Bear Markets are the Best Time to Invest
It’s a bear market now. The market is pricing in the increasing likelihood of a recession over the next year. And the market will probably get worse before it gets better.
Markets like this are the price stock investors pay for generating higher returns over time. Nothing is free. Bear markets test your faith in stocks, a faith that many investors lose as stocks fall. The consensus attitude turns overwhelmingly negative in times like this.
When the market falls 20%, most investors expect it to fall 30%. If it falls 30%, most expect it will plunge 50%. Who wants to lose money? Our emotions tell us to run for the hills. But history says there is great benefit to doing the opposite.
There is overwhelming historical evidence that buying good stocks in bear markets is a highly successful long-term strategy. After all, it’s better to buy stocks cheap. And the market always trends higher over time. The truth is that buying stocks in a bear market is the most successful investment strategy ever devised. The problem is that we don’t want to do it.
There is always a good chance that the market falls further. And in this case, that’s probably true. Nobody knows where the bottom is. And this bear market is different. It’s like an earthquake. You get that fear in the back of your mind that this is “the big one.” This is the quake that will rip part of California into the ocean. This is the bear market that will ruin stocks forever.
But the market will recover. It always does. It’s also true that you’ll never get the bottom. If you buy into the bear market, you will either be too early or too late. I invested heavily during the financial crisis, and it was never near the bottom. But it didn’t matter. In a relatively short time, all the stocks were much higher.
Don’t let the elusive quest for perfection hold you back. All you have to do is be generally right. “Generally right” can pad your retirement just fine.
It’s not an all-or-nothing proposition either. You don’t have to pick one day and invest all your cash. You can trickle in over time. You can invest just a little right now. If the low is already in, you got a great price. If the market falls more, you put more money in later. Over time it will work out.
In this issue, I highlight a portfolio position in the technology sector for purchase. The sector plunged into a bear market before the S&P and will likely be one of the first sectors to lead the way back up. The sector was already down less than the overall market in last week’s tumult.
It’s time to dabble with a great company and a stock that is likely to be a lot higher six months or a year from now.
What to Do Now
The market situation has severely deteriorated over the last several weeks.
It is now officially a bear market (defined as down 20% or more from the high for the S&P 500). The index closed last Friday down 22.9% YTD. Last week, the S&P fell 5.79%, making it the worst weekly performance for the index since the pandemic bear market in March of 2020.
A higher-than-expected May inflation reading of 8.6% and the Fed being more aggressive than previously expected by raising the Fed Funds rate by 0.75% at the June meeting tipped the scales toward the dark side. Most pundits are now calling for a recession in the next year and the market is pricing in that likelihood.
The Fed blew their chance to rein in inflation by tempering the overheated recovery a year ago. Now it appears inflation will have to be tamed the old-fashioned way, by recession. The selling will probably continue. It is unlikely we have seen the low. Things will get worse before they get better.
But there is good news for longer-term investors. While the market may get a little worse from here, the bulk of the selling is likely over. The S&P has only finished a year more than 20% lower three times since 1950. Historically, the market has been significantly higher a year after crossing into bear territory.
Many stocks have gotten cheap and should be a lot higher six months or a year from now. It’s also true that the more cyclical stocks tend to lead the market higher after the trough. It has been a highly successful strategy over time to buy good stocks cheap when everyone else is running away.
There will be great buying opportunities in the weeks and months ahead. But the near-term situation is still perilous. For that reason, all but two stocks in the portfolio have been reduced to a “HOLD” rating for the time being. While it’s too early to be aggressive, it is a good time to dabble very selectively on special situations for investors with a longer-term perspective.
The portfolio looks ugly right now. But realize that we generated a high income, and several stocks were called at prices significantly higher than the current price. The portfolio also sold outright positions in AGNC Investment Corp (AGNC) and U.S. Bancorp (USB). Profits were taken and income was generated when the market was in much better shape than it is now. There should be cash for future opportunities.
We will continue to generate a high income when the opportunities arise. And there will likely be great chances to buy stocks cheap later in the year. Strong total returns will be generated. But it might take longer than it did in the past.
