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Income Advisor
Conservative investing. Double-digit income.

November 17, 2021

What inflation? What supply-chain issues? Headlines be damned. This market is on the cusp of yet another new all-time high.

The Market Stays Hot, for Now
What inflation? What supply-chain issues? Headlines be damned. This market is on the cusp of yet another new all-time high.

The market is outrunning the rising concerns, for now. Inflation and supply shortages aren’t spoiling company profits. Meanwhile, the economy is still strong. Retail sales numbers are great. Homebuilder sentiment is the highest in six months. Manufacturing output is the highest in over two years. Earnings are killing it. The economy is booming. Interest rates are low. What’s not to like?

But I’m cautious about 2022. The market may be outrunning the problems for now. But when earnings excitement fades and the market slows down, the problems may catch up. The economy is still making up for the slack left by the pandemic. When the slack is made up, the environment should normalize next year.

Meanwhile, inflation isn’t going away. It’s getting worse. Supply chains continue to be a problem. And the Fed may have to pull back on the throttle sooner and faster than expected to combat rising inflation. We’ll see what happens. But, in any event, the market is unlikely to deliver returns of which we’ve recently grown accustomed in the next year.

The high market and uncertain new year make this an ideal environment in which to sell covered calls. Rising prices increase upside speculation, and call premiums have risen. We can milk the current market euphoria for high income. If the stocks get called, we’ll be selling on strength ahead of what could be a turbulent year.

While rising inflation may hurt the overall market, it will benefit certain well-chosen stocks.

Trades this month
October 20th
Sold OKE November 26th $65 calls at $2.25 or better

October 27th
Sold KKR December 17th $75 calls at $3.50 or better
Purchased FS KKR Corp. (FSK) - $22.01

November 10th
Sell OLP February 18th $35 calls at $1.50 or better – pending

November 17th
Buy Valero Energy (VLO)

Trade Alert
Buy Valero Energy (VLO)
Yield 5.1%
Oil and gas are essential commodities. And energy companies tend to thrive during times of inflation as the price of oil and gas tends to rise a lot more than the costs of extracting it and bringing it to market. The Energy Select Sector SPDR Fund (XLE), which tracks stock in the S&P 500 energy sector, soared 23% from late September to late October. The XLE is also up over 100% for the past year.

Energy stocks got creamed during the pandemic and a big part of the high returns over the past year was a recovery from absurd lows as the lockdowns ended and demand returned. But the latest surge is directly attributable to inflation and rising energy prices. Prices should at least maintain current levels on strong demand and supply constraints with no end in sight.

Valero is the largest petroleum refiner in the U.S. It has 15 petroleum refineries and markets products in 43 states, Canada and the U.K. It is also one of the largest producers of ethanol and has a rapidly growing renewable diesel business.

It is the best refiner because it is the most technologically advanced and has some of highest and most resilient profit margins in the business. But none of that is the main story for this stock right now. It’s all about the recovery. Refiners are extremely cyclical. And Valero is a high-leverage play on the continued recovery in energy stocks.

As demand for gasoline and diesel crashed during the pandemic, VLO got crushed. In late October, VLO was down 50% from the pre-pandemic high and 70% from the all-time high. But things are reversing in a big way. VLO has more than doubled over the past year.

Third-quarter revenue soared 87% from the year-ago quarter and profits flipped from a negative $464 million to a positive $463 million over the same period. Sure, crude oil is a cost and the price per barrel is way up. But so is the price of gasoline, which has more than doubled over the past year. Valero is good at making sure the margins are still high. And the robust demand and prices of refined products should stay strong in the quarters ahead.

But you haven’t missed the boat. VLO still sells at nearly 10% from the 52-week high, 23% below the pre-pandemic high, and 37% below the all-time high. This refiner should have a lot more room to run. It also generates big fat call premiums when it gets a move on.

