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Income Advisor
Conservative investing. Double-digit income.

Cabot Income Advisor 821

The S&P 500 and the Nasdaq just made new all-time highs. Strong earnings and a booming economy are outweighing concerns about the delta variant, the Chinese slowdown, inflation and a Fed tapering of bond purchases.

It’s difficult to say what narrative will be dominant after the summer. The cyclical slump could gain traction or turn around. Much will depend on the headlines, which are unpredictable. While I like the way the current portfolio is positioned, it needs more stocks with momentum that generate high call premiums.

In this issue I highlight for purchase one of the very best financial stocks on the market. Prospects are dazzling over the rest of this year. But the stock is also moving right now. It should offer a quick opportunity to ring the income register with a covered call.

Cabot Income Advisor 821

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The Bulls are Still in Charge
As worries continue to gather, the bulls are still winning, at least for now.

The S&P 500 and the Nasdaq just made new all-time highs. Strong earnings and a booming economy are outweighing concerns about the delta variant, the Chinese slowdown, inflation and a Fed tapering of bond purchases.

There is no doubt that the new virus strain will put somewhat of a damper on the recovery. It’s already affecting hotel bookings and restaurants as well as consumer optimism. The virus internationally, along with the slowdown in China, will likely hurt global growth. That should limit economic growth, at least in the third quarter.

But that might not be a bad thing. Instead of 7% GDP growth in the third quarter, we’ll get 4% or 5% growth. That’s still a lot better than normal. And that lost growth will likely be made up in future quarters. Economic growth won’t be stupendous. It will just be very good. But above-par growth will likely last longer, well into 2022.

We won’t party as hard. But we’ll party for longer. That might be better for stocks anyway. The return to normalization is further away. And stocks aren’t getting too overpriced. Of course, markets tend to be cranky after Labor Day when investors sober up from summer and refocus. There could be some choppiness in September. But any selloff should be short-lived.

It’s difficult to say what narrative will be dominant after the summer. The cyclical slump could gain traction or turn around. Much will depend on the headlines, which are unpredictable. While I like the way the current portfolio is positioned, it needs more stocks with momentum.

In this issue I highlight for purchase one of the very best financial stocks on the market. Prospects are dazzling over the rest of this year. But the stock is also moving right now. It should offer a quick opportunity to ring the income register with a covered call.

What to Do Now
While the overall market is still moving higher, some cyclical stocks are not faring well. The energy and consumer discretionary sectors are the worst performing on the S&P over the past month. The current growth concerns are definitely hurting these sectors.

But the current growth concerns may prove temporary. The delta variant may turn out to be far less ominous than is currently be portrayed. The economy and earnings continue to exceed expectations and likely will continue to do so. Meanwhile, the rally in energy stocks has halted despite the fact that prices are still for the most part well below pre-pandemic levels despite higher earnings and a promising second half of the year.

There are bargains in those sectors of the market that have experienced a correction. Portfolio positions Valero Energy (VLO), Enterprise Product Partners (EPD) and ONEOK (OKE) still sell at attractive valuations with high yields. It isn’t a good time to write covered calls, but it’s still a good time to acquire those stocks if you don’t own them already.

Positions in Brookfield Infrastructure Partners (BIP) and Qualcomm (QCOM) have done well lately but still don’t fetch attractive call premiums in this summer market. With bright prospects ahead in the coming months and uninspiring call premiums, it makes more sense to be patient. There will likely be much better opportunities to generate income on these stocks after the summer.

Monthly Recap
July 28th
Purchased One Liberty Properties, Inc. (OLP) - $30.37
Sell BIP August 20th $55 calls at $2.00 or better – Removed

August 11th
Sell NEE September 17th $80 calls at $3.50 or better

August 20th
AGNC August 20th $17 calls at $0.50 - Expired
OKE August 20th $57.50 calls at $1.65 – Expired

August 25th
Buy KKR & Co. (KKR)

Featured Actions

Buy KKR & Co. (KKR)
KKR & Co. is a leading global alternative asset manager. The firm manages multiple alternative asset classes including private equity, energy, infrastructure, real estate, credit, as well as hedge funds through strategic partners. It generates revenues from management fees, performance income and investment income with a global reach on five continents.

