The S&P 500 is on the cusp of a correction, down 10%. The technology- laden NASDAQ is already well beyond a correction. Energy is the only S&P 500 sector in positive territory YTD.
The problem is inflation and the Fed raising rates to combat it. There is a realization that inflation can’t be handled seamlessly. That means we could face continued high inflation, or much slower economic growth induced by a hyperactive Fed making up for lost time. Neither scenario is good for stocks.
While the year might be difficult for the overall market, the energy and financial sectors should shine. These sectors actually like inflation and rising interest rates. While portfolio positions in those sectors have been dragged lower by the recent indiscriminate selling, I expect them to regain momentum when this selloff ends.
Two fantastic portfolio positions in energy and finance are highlighted to buy in this issue. They had momentum going into the selloff and should pick up where they left off when the selling abates.
Market Overview
2022 Le Pew
Like the great cartoon character Pepe Le Pew, the market so far this year is stinking up the place.
It’s been ugly. The S&P 500 is on the cusp of a correction (down 10% from the high on a closing basis). The technology-laden Nasdaq is already well beyond a correction. Energy is the only S&P 500 sector in positive territory YTD.
The problem is inflation and the ensuing Fed tightening. There are other issues such as the Omicron virus and the Russia/Ukraine thing. But inflation and the Fed is the main event. The Fed has already declared its intention to raise interest rates more and sooner than previously anticipated in order to combat inflation, and the market is nervously awaiting the Central Bank meeting on Wednesday.
It’s not the likely 0.25% rate hikes per se. Interest rates will still be low for a while, and the market usually rallies in the early phases of a rate hike cycle. The problem is more the realization that inflation can’t be handled seamlessly. There is too much entrenched inflation to be remedied by business as usual, or close to it. It will likely take a significantly slower economy to break its back.
That means we could face continued high inflation, or much slower economic growth induced by a hyperactive Fed making up for lost time. Neither scenario is good for stocks.
The selling might not be over yet. It might get worse. But I don’t think it will be terrible. Stocks are still the only game in town to fetch a decent return. And strong earnings could save the day in the near term. But these problems aren’t going away soon and this year is likely to be a lot more volatile than the past couple of years.
While the year might be difficult for the overall market, the energy and financial sectors should shine. These sectors actually like inflation and rising interest rates. While portfolio positions in those sectors have been dragged lower by the recent indiscriminate selling, I expect them to regain momentum when this selloff ends.
What to Do Now
The market is down, but it’s still not a great time to buy stocks. The indexes are still falling, and at an increasing rate this week. There still isn’t enough evidence of a bottom to buy aggressively at this point. That said, there is no reason to panic sell. Most of the portfolio stocks are in well positioned or defensive sectors that should be OK amidst the turbulence and will likely rally thereafter.
It’s not a good time to buy generally, but there are a couple of select stocks that are worth getting into at this point if you don’t own them already. (Highlighted in the next section). All other positions were either already rated HOLD or have been reduced to a HOLD for the time being.
It’s also not a time to sell more covered calls. The premiums completely dry up in a falling market like this. But the portfolio did sell several calls before recent turbulence when stock prices and call premiums were high. The high income helps through this ugly market. And, as I mentioned earlier, most of the stocks in this portfolio are well positioned and worth holding.
Monthly Recap
January 5
Sold OKE February 18 $60 calls at $2.75
January 13
Sold USB February 25 $61 calls at $2.50
January 18
Sold VLO February 25 $83 calls at $4.20
SOLD AGNC Investment Corp. (AGNC) - $15.06
January 21
QCOM January 21 $185 calls at $9.65 – Expired
Xcel Energy (XEL) – rating change “BUY” to “HOLD”
FS KKR Capital Corp. (FSK) – rating change “BUY” to “HOLD”
Featured Action
Featured Action
Buy Enterprise Product Partners (EPD)
Enterprise is one of the largest midstream energy companies in the country, with a vast portfolio of service assets connected to the heart of American energy production. It is connected to every major U.S. shale basin and 90% of American refiners east of the Rockies, and offers export facilities in the Gulf of Mexico as well.
