A Hard-to-Impress Market
It’s earnings season. And it’s a weird one.
The first 25% of companies on the S&P 500 reported earnings with an average year-over-year growth rate of 33.8%, the highest in over a decade. In addition, companies are beating expectations by the widest margin on record. Earnings are stellar by every measure. But the market doesn’t seem to care.
Many companies are killing it on earnings and blowing away expectations only to trend lower in the following days. Great earnings don’t seem to be impressing this market much. It’s beyond a case of high expectations. The market expects earnings to exceed high expectations, and by a lot.
Sure, the S&P 500 is still very close to the all-time high. The market still looks to be in an uptrend. It’s hard to quibble with that. But this earnings reaction seems like a red flag. If record earnings don’t impress investors, what will? The market is trending higher for now but it’s hard to see how it offsets bad news. And bad news always comes eventually.
I’m still bullish about the remainder of the year because of the enormous force of a full recovery. But things may be getting topsy in the near term. Don’t be surprised if the market pulls back in the weeks ahead.
The situation makes this a good environment in which to write covered calls. And this newsletter had recently written three new ones.
Trades this month
April 14th
Sell AGNC June 18th $17 call at $0.50 or better
April 28
Sell KKR June 18 $55 calls at $3.00 or better
Sell USB June 18 $57.50 calls at $2.80 or better
May 4
Buy Qualcomm stock (QCOM)
Trade Alert: Buy Qualcomm stock (QCOM)
Qualcomm (QCOM) Yield 2.0%
Qualcomm 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 about 75% of revenues while licensing from patents provides the rest.
But the main reason the buy Qualcomm now is 5G. It is far more than just an incremental advancement in cellular technology. It is a game changer that will tip the world into a whole new digital age. It will enable a new generation of technologies including self-driving cars, artificial intelligence, robotics and more. And it’s arriving right now.
Qualcomm is the undisputed king of the chips that will enable 5G technology. It makes the only good smartphone chip for 5G, and that market is growing like crazy. Market research firm Research and Markets estimates that the annual growth rate for 5G chipsets will be 63.4% from 2020 to 2027.
Qualcomm has already partnered with 30 smartphone makers that will use its chips and equipment. And the new 5G-enabled phones are hitting the market. Over 75 5G devices are either in the process of being launched or in development.
Interesting timing
The stock soared 166% in 10 months between March of 2020 and January of this year. But the stock has since pulled back 20% from the January high.
QCOM got dinged twice. First, it took a hit after 5G phone sales were lower than expected in the first quarter because of industry-wide supply issues. Then, the technology sector corrected. As a result of the recent pullback, and despite the huge returns over the past year, QCOM still sells at just 23 times earnings, which is lower than the S&P 500 and dirt cheap for a company that is expected to grow earnings by 74% this year and an average of 25% over the next five years.
Last week, Qualcomm delivered a blowout earnings report for the most recent quarter (Qualcomm’s fiscal second quarter). It trounced expectations and grew revenue 52% and adjusted earnings 116% over last year’s quarter. 5G handset sales were strong at the smartphone’s rollout despite chip shortages. But the chip maker also got a huge benefit from increased Internet applications. That’s the part of 5G that’s just beginning.
QCOM moved higher after earnings but has since pulled back. There is some selling on the good news. But the company also raised guidance and future quarters look fantastic as well. This is a stock that should regain its mojo in the weeks and months ahead.
This is a cheap technology stock at the epicenter of 5G with huge growth. A stock like this generates huge call premiums. If we can sneak in at an advantageous price, we should be able to get a great income and a high total return.
