GSL $20 Aug 18th call | out-of-money | 7/11/23 | $1.25 | 8/18/23 | $1.25 | 5.00% | |
| OKE $65 Sep 15 call | in-the-money | 9/15/23 | $3.20 | 7/25/23 | $3.20 | 4.92% | |
| INTC $35 Oct 20th call | out-of-money | 9/8/23 | $3.78 | 10/20/23 | $3.78 | 9.41% | |
| HES $155 Oct 20th call | in-the-money | 9/8/23 | $9.00 | 10/20/23 | $9.00 | 6.81% | |
| DLR $135 Jan 19th call | in-the-money | 11/22/23 | $6.00 | 1/19/24 | $6.00 | 5.11% | |
| INTC $42.50 Jan 19th call | in-the-money | 11/29/23 | $3.50 | 1/19/24 | $3.50 | 8.71% | |
| ABBV $160 Mar 15th call | in-the-money | 1/10/24 | $7.00 | 3/15/24 | $7.00 | 4.94% | |
| MPC $165 Mar 28th call | in-the-money | 2/14/23 | $10.00 | 3/28/24 | $10.00 | 6.69% | |
| QCOM $200 July 19th call | out-of-money | 6/5/24 | $12.00 | 7/19/24 | $12.00 | 8.91% | |
| MAIN $49.4 Sep 20th Call | in-the-money | 6/27/24 | $2.00 | 9/20/24 | $2.00 | 4.31% | |
| BIPC $35 Sep 20th Call | in-the-money | 7/16/24 | $3.00 | 9/20/24 | $3.00 | 9.19% | |
| AMT Sep 20 $210 call | in-the-money | 7/30/24 | $15.00 | 9/20/24 | $15.00 | 7.42% | |
| OKE Oct 18 $87.50 call | in-the-money | 8/27/24 | $3.50 | 10/18/24 | $3.50 | 4.40% | |
AGNC Investment Corp. (AGNC)
Yield: 14.8%
The mortgage REIT pulled way back from the high in October as the interest rate prognosis pointed to higher rates for longer. But the mortgage REIT has been trending higher in November. Although interest rates are likely to trend lower over the next year, the still-high rates are biting. The deterioration of the interest rate story is more of a short-term issue. The stock is still on track for improving performance over the next year. The stock is up 6% in November and hopefully will continue trending higher. BUY
AGNC Investment Corp. (AGNC)
Next ex-div date: November 29, 2024
Cheniere Energy Partners, L.P. (CQP)
Yield: 6.3%
The price of this liquid natural gas exporting partnership doesn’t move much because the security is mostly about the quarterly payout. But it has been on fire since the election. It’s up 11.5% since. The reason for the price spike is the anticipated improvement in the regulatory environment. The next administration is highly encouraging of natural gas exports and Cheniere is the country’s largest exporter. The longer-term situation was always strong as the rest of the world desperately needs U.S. natural gas. Now, the short-term situation is improving. (This security generates a K1 form at tax time). BUY
Cheniere Energy Partners (CQP)
Next ex-div date: February 4, 2025, est.
Constellation Energy Corporation (CEG)
Yield: 0.6%
This nuclear energy provider has returned 115% YTD and 28% in the three months since being added to the portfolio. It’s been a bit of a ride. CEG soared 60% between early September and early October after the company announced a deal with Microsoft (MFST) to provide energy from a reopened Three Mile Island nuclear plant. It then pulled back over 20% the following month after the Federal Regulatory Commission shot down Amazon’s (AMZN) recently announced nuclear deal with Talen Energy (TLN). But the stock has been trending higher again since the election.
It soared as high as it did because of anticipation of more deals with technology companies to provide carbon-free nuclear power. The FRC’s recent decision put a damper on that dream. But the election ushers in a far more regulatorily friendly administration and there is renewed hope. We sold calls while CEG was riding high, and I still think the future is bright. HOLD
Constellation Energy Corp. (CEG)
Next ex-div date: February 15, 2025, est.
Rating change – “BUY” to “HOLD”
Enterprise Product Partners L.P. (EPD)
Yield: 6.4%
The good times are rolling. It’s another new day and another new high. The energy sector has been hot since the election. The Energy Select Sector SPDR Fund (XLE) is up over 8% in three weeks. The anticipated higher level of oil and gas production and the improved regulatory environment are huge positives for midstream energy companies. These companies benefit from more oil and gas sloshing around the country and things are about to get better. EPD is up 12% since the election and 33% YTD. The post-election spike has thrust EPD above the target buy range of under 30 per share. It will be downgraded to hold so subscribers don’t chase the stock into red-hot territory. (This security generates a K1 form at tax time). HOLD
Enterprise Product Partners (EPD)
Next ex-div date: January 31, 2025, est.