Stock Portfolio Recap
AGNC Investment Corp. (AGNC)
Yield 8.9%
This mortgage REIT fell from a high of nearly 19 per share in June and has wallowed around the current 16 level since July. It’s not going higher as I’d hoped. But there doesn’t seem to be any pressure on the downside from here. That’s not the worst thing when the stock yields 8.9%, especially considering we sold two calls this year for an extra 1.00 of income. Interest rates should still go higher as inflation persists and the bias on the stock price should be to the upside. BUY

Enterprise Product Partners (EPD)
Yield 7.9%
The story for this midstream energy partnership is similar to that of AGNC in that the price doesn’t seem to go anywhere. But the distribution is rock solid. It also sells at a cheap valuation and the energy environment is very good for stocks in the sector. There should be another move to the upside in the months ahead and you can be patient with EPD because it pays you a huge income while you wait around. BUY

FS KKR Corp. (FSK)
Yield 11.3%
I can’t say it better than I said last week. This newest portfolio addition hasn’t done anything yet. That’s fine. Even if the stock price never goes anywhere, it still pays a double-digit income. I would have gladly signed up for no price movement and an 11.3% income any day of the week. But I think the stock price will trend higher in the months ahead. This is a great business environment for small companies and investors will flock to the income when the market inevitably cools off. BUY

KKR & Co., Inc. (KKR)
Yield 0.8%
The cold water has been applied. This thoroughbred racehorse of October and early November has come back to reality. This thing soared 40% in a month. And it’s a financial stock for heaven’s sake. But it’s consolidating now. KKR has pulled back more than 10% from the high and looks like it will go sideways for a while. I still like KKR longer term, but it couldn’t maintain that pace. We’ll see if the stock gets called in a month. HOLD

One Liberty Properties, Inc. (OLP)
Yield 5.3%
The market has been showing this normally slow-moving industrial REIT a lot of love lately. It’s up over 10% this month as the market liked the earning report. I like REITs as the market is poised to normalize and yield becomes more valuable. Also, REITs are good in inflation. OLP is in a higher-growth area than most its peers as well. It also helps that it pays a healthy yield. This industrial property REIT is a sleeper pick that has grown earnings by an average of more than 20% over the last three years. BUY

ONEOK, Inc. (OKE)
Yield 5.8%
This midstream energy company stock has also gotten a splash of the cold water after a spectacular run higher. The energy sector rally in late September and early October lit a fire under OKE’s keester. But it has been a downward biased sideways slog for the last month. That’s okay because it pays a big fat yield no matter what the stock price is doing. I still like energy and I love ONEOK. We’ll see what happens in the near term and if this stock gets called when the options expire in 10 days. HOLD

Qualcomm Corp. (QCOM)
Yield 1.7%
I don’t think this upside move is over. QCOM just made a new high and it’s soaring into unchartered territory. After wallowing in oblivion almost the whole year, QCOM has finally caught fire and is up nearly 40% in the last month. It was better than a blowout earnings report because results portend a much better future than the market expected. That’s why there were a slew of upgrades and higher price targets. Let’s just ride this horse and see what happens. BUY

U.S. Bancorp (USB)
Yield 3.0%
Okay, the regional bank stock has been sideways since September. It continues to bounce around the high end of its recent range. It doesn’t look like it’s going anywhere soon. But I like the way it’s setting up. Interest rates should trend higher. The economy should remain strong for a while. The prognosis for bank stocks over the next year is excellent. And we’re milking it for income while the stock finds itself. HOLD

Xcel Energy Inc. (XEL)
Yield 2.8%
This alternative energy utility has been a dog with fleas of late. It’s still busy wallowing near the low point of its recent crummy range. But I’m still a big believer. This is one of the best utilities out there. Defensive stocks should have their day in the sun as the market and economic environment normalizes into next year with stock prices at very high levels. And Xcel should also be a huge beneficiary of the growth in alternative energy beyond that. Patience should pay off before too long. BUY

Existing Call Trades
Sell USB November 19th $60 calls at $2.30 or better
My, this is tight. It’s a real horserace to see if USB closes above or below the strike price in two days at expiration. The stock price is pennies below the 60 per share strike price right now. But we’ll get a great income and/or a strong total return in a short amount of time regardless of what happens.

Sell OKE November 26th $65 calls at $2.25 or better
We’re looking good here. The stock has really cooled off since we wrote these high-priced calls in its glory days. The stock is more than 2 per share below the strike price right now with 10 days to go before expiration. Sure, the stock is bumbling for now. But I still like the prognosis in the months ahead. We just might be able to milk a high income and hold the stock for more income opportunities going forward.