I know. This portfolio already owned KKR. It was purchased in March and called away in June at options expiration after writing a call. It provided a 21% total return in less than three months, between the dividend and call premium. It is also in the Cabot Dividend Investor portfolio. Picking it again seems lazy. But I assure you it is not.

I like financial sector stocks very much right now. I believe the growth concerns are overblown and the 10-year Treasury yield is likely to move higher over the rest of the year. I scoured the market for the very best financial sector stocks right now. I very much wanted an original pick. But KKR stacked up better than anything else on both a fundamental and technical basis, and I’d rather be right than original.

Asset manager stocks have been strong. And KKR is in the fast-growing alternative asset part of the business. Alternative assets are basically those that do not fall within the realm of traditional stock and bond market investments. High-net-worth individuals, and most especially institutions like pension and endowment funds seek to diversify from stock and bond markets.

Alternative investments have been growing like crazy. Global alternative asset investments have grown from $6.4 trillion in 2012 to about $14 trillion in 2020. It is estimated that alternative assets worldwide will continue to grow to more than $21 trillion by 2025. Estimates vary of course. But all estimates show rapid growth.

KKR is thriving and killed it last quarter. Earnings more than doubled over last year’s quarter and the asset manager brought in a record $59 billion in assets under management. Although I also like the prognosis for other types of financial companies, I think KKR’s business should be more durable as economic growth slows next year.

KKR has also blown away the competition in stock returns over the last several years. It has provided a whopping 37% average annual return over the last five years, which is more than double the market return over the same period. It also has momentum. KKR is up 60% so far this year and still sells at a reasonable valuation.

The stock has pulled back a little this month but is still very much in an uptrend. The yield is low at just 0.92%. But there is a high chance the stock moves higher in the weeks and months ahead and the call premiums tend to be high. I don’t want to wait around too long to milk a good income out of a stock and KKR offers a strong opportunity right now.