The thing that jumps out about the Master Limited Partnership (MLP) is the distribution. It currently yields 7.9%. And the payout is rock solid. Distributable cash flow covered the distribution by 1.6 and 1.7 times in the two worst quarters of the pandemic. A ratio of 1.2 is considered conservative.
The stock has been a laggard. It did return 23% in 2021 but that underperformed the S&P 500 in a year when energy was the top-performing sector. It tends to take a rally in the energy sector to get it moving higher, which has been the case recently. It’s up over 50% in the last month.
In addition to the stratospheric and safe payout, EPD still sells at a freakishly low valuation at a time when the market is high and energy stocks look ahead to a promising year. EPD still sells well below the pre-pandemic high, despite having significantly higher earnings. It also has inflation adjustments built into its contracts.
There isn’t much I’m confident buying while the market is still falling. But EPD has shown remarkable resilience even during the recent indiscriminate selling. The stock price has barely budged. It looks great over the course of the year and unlikely to take a hit in the near term even if the market selloff continues.
Buy Visa Inc. (V)
Visa is a global payments technology company that provides a digital currency instead of cash and checks to individuals and business in more than 200 countries and over 160 currencies. It is the largest payment processor in the world with about a 50% market share of cards issued worldwide. Its systems can process 65,000 transactions per second.
Visa isn’t a credit card company. They don’t loan money. Sure, you can charge things with a Visa card instead of using a debit, but it is the sponsoring bank that loans the money, not Visa. The company isn’t in the business of lending. It’s a payment technology company that makes money every time the card is swiped. And Visa has the largest market share of the global business.
That’s a good place to be and a great business to be in because the global trend toward cashless transactions is undeniable and unstoppable. In fact, digital payments surpassed cash transactions on a global basis a few years ago. The trend will accelerate going forward and Visa is in the ideal position to benefit.
It’s a good stock to own anytime, but especially now because it’s cheap. The international recovery has lagged the U.S. In addition, the very profitable cross-border transactions are way down as travel has been restricted. But the global economy will catch up. And travel will return. U.S. business is booming and Visa should get the complement of booming international business over the course of the year.
The stock is down more than 20% from the 52-week high. It has grappled with some short-term issue and the indiscriminate market selling of late. The stock has a phenomenal track record and 25 out of 29 analysts rate it a “BUY” or “STRONG BUY”.
V is not immune to a down market, and it could fall further if the selling continues. But under 200 per share or close to it should be a bargain price as the stock should head much higher over the course of the year.
This is a great stock to own over the long term. It has a commanding market share in the electronics payment industry that still has plenty of runway for growth. Visa’s size and scale should allow the company to improve its already sizable margins. The stock performance reflects these facts. V stock appreciated more than 790% over the last 10 years, more than double the performance of the S&P 500 over the same period.