Stock Portfolio Recap
AGNC Investment Corp. (AGNC) Yield 8.0%
This is unquestionably a positive environment for mortgage REITs. AGNC has been trending higher for more than a year. Demand for mortgages and longer-term rates is trending higher. The stock is almost all the way back to pre-pandemic levels. It may have a little more to go as the environment ahead will probably be better. But this one has come as advertised. HOLD
Brookfield Infrastructure Partners (BIP) Yield 3.8%
The good news is that this infrastructure partnership continues to trend higher. The bad news is that the pace is painfully slow. BIP is at the same price it was in the beginning of February. It’s still not far from the all-time high and this year should be good to Brookfield. Earnings should get a nice boost from new assets coming online as well as a recovery in Brookfield’s transportation assets. Infrastructure should also be a popular subsector after the pandemic. BUY
Digital Realty Trust, Inc. (DLR) Yield 3.1%
After going nowhere for a year, this data center REIT is finally getting some traction. It’s up over 15% since early March and isn’t that far from the high. The stock also got a bump from positive earnings last week. The specialty REIT grew year-over-year earnings (as reflected by core funds from operations) by 9%, and also raised guidance for the year. That may not sound like much in this crazy upside earnings quarter, but DLR is a global REIT and most of the world lags the U.S. recovery. The market was happy with the quarter. BUY
Enterprise Product Partners (EPD) Yield 7.8%
The midstream energy partnership reported first-quarter earnings that beat estimates, but the market yawned it off. Despite the industry being more hindered by the pandemic in this first quarter than last year’s, earnings came in the same as in last year’s quarter and distributable cash flow rose. Enterprise was also hampered in the quarter by the winter storm in Texas. Earnings show amazing resilience. But much of the rest of the energy sector benefitted from rising commodity prices and got a bigger boost this quarter. Still, everything looks great for EPD ahead of the full recovery later this year. BUY
KKR & Co. (KKR) Yield 1.0%
The alternative investment wealth manager announced earnings this morning that were stellar. Distributable earnings soundly beat estimates and rose 63% over last year’s quarter as its capital markets revenues more than doubled. The earnings seem by all measures a home run, but the stock is off a little on the day. It looks like no one was surprised and it’s an example of selling on the news. The quarters ahead should continue to be good, but the stock may have plateaued in the near term. HOLD
NextEra Energy Inc, (NEE) Yield 1.9%
The stock has been bouncing around since early this year. And it has had rare subpar performance of late. But therein lies the opportunity. The stock is getting a little beaten up ahead of what should be a glorious time for renewable energy. According to the International Energy Agency (IEA), renewables will provide nearly one-third of the world’s electricity by 2025. NextEra is an established provider with a strong backlog of projects. NEE should again be loved by investors in the near future. BUY
U.S. Bancorp (USB) Yield 2.8%
Like KKR, USB seems to trend relentlessly higher in a great environment for banks. The economy is starting to boom and interest rates will likely move higher. The stock seems destined to reach the pre-pandemic high of over 60 per share. The stock could consolidate around this important resistance level, which made it an ideal time to cash in on the recent move and write a call. HOLD
Existing call trades
Sell AGNC June 18 $17 call at $0.50 or better
The stock took off after we wrote the calls, and they are selling well above the target price at $1.09 per call. If you haven’t written the calls already you can still do so. The current call premium provides the equivalent of eight and a half months of dividends.
Sell KKR June 18 $55 calls at $3.00 or better
These calls were originally targeted at a lower price. But by the time the April issue came out and you could act on the call, the price was over $3.00 per call and stayed at that level for several days. The stock pulled back today and the calls are currently selling at $2.85 per call. If you haven’t purchased the calls already, it’s worth it to hold out for $3.00.
Sell USB June 18 $57.50 calls at $2.80 or better
The stock has been strong. In fact, it is on the cusp of the pre-pandemic high. This up-trending stock fetches solid call premiums, but at the same time, it is heading to a resistance level. The combination makes it a good time to write a call. Calls are above the target at $3 and are worth selling here if you haven’t done so already.
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 5/3/21 | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp. | AGNC | 01/13/21 | 15.52 | 17.99 | 17.00 | 8.03% | 19.30% |
| Brookfield Infrastructure | BIP | 01/13/21 | 50.63 | 53.73 | 53.00 | 3.79% | 7.17% |
| Digital Realty Trust | DLR | 1/27/21 | 149.17 | 151.67 | 155.00 | 3.01% | 2.55% |
| NextEra Energy, inc. | NEE | 2/24/21 | 73.76 | 76.70 | 80.00 | 1.99% | 4.53% |
| Enterprise Product Partners | EPD | 3/17/21 | 23.21 | 22.95 | 25.00 | 7.82% | 1.13% |
| U.S. Bancorp | USB | 3/24/21 | 53.47 | 59.29 | 55.00 | 2.83% | 11.72% |
| KKR & Co. | KKR | 3/24/21 | 47.98 | 56.27 | 50.00 | 1.03% | 17.20% |
| Qualcomm Inc. | QCOM | 5/5/21 | 133.00 | 140.00 | 2.00% | ||
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Price on 5/3/21 | Recent Price | Buy Under or | Total Return |
| AGNC June 18 $17 call | AGNC210618C0017000 | Sell | 4/13/21 | 0.50 | 1.09 | 0.50 | 3.20% |
| KKR June 18 $55 call | KKR210618C00055000 | Sell | 4/28/21 | 3.00 | 2.85 | 2.50 | 6.25% |
| USB June 18 $57.50 call | USB210618C00057500 | Sell | 4/28/21 | 2.80 | 3.25 | 2.50 | 5.24% |
| As of Close on 5/3/21 | |||||||
| 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% |
| 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% | |