Portfolio Updates

CIA STOCK PORTFOLIO
Open RecommendationsTicker SymbolEntry DateEntry PricePrice on
8/23/21
Buy at or
Under Price
YieldTotal Return
AGNC Investment Corp.AGNC01/13/2115.5216.2817.008.85%10.25%
Brookfield InfrastructureBIP01/13/2150.6355.9553.003.67%12.65%
NextEra Energy, inc.NEE2/24/2173.7684.4080.001.78%15.63%
Enterprise Product PartnersEPD3/17/2123.2121.9225.008.34%-1.51%
U.S. BancorpUSB3/24/2153.4756.1755.003.30%6.62%
Qualcomm Inc.QCOM5/5/21134.65144.14140.001.91%7.59%
ONEOK, Inc.OKE5/26/2152.5151.9860.007.29%0.77%
One Liberty Properties, inc.OLP7/28/2130.3731.0733.005.82%2.30%
KKR & Co., Inc.KKR8/25.2164.4268.000.92%
EXISTING CALL TRADES
Open RecommendationsTicker SymbolIntial
Action
Entry DateEntry
Price
Price on
8/23/21
Sell To Price
or Better
Total Return
NEE Sep 17 $80 callNEE210820C00080000Sell8/11/213.504.603.504.75%
SOLD STOCKS
SecurityTicker SymbolActionEntry DateEntry
Price
Sale DateSale PriceTotal Return
Innovative Industrial Props.IIPRCalled6/2/2087.829/18/20100.0015.08%
QualcommQCOMCalled6/24/2089.149/18/2095.007.30%
U.S. BancorpUSBCalled7/22/2036.269/18/2038.003.42%
Brookfield Infras. Ptnrs.BIPCalled6/24/2041.9210/16/2045.008.49%
Starbucks Corp.SBUXCalled8/26/2082.4110/16/2088.006.18%
Visa CorporationVCalled9/22/20200.5611/20/20200.000.00%
AbbVie Inc.ABBVCalled6/2/2091.0412/31/20100.0012.43%
Enterprise Prod. Prtnrs.EPDCalled6/24/2018.141/15/2120.0015.16%
Altria GroupMOCalled6/2/2039.661/15/2140.007.31%
U.S. BancorpUSBCalled11/25/2044.681/15/2145.001.66%
B&G Foods Inc,BGSCalled10/28/2026.792/19/2128.004.42%
Valero Energy Inc.VLOCalled8/26/2053.703/26/2160.0011.73%
Chevron Corp.CVXCalled12/23/2085.694/1/2196.0012.95%
KKR & Co.KKRCalled3/24/2147.986/18/2155.0014.92%
Digital Realty TrustDLRCalled1/27/21149.177/16/21155.005.50%
EXPIRED OPTIONS
SecurityIn/out moneySell DateSell PriceExp. Date$ ReturnTotal % Return
IIPR Jul 17 $95 callout-of money6/3/203.007/17/203.003.40%
MO Jul 31 $42 callout-of-money6/17/201.607/31/201.604.03%
ABBV Sep 18 $100 callout-of-money7/15/204.609/18/204.605.05%
IIPR Sep 18 $100 callin-the-money7/22/205.009/18/205.005.69%
QCOM Sep 18 $95 callin-the-money6/24/204.309/18/204.304.82%
USB Sep 18 $37.50 callin-the-money7/22/202.009/18/202.005.52%
BIP Oct 16 $45 callin-the-money9/2/201.9510/16/201.954.65%
SBUX Oct 16 $87.50 callin-the-money10/16/203.3010/16/203.304.00%
V Nov 20 $200 callin-the-money9/22/2010.0011/20/2010.004.99%
ABBV Dec 31 $100 callin-the-money11/18/203.3012/31/203.303.62%
EPD Jan 15 $20 callin-the-money11/23/200.801/15/210.804.41%
MO Jan 15 $40 callin-the-money11/25/201.901/15/211.904.79%
USB Jan 15 $45 callin-the-money11/25/202.001/15/212.004.48%
BGS Feb 19 $27.50 callin-the-money12/11/202.402/19/212.408.96%
VLO Mar 26 $60 callin-the-money2/10/216.503/26/216.5012.10%
CVX Apr 1 $95.50 callin-the-money2/19/214.304/1/214.305.02%
AGNC Jun 18 $17 callout-of-money4/13/210.506/18/210.503.21%
KKR Jun 18 $55 callin-the-money4/28/213.006/18/213.006.25%
USB Jun 16 $57.50 callout-of-money4/28/212.806/18/212.805.24%
DLR Jul 16 $155 callin-the-money6/16/218.007/16/218.005.36%
AGNC Aug 20 $17 callout-of-money6/23/21$0.508/20/21$0.503.00%
OKE Aug 20 $57.50 callout-of-money6/23/21$3.508/20/21$3.504.75%

AGNC Investment Corp. (AGNC)
Yield 8.8%
The mortgage REIT has found a level around 16 per share and a little higher for now. Virus concerns are keeping the 10-year Treasury rate low and AGNC profits from a higher 10-year rate and a steeper yield curve. But I believe the rate has fallen too far for the current booming economy and persistent inflation. The rate is likely headed higher from here, and AGNC should appreciate. This portfolio has already written two calls on the stock, and we should get a chance for another as the stock trends higher. BUY

AGNC-082321

Brookfield Infrastructure Partners (BIP)
Yield 3.7%
This infrastructure partnership should start to go places. It’s already very near the all-time high. The Inter Pipeline acquisition should go through in the third quarter and be accretive to earning immediately. It should bring already steadily rising earnings to another level. A likely passage by Congress of an infrastructure bill of some kind should increase investor awareness and interest in the rapidly growing infrastructure subsector as well. We will look to write calls in the near future as BIP moves higher. HOLD

BIP-082321

Enterprise Product Partners (EPD)
Yield 8.3%
EPD, along with the rest of the energy sector, has been floundering since June. The recovery was going great and midstream energy companies were hot. Then the stimulus petered out and the delta variant started getting all the headlines. Energy is the most vulnerable sector to growth concerns. That said, the recovery will continue and business for Enterprise will boom over the rest of this year. The market will again realize the value and you collect a massive 8.3% yield in the meantime. BUY

