It’s been a sideways summer market. Perhaps earnings will change that. But summer markets have a tendency to do whatever they were doing before investors stopped paying attention in the dog days of August.
In this issue I highlight a high-paying REIT that has been bucking the trend and moving higher in this market. It presents a timely buying opportunity that can create a call writing opportunity in a short amount of time.
Few income stocks have had consistent upward momentum in this market, but those that do generally fetch higher call premiums. The target buy is a fantastic REIT that pays a high dividend and continues to move higher. It should provide a great income opportunity in an otherwise lackluster summer market.
Cabot Income Advisor 721
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An Earnings Season for the Ages
It’s been a sideways summer market for a while. Sure, the indexes have been making a series of new highs. But the S&P 500 is just 1.2% higher than it was in early May.
This week inflation is the worry. Last week growth was the problem. The market can’t seem to make up its mind and nothing seems to get any real traction. Any move higher gets tempered by a pullback. Any significant selloff is followed by a quick recovery. But earnings could change things.
This is a crazy earnings season. Earnings on the S&P 500 are expected to grow a stratospheric 74% on average over last year’s second quarter amidst the booming pandemic recovery. That will be the highest quarterly earnings growth since 2009, and one of the highest growth rates ever recorded.
But it’s hard to impress a market that already expects average growth of 74%. The most important factor overall in this quarter will likely be future projections and guidance. It will give the market a better idea of what businesses are seeing and what they expect in the quarters ahead. A consistent message may finally give lasting traction to a narrative and provide a more definitive future direction.
This is a major earnings week for technology companies. A lot of the big players report this week, and more next week. Even if earnings don’t get the overall market moving, it could be very important for the technology sector and portfolio position Qualcomm (QCOM). I’m expecting good things and therefore won’t write a call on QCOM until after the earnings report today. Earnings may create other opportunities as well.
While earnings could change things, summer markets tend to be lackluster. Once we hit the dog days of August, the market tends to continue whatever it was doing before people stopped paying attention. Therefore, in this issue I highlight a high-paying REIT that has been bucking the trend and moving higher in this market. It presents a timely buying opportunity that can create a call writing opportunity in a short amount of time.
And if you’re a Cabot Retirement Club or Cabot Prime Member, make sure to tune into the monthly Cabot Retirement Club video conference call on Thursday at 2:00 pm ET.
What to Do Now
Without much investor confidence about an upward surge in the market, call writing opportunities have been few and far between. But this portfolio has made the most of the situation.
We generated a solid income from recently expired calls in AGNC Investment Corp (AGNC), KKR & Co. (KKR), U.S. Bancorp (USB) and Digital Realty (DLR). There are outstanding calls for AGNC and ONEOK (OKE) as well. But several positions including Enterprise Product Partners (EPD), NextEra Energy (NEE) and Brookfield Infrastructure Partners (BIP) are still floundering and not generating strong call premiums.
The recent attempt to sell a call on BIP failed as the stock pulled back quickly. At the same time, there haven’t been a lot of buying opportunities in the indecisive market. So, activity has been somewhat slow of late. But things can change fast.
We have been able to take advantage of stocks at the top of the trading range and write profitable calls. We will continue to do so as opportunities present themselves. This week, I found a way to hasten the situation while the market tools around.
In this issue I highlight a stock to buy that has momentum. Few income stocks have had consistent upward momentum in this market, but those that do generally fetch higher call premiums. The target buy is a fantastic REIT that pays a high dividend and continues to move higher. It should provide a great income opportunity in an otherwise lackluster summer market.
Monthly Recap
June 23
Sell AGNC August 20 $17 calls at $0.50 or better
Sell OKE August 20 $57.50 calls at $1.65 or better
July 14th
Sell BIP August 20th $55 calls at $2.00 or better - pending
July 16th
DLR July 16th $155 calls at $8.00 – Expired
Digital Realty Trust stock (DLR) – Called at $155
July 28th
Buy One Liberty Properties, Inc. (OLP)
Sell BIP August 20th $55 calls at $2.00 or better – Remove
Featured Actions
Buy One Liberty Properties, Inc. (OLP)
Yield 6.0%
One Liberty is a Real Estate Investment Trust (REIT) that acquires and owns a diversified portfolio of industrial, retail, and office properties under long-term triple net leases. The Great Neck, New York based REIT operates 123 properties in 31 states.
It’s about momentum.