Monthly Recap
May 25
Purchased ONEOK, Inc. (OKE) stock - $65.14
June 1
Purchased Star Bulk Carriers Corp. (SBLK) - $33.30Sold SBLK July 15 $34 calls at $1.60
June 15
Global Ship Lease (GSL) – Rating change “BUY” to “HOLD”
Innovative Industrial Partners (IIPR) – Rating change “BUY” to “HOLD”
One Liberty Properties (OLP) – Rating change “BUY” to “HOLD”
Star Bulk Carriers Corp. (SBLK) – Rating change “BUY” to “HOLD”
June 22
Qualcomm (QCOM) – Rating change “HOLD” to “BUY”
Featured Action: Buy Qualcomm (QCOM)
Yield 2.5%
Qualcomm (QCOM) is the world’s largest supplier of chips for mobile devices. It also holds the patents for the key technology systems that are the backbone of all 3G and 4G networks. Chips account for most of revenues while licensing from patents accounts for the rest, although the smaller area is more profitable and better insulated from competition.
A chip is part of the processor that is essentially the brains of a computer, smartphone or device that controls other devices in the system. These chips are the cutting edge of computer technology and determine the power, speed and function.
Big deal, there’s lots of semiconductor companies. And competition is fierce. But Qualcomm has an enormous advantage going for it right now. It is the undisputed king of the chips that will enable 5G technology.
Qualcomm’s 5G Snapdragon 855 chipset uniquely offers modularity, the ability to mitigate existing spectrum to accommodate 5G. It offers a bridge between older 3G and 4G and the 5G upgrade that virtually every company will need. In order to effectively compete in the fierce race between countries and companies to develop the new technology, equipment makers must have Qualcomm’s chips.
Analysts estimate that the 5G chip set market will grow from $2.1 billion in 2020 to over $23 billion by 2026. Qualcomm has already partnered with 30 smartphone makers that will use its chips and equipment. And the new 5G-enabled phones have rocketed earnings for over a year and will continue to do so for a while.
Sure, other companies including Apple (AAPL) as well as companies in China, are working on competing chips. That’s alarming because they account for a sizable portion of Qualcomm’s smartphone chip business. But those competing chips won’t be here in the foreseeable future and Qualcomm has huge growth from other sources down the road.
Earnings this past quarter were up a whopping 68% over the same quarter last year and the company upgraded guidance for this year and next.
In addition to booming smartphone sales, the company has done a stellar job of diversifying by selling a lot more Samsung chips. In addition, future business looks very promising. The company increased automobile chip sales by 41% and internet of things (IoT) by 61% versus the year ago quarter. These are areas with the most growth potential in future years.
The stock has been hammered in the tech selloff this year. But it was a beloved superstar before then. It had received a slew of analyst upgrades and high prices targets after it reported its projections for this year and next. And little has changed except the market’s treatment of the sector. Sure, smartphone sales will slow during a recession. But that fact is likely already priced into the stock.
The stock doesn’t deserve to be down as much as it is. When things change, and they always do, the market will come back to Qualcomm and its booming earnings growth.
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 | $120.99 | $140.00 | 2.48% | -8.06% |
| One Liberty Properties | OLP | 7/28/21 | $30.37 | $24.86 | NA | 7.24% | -13.05% |
| Visa Inc. | V | 12/22/21 | $217.96 | $190.01 | NA | 0.79% | -12.51% |
| Global Ship Lease, Inc. | GSL | 2/23/22 | $24.96 | $18.35 | NA | 8.06% | -25.27% |
| Innovative Industrial Props. | IIPR | 3/23/22 | $196.31 | $108.34 | NA | 6.46% | -44.34% |
| ONEOK, Inc. | OKE | 5/25/22 | $65.14 | $53.39 | $67.00 | 7.01% | -18.04% |
| Star Bulk Carriers Corp. | SBLK | 6/1/22 | $33.30 | $26.78 | NA | 24.65% | -15.33% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Initial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| SBLK July 15th $34 call | sblk220715C00034000 | Sell pending | 6/1/22 | 1.6 | $0.20 | $1.60 | 4.80% |
| As of close on 6/17/2022 | |||||||
| 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% |
| 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% | |
Global Ship Lease, Inc. (GSL)
Yield 8.1%
The recent recession anticipation has been a problem for cyclical companies. Shipping stocks also took a big hit when the World Bank and the International Monetary Fund downgraded global growth for this year and next. But slower global growth has been known for months and shipping rates are likely to stay above trend anyway because of a beneficial supply/demand dynamic. Shipping rates and shipping stocks are likely in a secular bull market and the recent selloff creates a buying opportunity when the market stabilizes. HOLD
Global Ship Lease, inc. (GSL)
Latest ex-div date: August 23, 2022, est.