EPD-082321

NextEra Energy Inc, (NEE)
Yield 1.8%
NEE has had a nice move higher since the end of June. The normally up-trending juggernaut has been knocked around with the fortunes of cyclical stocks this year. NEE got pulled down as cyclical stocks rallied earlier this year. And lately, it has rallied while those stocks have struggled. Such a stark connection to the fortunes of cyclical stocks is likely temporary. NEE should also benefit from the growth of alternative energy and again be the highly desirable conservative play on the growth in that area. HOLD

NEE-082321

One Liberty Properties, Inc. (OLP)
Yield 5.8%
This diversified industrial REIT just keeps rolling along, trending higher at a snail’s pace. That what it does best. OLP should also benefit as yield-starved investors seek high income from a solid defensive play like this. Hopefully, the stock will get a bump after Labor Day as typically cranky investors fret about all the recent headlines after they sober up from the summer. We’ll look for a move higher and a chance to ring the register with a covered call. In the meantime, we’ll collect the high yield. BUY

OLP-082321

ONEOK, Inc. (OKE)
Yield 7.2%
This once-surging, high-yielding and high-leverage play on the recovery will likely remain in the doghouse as long as the delta variant crimps growth optimism. But that situation should be short lived. The economy is booming and demand for natural gas is strong. Strong earnings performance along with a cheap valuation and a high and safe dividend should win out eventually. We collected a great call premium, along with the high yield and will likely get a chance to ring the income register again before long. OKE offer the rare combination of both a high yield and high call premiums. BUY

OKE-082321

Qualcomm (QCOM)
Yield 1.9%
The chipmaker stock has been pulling back after the big bounce it got following its fabulous second-quarter earnings. The company is giving the market every reason to love the stock, but this late summer market just won’t bite. There is a good chance that after Labor Day when investors refocus 5G will be a bigger story in the market and QCOM will get going again. For now, it is still a good entry point for the stock if you don’t own it already. BUY

QCOM-082321

U.S. Bancorp (USB)
Yield 3.3%
The bank recorded a very strong quarter as the economy continues to boom. But banks have been struggling as the falling 10-year rate negatively effects net interest income. Banks and USB have been casualties of the falling 10-year yield recently. But I believe there is a strong chance rates rise into the second half of the year. The bank’s other businesses are thriving, and a rising yield should get the stock moving again. HOLD

USB-082421

Existing Call Trades
Sell AGNC August 20th $17 calls at $0.50 - Expired
While the stock fell along with falling 10-year Treasury yield, we managed to secure a solid 4.3% income return in the last two months. It’s also well worth noting that this portfolio generated a 7.1% income return from AGNC in the five months prior, between and earlier call and the monthly dividends. We’ve already generated an 11.3% income from the stock since January. Plus, we might get a chance for more over the rest of the year.
Call premium: $0.50
Dividend: $0.12
Dividend: $0.12

Total: $0.74 (total income return of 4.3% in two months)

Sell OKE August 20th $57.50 calls at $1.65 - Expired
The stock has fallen amidst growth concerns since we wrote these calls. But we generate a solid 4.9% income return in three months. As I mentioned above, there is a good chance the recent pullback in the stock is temporary. We should get another bite at the apple to write a covered call in the months ahead.
Call premium: $1.65
Dividend: $0.935

Total: $2.59 (total income return of 4.9% in 3 months)

Sell NEE September 17th $80 calls at $3.50 or better
The stock has trended higher since these calls were written and the premium is currently above the target price at 4.60. Of course, NEE has been trending lower this week as the cyclical stocks are rallying. We’ll see where the stock is several weeks after Labor Day at options expiration. It’s still a good time to write these calls if you already own the stock and haven’t done so.

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.

CIA September Calendar

CIA October Calendar


The next Cabot Income Advisor issue will be published on September 22, 2021.

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Publishing independent investment advice since 1970.

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Chief Investment Strategist: Timothy Lutts
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