FS KKR Capital Corporation (FSK)
Yield: 12.9%
This Business Development Company (BDC) is a strong beneficiary of the Trump victory. The perception of high economic growth going forward is exactly what FSK needed to make a new high. It has a portfolio of smaller companies that tend to be economically sensitive. The prognosis just got better going forward. FSK is mostly about the huge dividend, but the price has moved up over 7% since the election. When a security has a payout and yield of this size it usually pulls back after the quarterly dividend gets priced out of the stock. It held up nicely after the September dividend, but we’ll see about the December one, especially after the recent price increase. HOLD
FS KKR Capital Corp. (FSK)
Next ex-div date: December 4, 2024
NextEra Energy, Inc. (NEE)
Yield: 2.7%
Things were bad for NEE. Then they got very good. Now, things turned rotten again. Of course, the volatility is from the macro environment and not the internal operations of the company. The regulated and clean energy utility is doing great. NextEra expects to deliver 10% average earnings growth over the next several years, and it has a long track record of successfully delivering. The utility also stands to benefit from the increased electricity demand from AI and data centers, which will opt for clean energy whenever possible. The longer-term situation is great, but NEE will get knocked around with the interest rate narrative in the near term. HOLD
NextEra Energy, Inc. (NEE)
Next ex-div date: February 22, 2025, est.
Qualcomm Corp. (QCOM)
Yield: 2.2%
This semiconductor giant reported earnings that surpassed expectations with year-over-year revenue growth of 19% and earnings growth of 80%. The strong quarter was fueled by a wave of launches of flagship Chinese smartphones. The new quarter is off to a strong start as well with automotive sales expected to rise 50%. Despite the good news, QCOM has fallen back to near the low point of the recent range. The market wants to see strong U.S. smartphone sales from an AI upgrade cycle. But that doesn’t appear to be happening yet, although analysts think it is a strong possibility next year. BUY
Qualcomm Incorporated (QCOM)
Next ex-div date: December 5, 2024
Realty Income Corp. (O)
Yield: 5.2%
The legendary monthly income REIT reported solid earnings last quarter with a robust pipeline of new cash-generating investments, high occupancy rates, and solid guidance. But the legendary income stock has been trending lower over the last month. O is down over 11% from the high made last month. The interest rate story had been deteriorating and the election, with higher growth expectations, added fuel to the fire. We’ll see how the interest rate situation plays out. HOLD
Realty Income Corporation (O)
Next ex-div date: December 2, 2024
Toll Brothers, Inc. (TOL)
Yield: 0.6%
The luxury homebuilder had been pulling back since the middle of October because of rising mortgage rates. But it spiked higher after the election. The expectation of a stronger economy is counterbalancing the spike in mortgage rates as investors anticipate more homebuying activity going forward. The main event for TOL over time is the fact that there is a short supply and massive pent-up demand for new homes. Sure, the market and the stock can always bounce around in the near term because of mortgage rates and other things, but the central reason to buy this stock just got better. BUY
Toll Brothers, Inc. (TOL)
Next ex-div date: January 10, 2025, est.
Existing Call Trades
Sell CEG Dec 20th $260.00 calls at $24.00 or better
This nuclear electricity provider has regained its footing after selling off last month. The regulatory environment should improve, and new tech deals are still on the table. CEG is still $10 per share below the strike price with four weeks to go before expiration. We’ll see what happens but, either way, we milked it for a huge call premium and will get a stellar total return in a short time if the stock gets called.
Sell FSK Dec 20th $20.00 calls at $0.95 or better
We sold the call when this BDC was right near the high. But FSK is getting a further boost from the Trump election. It’s almost $2 per share over the strike price now with over a month to go before expiration. We’ll see how things shake out after the dust settles from the election. But FSK could pull back after it goes ex-dividend in December, and we secured a high income in a short time no matter what.
Sell EPD Jan 17th $29.00 calls at $1.75 or better
The midstream energy stalwart has been moving ever higher since the election because of anticipated higher growth and a more energy-friendly regulatory regime. It’s moved almost $4 per share above the strike price for now, but the expiration date is still nearly two months away.
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 24, 2024.
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