Portfolio Updates and Income Calendar
Portfolio Updates
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 1/26/22 | Buy at or Under Price | Yield | Total Return |
| Enterprise Product Partners | EPD | 3/17/2021 | 23.21 | 23.65 | 25.00 | 7.86% | 8.33% |
| U.S. Bancorp C | USB | 3/24/2021 | 53.47 | 56.81 | 57.00 | 3.34% | 9.55% |
| Qualcomm Inc. | QCOM | 5/5/21 | 134.65 | 170.07 | 140.00 | 1.65% | 28.03% |
| ONEOK, Inc. C | OKE | 5/26/21 | 52.51 | 58.63 | 60.00 | 6.39% | 15.33% |
| One Liberty Properties C. | OLP | 7/28/21 | 30.37 | 30.40 | 33.00 | 5.92% | 2.88% |
| KKR & Co., Inc. | KKR | 8/25/21 | 64.52 | 65.41 | 70.00 | 0.88% | 1.57% |
| Xcel Energy Inc. | XEL | 10/12/21 | 63.00 | 67.43 | 67.00 | 2.68% | 7.77% |
| FS KKR Capital Corp. | FSK | 10/27/21 | 22.01 | 21.18 | 24.00 | 11.55% | 0.80% |
| Valero Energy Corp. C | VLO | 11/17/21 | 73.45 | 78.59 | 85.00 | 4.82% | 8.43% |
| Visa Inc. | V | 12/22/21 | 217.96 | 201.85 | 225.00 | 0.74% | -7.39% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Initial Action | Entry Date | Entry Price | Price on 1/14/22 | Sell To Price or Better | Total Return |
| OLP Feb 18 $35 call | OLP220218C00035000 | Sell | 11/19/21 | 1.50 | 0.00 | 1.50 | 4.94% |
| OKE Feb 18 $60 call | OKE220218C00060000 | Sell | 1/5/22 | 2.75 | 1.28 | 2.75 | 5.24% |
| USB Feb 25 $61 call | USB220225C00061000 | Sell | 1/13/22 | 2.50 | 0.32 | 2.50 | 4.68% |
| VLO Feb 25 $83 call | VLO220225C00083000 | Sell | 1/18/22 | 4.20 | 1.67 | 4.20 | 6.13% |
| as of close on 1/24/2022 | |||||||
| 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 | 38.00 | 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% |
| NextEra Energy, Inc. | NEE | Called | 2/24/21 | 73.76 | 9/17/21 | 80.00 | 10.00% |
| Brookfield Infras. Ptnrs. | BIP | Called | 1/13/21 | 50.63 | 10/15/21 | 55.00 | 11.65% |
| AGNC Investment Corp | AGNC | Sold | 1/13/21 | 15.52 | 1/19/22 | 15.00 | 5.92% |
| 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 | 11/30/2021 | $9.65 | 1/21/2022 | $9.65 | 7.17% | |
Enterprise Product Partners (EPD)
Yield 7.9%
The past week has taken down just about everything. But EPD is only off a few pennies since the selling began. In fact, it’s been the strongest stock in the portfolio in the recent unforgiving downturn. Energy is still the strongest market sector by far. Prices are high and demand is strong. EPD is particularly undervalued with a massive payout. I expect the stock to continue rallying when the market selling abates. (This security generates a K1 form at tax time). BUY
Rating change “BUY” to “HOLD”
FS KKR Corp. (FSK)
Yield 11.6%
This BDC had been very strong until it lost about half of its market gain during the market rout of the past week. Hopefully, it will resume moving higher when the market stops going down. It is still holding a level above technical resistance. Last earnings were strong as FSK continues to benefit from the current environment. Strong economic growth is good for small companies. When it gets higher there should be a good call writing opportunity. HOLD
KKR & Co., Inc. (KKR)
Yield 0.9%
The stock continues to be weak since hitting the high in early November, although the past week is understandable. It has now lost most of what it gained from the big surge in October. But business is still strong, and the company should have a good year in 2022. This stock needs to break the downtrend. Hopefully, it will behave well again when the market comes down. I will keep a close eye on it. HOLD
One Liberty Properties, Inc. (OLP)
Yield 5.9%
This industrial REIT was performing exceptionally well. But it really got clobbered in the recent down market. It’s down about 18% from the high made at the beginning of this month. REITs have been one of the worst-performing sectors and OLP is a more cyclical and aggressive one. As high dividend payers, the sector is under pressure from rising interest rates, as fixed rate securities can theoretically compete for income investors. But the 6% payout should continue to make it attractive and real estate should hold up well against inflation. HOLD
ONEOK, Inc. (OKE)
Yield 6.4%
This midstream energy stock has been a better mover than the overall midstream sector during the recovery. It returned a phenomenal 69% in 2021. But it also has more downside in a tough market. It has pulled back in sympathy with the overall market despite the fact that prospects for energy stocks are still strong for 2022. The high yield, plus the calls we sold, should provide a strong income and make it easier to endure what is likely short-term volatility. HOLD
Qualcomm (QCOM)
Yield 1.7%