Innovative Industrial Properties, Inc. (IIPR)
Yield 6.5%
This stock tends to move in exaggerated motions with the overall market. That’s unfortunate right now as stocks plunged into bear territory and beyond. But stocks like this also tend to rebound very sharply when the market recovers. Innovative is projected to grow earnings 37% this year and it sells at a price/earnings ratio below that of the overall market. It also pays a large and rapidly growing dividend. With those attributes, IIPR doesn’t deserve to be decimated like this. It could fall further. But it should be a lot higher six months to a year from now. HOLD
Innovative Industrial Properties, Inc. (IIPR)
Next ex-div date: June 29, 2022
ONEOK, Inc. (OKE)
Yield 7.0%
The latest down leg of the market has been different. Unlike the year up until that point, energy stocks got crushed along with everything else. The sector had been completely bucking the market trend. It’s the recession talk. Although there are still a lot of factors pressuring energy prices higher, a recession will cause demand destruction and lead to lower prices. While ONEOK is now levered to the price of oil and gas it does tend to move with the overall sector. But earnings were resilient in the pandemic and should remain solid even in a recession. The energy selloff is likely overdone. Plus, that huge dividend is safe. BUY
ONEOK, inc. (OKE)
Next ex-div date: July 29, 2022, est.
One Liberty Properties, Inc. (OLP)
Yield 7.2%
REITs have been under pressure because rising interest rates diminish the relative benefit of the dividends, and many have high debt levels and costs will likely rise. One Liberty is also a cyclical REIT because it primarily owns industrial properties. It’s been a double whammy. That’s the bad news. It’s also a solid company and the operation performance remains solid. The favorable supply-demand dynamic for industrial properties in not going away. OLP should be one of the first REITs to the party when the market recovers. HOLD
One Liberty Properties, Inc. (OLP)
Last ex-div date: June 17, 2022
Star Bulk Carriers Corp. (SBLK)
Yield 24.7%
This dry bulk shipping company was added to the portfolio in the last monthly issue. The urgency was that the stock went ex-dividend a couple days later and buying then entitled you to a massive $1.65 per share payout. Plus, the call provided even more income. But the timing for the stock price has been unfortunate. Shipping stocks took a huge hit over the past weeks amidst increasing recession expectations.
But the supply/demand dynamic remains strong for these shippers and rates will likely remain well above the levels of the last decade. We are likely in a secular bull market for shipping. The stocks should thrive in the years ahead. But things may well get worse for this stock before they get better. HOLD
Star Bulk Carriers Corp. (SBLK)
Next ex-div date: September 3, 2022, est.
Qualcomm Corp. (QCOM)
Yield 2.3%
The recent market has dragged this already downtrodden stock even lower. But there is some positive news. But technology stocks rolled over before the overall market. Perhaps they will also turn around before the overall market recovers.
Remember, analysts were slobbering all over this stock just a few months ago and nothing has really changed at the company. Sure, a depressed economy will slow smartphone sales. But that issue has already been more than priced into the stock. Things can always get worse in the near term. But QCOM should lead the market in recovering from this abyss. BUY
Qualcomm Inc. (QCOM)
Next ex-div date: September 1, 2022, est.
Visa (V)
Yield 0.8%
V is the poster child for a stock whose fortunes look bad now but great later. Everything related to global growth is getting clobbered. And the beatings may not be over. But the company itself is killing it. The tremendous earnings boost it gets globally from the removal of Covid restrictions outweighs slower global growth or geopolitical uncertainty with the exception of a global recession. Visa’s earnings blew away expectations with YOY revenue growth of 25% and 30% earnings growth. This stock should be one of the first to reverse course and move higher when the market stabilizes. HOLD
Visa Inc. (V)
Next ex-div date: August 12, 2022, est.
Existing Call Trades
Sell SBLK July 15 $34 calls at $1.60 or betterAlthough the market and the stock have tanked over the last few weeks, the targeted call price was achievable on June 1. The stock is way down in the near term but likely to be higher six months to a year from now. In the meantime, we generated a huge income which includes the latest $1.65 dividend and the $1.60 call.
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 July 27, 2022.