Sell KKR December 17th $75 calls at $3.50 or better
The stock appeared to be running away. But not so fast. It has come down a lot after a huge run. It’s now just about 2.20 per share above the strike price and still trending lower with a month to go before expiration. We get the high income no matter what. And in a month will either get to keep the stock ahead of a positive environment or we will lock in a strong total return.

Sell OLP February 18th $35 calls at $1.50 or better – pending
We never got the calls at the target price since this trade was highlighted last week. There appears to have been some sort of pricing aberration. It happens. But the stock has continued to forge higher since. The calls may hit the target price after another strong day. So, let’s leave the order at 1.50 per call for now.

CIA STOCK PORTFOLIO
Open RecommendationsTicker SymbolEntry DateEntry PricePrice on
11/15/21
Buy at or
Under Price
YieldTotal Return
AGNC Investment Corp.AGNC1/13/202115.5216.0217.008.98%10.95%
Enterprise Product PartnersEPD3/17/202123.2122.9225.007.85%4.99%
U.S. BancorpUSB3/24/2153.4760.4657.003.04%15.64%
Qualcomm Inc.QCOM5/5/21134.65168.51140.001.65%26.37%
ONEOK, Inc.OKE5/26/2152.5163.3660.005.90%24.64%
One Liberty Properties, inc.OLP7/28/2130.3734.5733.005.34%15.49%
KKR & Co., Inc.KKR8/25/2164.5277.7770.000.75%20.76%
Xcel Energy Inc.XEL10/12/2163.0064.3167.002.90%2.08%
FS KKR Capital Corp.FSK10/27/2122.0121.5924.0011.33%-1.91%
Valero Energy Corp.VLO77.3585.005.12%
EXISTING CALL TRADES
Open RecommendationsTicker SymbolIntial
Action
Entry DateEntry
Price
Price on
11/15/21
Sell To Price
or Better
Total Return
USB Nov 19 $60 callUSB211119C00060000Sell9/24/212.301.002.304.30%
OKE Nov 26 $65 callOKE211126C00065000Sell10/20/212.250.502.254.28%
KKR Dec 17 $75 callKKR211217C00080000Sell10/26/213.504.303.505.42%
OLP Feb 18 $35 callOLP220218C00035000Sell pending1.151.50
SOLD STOCKS
SecurityTicker SymbolActionEntry DateEntry
Price
Sale DateSale PriceTotal Return
Innovative Industrial Props.IIPRCalled6/2/2087.829/18/20100.0015.08%
QualcommQCOMCalled6/24/2089.149/18/2095.007.30%
U.S. BancorpUSBCalled7/22/2036.269/18/2038.003.42%
Brookfield Infras. Ptnrs.BIPCalled6/24/2041.9210/16/2045.008.49%
Starbucks Corp.SBUXCalled8/26/2082.4110/16/2088.006.18%
Visa CorporationVCalled9/22/20200.5611/20/20200.000.00%
AbbVie Inc.ABBVCalled6/2/2091.0412/31/20100.0012.43%
Enterprise Prod. Prtnrs.EPDCalled6/24/2018.141/15/2120.0015.16%
Altria GroupMOCalled6/2/2039.661/15/2140.007.31%
U.S. BancorpUSBCalled11/25/2044.681/15/2145.001.66%
B&G Foods Inc,BGSCalled10/28/2026.792/19/2128.004.42%
Valero Energy Inc.VLOCalled8/26/2053.703/26/2160.0011.73%
Chevron Corp.CVXCalled12/23/2085.694/1/2196.0012.95%
KKR & Co.KKRCalled3/24/2147.986/18/2155.0014.92%
Digital Realty TrustDLRCalled1/27/21149.177/16/21155.005.50%
NextEra Energy, Inc.NEECalled2/24/2173.769/17/2180.0010.00%
Brookfield Infras. Ptnrs.BIPCalled1/13/2150.6310/15/2155.0011.65%
EXPIRED OPTIONS
SecurityIn/out moneySell DateSell PriceExp. Date$ 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$3.506.67%
NEE Sep 17 $80 callin-the-money8/11/21$3.509/17/21$3.504.75%
BIP Oct 15 $55 callin-the-money9./01/2021$2.0010/15/21$2.003.95%