OLP is trading at the 52-week high and does not offer the attractive valuations of some of its peers. But this is a weird summer market where many attractive dividend-paying stocks are going sideways. OLP is bucking the trend and moving higher. Established patterns tend to persist through August markets and OLP has a strong change to present a call-writing opportunity in the near future.
This is a strong REIT with a track record to prove it. It has vastly outperformed the REIT index in both the long and short terms. OLP has also performed on par with the overall market over the long term and has significantly outperformed the S&P 500 recently, returning 93% over the past year compared to a 38% S&P return over the same period.
The current property portfolio breaks down with the following allocations: industrial (53.6%), retail (17.5%), restaurants (5.0%), and health and fitness (4.5%). The largest tenants in terms of contracted revenue include Haverty Furniture Company (6.86%), FedEx (5.0%), LA Fitness (4.5%), Northern Tool and Equipment (4.1%), and L3 Harris Technologies (3.8%).
The fact that most of the properties are industrial is a good thing. Industrial properties are in high demand with a limited supply. Plus, there is strong growth potential for demand going forward as manufacturing activity is increasing in the U.S. The U.S. market for industrial properties is estimated to be $1 trillion.
It’s a fragmented property niche. The 20 largest industrial property owners in the country only have about 15% of existing properties. That makes acquisition potential enormous. One Liberty has a strong track record of growing through acquisition and also has an estimated $150 million in liquidity, a significant amount for a company with a $600 million market cap.
The retail, restaurant and health and fitness properties held their own in the pandemic. One Liberty actually grew the occupancy rate (currently 97.5%) in 2020 over 2019. Plus, these tenants are seeing a big rebound in demand in the full recovery.
Revenue is stable as One Liberty has long-term contracts with a current average length of 5.4 years. It also uses the proven triple net lease formula with most of its properties whereby tenants pay maintenance expenses, taxes and insurance. That eliminates a lot of the uncertainty and provides for steady and predictable cash flows from which to pay the dividend.
As a REIT, OLP pays out at least 90% of profits in the form of dividends. The yield is currently a stellar 6%. It has also grown at an average annual rate of 46% over the past ten years, reflecting how much profits have grown over that period.
One Liberty Properties, Inc. (NYSE: OLP)
Security type: Real Estate Investment Trust
Industry: Industrial and diversified
Price: $30.62
52-week range: $14.93 - $30.73
Yield: 6.0%
Profile: One Liberty is a REIT that owns and operates a diversified portfolio of industrial, retail, restaurant and fitness center properties under long-term triple net leases.
Positives
- Demand for industrial and e-commerce properties is soaring amidst limited supply.
- One Liberty has a good track record that reflects the success of its business model.
- It’s a rare REIT that has upward momentum in this sideways market and should fetch solid call premiums.
Risks
- The stock doesn’t offer as much value as other REITs price at the 52-week high.
- As a cyclical REIT, the stock could suffer if the virus variant gains traction.
Portfolio Updates
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 7/26/21 | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp. | AGNC | 01/13/21 | 15.52 | 16.18 | 17.00 | 8.93% | 8.76% |
| Brookfield Infrastructure | BIP | 01/13/21 | 50.63 | 54.71 | 53.00 | 3.72% | 10.15% |
| NextEra Energy, inc. | NEE | 2/24/21 | 73.76 | 76.91 | 80.00 | 1.99% | 5.37% |
| Enterprise Product Partners | EPD | 3/17/21 | 23.21 | 24.00 | 25.00 | 7.65% | 5.76% |
| U.S. Bancorp | USB | 3/24/21 | 53.47 | 56.18 | 55.00 | 3.30% | 6.64% |
| Qualcomm Inc. | QCOM | 5/5/21 | 134.65 | 143.50 | 140.00 | 1.88% | 7.11% |
| ONEOK, Inc. | OKE | 5/26/21 | 52.51 | 53.83 | 60.00 | 7.06% | 2.51% |
| One Liberty Properties, inc. | OLP | — | — | 30.62 | 33.00 | 5.96% | — |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Price on 7/26/21 | Sell To Price or Better | Total Return |
| AGNC Aug 20 $17 call | AGNC210820C00017000 | Sell | 6/23/21 | 0.50 | 0.06 | 0.50 | 3.00% |
| OKE Aug 20 $57.50 call | OKE210820C00057500 | Sell | 6/23/21 | 1.65 | 0.31 | 1.65 | 3.14% |
| 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 | 38.00 | 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% |
| KKR & Co. | KKR | Called | 3/24/21 | 47.98 | 6/18/21 | 55.00 | 14.92% |
| Digital Realty Trust | DLR | Called | 1/27/21 | 149.17 | 7/16/21 | 155.00 | 5.50% |
| 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 Investment Corp. (AGNC)
Yield 8.9%
This has been a bad six weeks for AGNC. The mortgage REIT benefits from a strong economy and a steepening yield curve, as it earns profits on the spread between long and short rates. But the yield curve has been flattening. Plus, the new virus cases have caused some skepticism about future growth. As a result, AGNC fell from almost 19 per share in early June to about 16 today.