QCOM had been hanging incredibly tough near the high despite the technology sector weakness until the past couple of weeks. It’s down about 10% from the January 14 close, as of Monday’s close. It didn’t really budge until technology got absolutely hammered. And it had a huge surge recently, after which a consolidation is normal. The stock still looks strong on a relative basis. Company results have been terrific and are likely to stay that way. The pullback is entirely due to the external environment, and I expect the stock to move higher again when the tech selloff ends. HOLD
U.S. Bancorp (USB)
Yield 2.9%
This regional bank stock had been flourishing. Rising interest rates juice profits as the banks earn more net interest income. The other elements of the business have been strong, but high interest rate spreads add the missing piece of the puzzle. But USB has been taken down along with the overall market over the past couple of weeks. The market is falling primarily because of the prospects of rising interest rates. But in markets like this it doesn’t even matter if a stock benefits. Everything falls in the near term. But I still expect a good year for USB. HOLD
Valero Energy Corp. (VLO)
Yield 4.8%
The refiner stock had been soaring until the recent market took it down. It hit a post-pandemic high one week ago but it’s down 10% since. VLO is a great stock for inflation and demand for refined product is still strong and will likely remain so. The stock is a casualty of recent indiscriminate selling, but it should have a very strong year. The stock is still well below the pre-pandemic highs and miles below the 2018 high despite likely significantly higher earnings than those times. HOLD
Visa Inc. (V)
Yield 0.7%
The card company stock got clobbered and fell again to below 200 per share. But Visa should benefit from the international recovery this year, which has lagged the U.S. recovery. As travel returns, the very profitable cross-border transactions should get a big boost while U.S. business is already booming. When the dust finally settles from the recent market turmoil, I expect V to resume moving higher. BUY
Rating change “BUY” to “HOLD”
Xcel Energy Inc. (XEL)
Yield 2.7%
This alternative energy utility has been solid and barely budged during the market turmoil of the last week. Utilities have been the best-performing market sector since things got ugly as investors seek defense and safe havens. It’s a good market to have utilities. But XEL also has the added benefit of being on an uptrend and providing a safe way to play the growth in alternative energy. XEL is strong for now and probably stronger later in the year as investors rediscover clean energy growth. HOLD
Existing Call Trades
QCOM January 21 $185 calls at $9.65 - Expired
The stock had held very strong near the very top of the recent range after a huge surge despite weakness in the technology sector. But over the past week QCOM couldn’t endure the accelerated pace of selling and fell 12.6% to close at expiration last Friday at 164.93 per share, well below the 185 strike price. But we keep the stock with a still-healthy profit from the original purchase price. But more importantly, QCOM still has very strong prospects going forward in 2022. It’s still a great hold and the call turned it into a great income stock too.
Call premium: $9.65
Dividends: $2.04
Total: $11.69 (total income return of 8.7% in 6.5 months)
Sell OLP February 18 $35 calls at $1.50 or better
I still like the stock, even though it has been getting creamed. It’s down more than 10% from the January 14 close to just below 30 per share. We sold these calls when OLP was near the high. It’s well below the $35 per share strike price but we’ll see what happens over the next month.
Sell OKE February 18 $60 calls at $2.75 or better
The stock is getting hit along with everything else right now. But it’s still only few dollars below the strike price with more than three weeks to go before options expiration. We’ll see how long the current turbulence lasts in the market. But I expect the stock to perform well after the dust settles. We locked in a high income and sold calls on this position for the third time.
Sell USB February 25 $61 calls at $2.50 or better
The stock has been week and is selling more than $5 per share below the strike price. I expect USB to recover as the current environment is good for business. But it may not recover to the strike price in the next month. This is also the third call sold on this position. We’re set up for a fantastic income no matter what.
Sell VLO February 25 $83 calls at $4.20 or better
The timing is looking good on these calls. We sold them when the stock was near the high just before the dog doo hit the fan in the market. Prospects for the stock are solid for the rest of the year. We’ll get a great income in the meantime and a strong total return if shares are called a month from now.
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 February 23, 2022.