But the growth skepticism is silly, and I believe it is highly likely that the yield curve steepens from here, as the economy booms, and inflation remains an issue. In the meantime, the dividend is safe, and we wrote a second covered call on the position. We’ll get a huge income and the stock should appreciate over time. BUY
Brookfield Infrastructure Partners (BIP)
Yield 3.7%
Every time this infrastructure partnership starts to get somewhere it gets knocked back. BIP is on a longer-term uptrend. But it’s hard to appreciate that when the stock is still where it was at the end of May. It’s in a very defensive business that should grow this year as new projects come online and its transportation assets rebound. We tried to write a call when the stock was at the high at the beginning of this month. But it pulled back quickly and you didn’t get a chance to get the targeted price. But we should get another shot soon. HOLD
Enterprise Product Partners (EPD)
Yield 7.5%
For reasons that have nothing to do with fundamentals, EPD pulled off the high and has been languishing for the last month. The cyclical trade went out of vogue and EPD got thrown to the side with the rest of the energy sector. But the economy is booming and business is strong. Hopefully, today’s second-quarter earnings report turns things around. We’ll see. BUY
NextEra Energy Inc, (NEE)
Yield 2.0%
This alternative energy utility was one of the very best conservative stocks on the market for a long time. But it lost its mojo this year. Given that nothing has changed with the company, I assign the underperformance to sector rotation in this unusual pandemic market. I continue to wait for alternative energy to come back into vogue. It’s been like waiting for the Great Pumpkin. But I’m confident NEE will shine again. In the meantime, we’ll continue to write covered calls and milk it for a great income. BUY
ONEOK, Inc. (OKE)
Yield 6.9%
Not you ONEOK! Wall street traders have so soured on anything cyclical in this summer market that even OKE has been floundering. That’s okay. We wrote a call for a high income while we wait for this nonsense attitude to change. Business is good and should stay that way for a long time. The second-quarter earnings report should reflect that fact. OKE can move fast, and it should get going again at some point. BUY
Qualcomm (QCOM)
Yield 1.9%
Technology goes in and out of vogue as often as I change my socks. This pandemic-recovery summer market just can’t seem to make up its mind. One day inflation is a problem and the next day growth is the problem. The market can’t make up its mind, but earnings could come to the rescue. Qualcomm reports quarterly earnings today. Last quarter was spectacular, and another good quarter could get things moving again. BUY
U.S. Bancorp (USB)
Yield 3.3%
The sideways funk continues. USB peaked in May and then pulled back and has moved sideways for the last month. Earnings were stellar. The bank reported earnings of $1.28 versus an expected $1.12 on the strength of both a release of loan-loss reserves and a booming fee business. But the market is still worried about the flattening yield curve and the effect on banks. The strong economy should keep it from losing any ground, and I still believe rates will trend higher in the months ahead amidst a booming economy and persistent inflation. HOLD
Existing Call Trades
Sell AGNC August 20th $17 calls at $0.50 or better
The mortgage REIT remains under pressure and the calls currently sell at just $0.06. For the reasons stated above, I still like the stock. The calls provide more than four months of additional income.
Sell OKE August 20th $57.50 calls at $1.65 or better
OKE is also getting knocked around. It hasn’t been a good market for anything energy related. These calls are also well below the targeted price at $0.31. The stock is about $5 per share below the strike price. But there are more than three weeks to go before expiration. Either way, we’ll get a great income.
Sell BIP August 20th $55 calls at $2.00 or better – Remove
The stock pulled back soon after I targeted the calls and you never got a chance to get the targeted price above. The calls are miles below the $2.00 price and another week in time value has been lost. We’ll take these calls off the list and remove any pending trades. It happens. Calls have to be targeted at a specified price as they move fast. That’s okay. We’ll wait for another time to sell calls.
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 August 25, 2021.
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Chief Investment Strategist: Timothy Lutts
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