Defense With a Twist in an Uncertain Market
The market is always uncertain. That’s what makes it a market. But this is ridiculous.
This year has been good so far with the S&P 500 up over 7% YTD. But it has been choppy, and huge questions remain. Inflation could stop falling. And the Fed could reverse its notably less hawkish recent stance. We are likely in an earnings recession, with two straight quarters of negative earnings growth. And a growing number of economists see an economic recession later this year.
It’s hard to see how stocks can rally into the next bull market without more clarity on these issues. And such clarity may be many months away. Anything is possible, but it looks like there will be more choppiness at best, and possibly much worse in the months ahead.
A recession may be avoided. The economy is almost always more resilient than most pundits give it credit for. But it seems highly unlikely that the economy will not at least slow in the months ahead after the steepest rate hiking cycle in decades and a banking problem that is sure to result in restricted lending.
In the midst of an earnings recession and a slowing economy, defensive stocks are probably the best places to be. These companies can maintain earnings growth while most companies are sliding and remain consistent even as the economy deteriorates further.
Defense is king right now. But defensive stocks are even better when they offer growth as well. In such uncertain times, it makes sense to bank on things that are more certain. Stocks poised in front of a megatrend are the best bet. A megatrend acts as a powerful tailwind for a stock that can make a mediocre pick very good and a good pick great.
One such megatrend is alternative energy. Sure, recent events underscore that the importance of fossil fuels has been underestimated. And fossil fuels will remain important for a long time. But clean energy isn’t going away. And the global move toward alternative energy sources will surely continue.
In this issue, I highlight a defensive stock that is also one of the world’s largest producers of alternative energy. At the same time, it is also one of the best traditional regulated utilities in the country. It offers defense as well as growth and can thrive in any kind of market.
What to Do Now
The market has been much better so far this year. But things still don’t look great.
The early part of the year saw a resurgence in cyclical stocks after they got hammered last year and there was growing optimism about a soft landing for the economy. And defense stock sectors underperformed the market.
But things changed after the bank failures. The main market catalysts had been inflation and the Fed. When investors sensed easing inflation and a less aggressive Fed, stocks rallied. When investors feared a more hawkish Fed, stocks fell. But after the bank failures, the main catalyst is moving more towards recession fear.
The bank situation may have helped stocks in the near term. The issues managed to temper the Fed, who rapidly changed their hawkish posture and insinuated only one more rate hike. The bank failures managed to temper the Fed without any offsetting crisis, so far, and the market rallied.
But recession fear is starting to creep in. As a result, previously underperforming defensive sectors like healthcare, consumer staples, and utilities have been among the market’s top-performing sectors. A recession isn’t guaranteed. Maybe one can be avoided. This earnings quarter should lend some insight as companies issue guidance on what they expect for the rest of the year. But it seems almost certain that the economy will at least slow down and possibly flirt with recession.
It is unlikely that the market can muster a significant enough rally to lead us out of the bear market until investors can sense an economic bottom. And that seems at least months away at this point.
Shrinking earnings and a slide toward recession should favor defensive stocks, many of which are still lower YTD. The pricing and timing look attractive. That’s why the BUY-rated stocks in the portfolio are almost all those of defensive companies.
There may be a time later in the year when it will be advantageous to buy cyclical stocks in the portfolio. But not yet. Defense is still king. It’s also worthwhile to take advantage when any stock rallies in the market and sell a higher-priced covered call. That’s why this portfolio recently sold calls on ONEOK (OKE) and Visa (V).
Monthly Recap
March 28th
Purchased ONEOK, Inc. (OKE) - $60.98
April 11th
SOLD OKE May 19th $65 calls at $2.70
April 21st
SOLD V June 2nd $230 calls at $10.50
April 25th
Buy NextEra Energy, Inc. (NEE)
Featured Action: NextEra Energy, Inc. (NEE)
Yield: 2.4%
Utility stocks fill a great niche in any investment portfolio, especially in an economy and market this uncertain. The sector is the most defensive on the market as earnings are virtually immune to economic cycles. Utility stocks also pay high dividends and typically hold up very well in down markets.
NextEra Energy provides all those advantages plus exposure to the fast-growing and highly sought-after alternative energy market.
NextEra Energy is the world’s largest utility. It’s a monster with over $20 billion in annual revenue and a $158 billion market capitalization.
Ordinarily, when you think of a huge utility you probably think it has lackluster growth and a stable dividend. But that’s not true in this case. Earnings growth and stock returns have well exceeded what is normally expected of a utility.
For the last 15-, 10- and five-year periods, NEE has not only vastly outperformed the Utility Index. It has also blown away the returns of the overall market. How can that be?
It’s because it isn’t a regular utility. NEE is two companies in one. It owns Florida Power and Light Company, which is one of the very best regulated utilities in the country, accounting for about 55% of revenues. It also owns NextEra Energy Resources, the world’s largest generator of renewable energy from wind and solar and a world leader in battery storage. It accounts for about 45% of earnings and provides a higher level of growth.
Florida Power and Light is the largest regulated utility in the U.S. It has about 6 million customers in Florida. It is one of the very best electrical utilities in the country. There are a few good reasons why Florida is a great place to operate a utility.
The state has a growing population. Utilities have a limited geographical range, and a stagnant population can make it tough to grow. Plus, it is one of the most regulator-friendly areas in the country. That’s huge for getting approvals for periodic expansions and price hikes. It also doesn’t hurt that Floridians run their air conditioners like crazy, and just about all year long.
The alternative energy company, NextEra Energy Resources, is the world’s largest generator of renewable energy from wind and solar. Alternative energy is the future, and this company is at the top of the heap. The government and regulators love them for it. It’s also a huge benefit that the cost of clean energy generation constantly gets cheaper as technology advances.
There is also a huge runway for growth projects. NextEra has deployed about $55 billion between 2019 and 2022 on growth expansions and acquisitions. The company is expecting an increase in investments of 1.5 times from year-end 2019 levels between 2021 and 2024.
A key aspect of this recommendation is timing. The stock is a decent bargain after a period of underperformance and ahead of a slowing economy, a period of historic market outperformance.
NEE had been on fire until the beginning of last year. It blew away the market returns in every measurable period over the last ten years. But the stock moved lower and has been bouncing around in that lower range ever since. It was negatively affected by rising interest rates in 2022, as competition from fixed-rate investments increased. And safe stocks have underperformed so far in 2023 as cyclical and technology stocks rallied early in the year.
But things are changing. Many economists are now forecasting a recession, or at least a slowing economy, later this year. Interest rates have been coming down. The benchmark 10-year Treasury rate has fallen from a high of 4.25% in October and over 4% at the beginning of March to around 3.5% today. Recessions typically put further downward pressure on interest rates.
It is also a likely earnings recession already, as average S&P 500 earnings fell over 4% in the fourth quarter and are forecast to be down again for the first quarter. Falling earnings are likely to put a premium on companies that can continue to grow profits. And utility stocks typically outperform in a recession.
It’s a good time for a defensive stock like this. The more conservative stocks have been working much better in the portfolio and providing opportunities to generate a high income with covered calls.
NextEra Energy, Inc. (NEE)
Next ex-div date: May 27, 2023, est.
Portfolio Recap
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 | $117.76 | NA | 2.72% | -8.93% |
Visa Inc. | V | 12/22/21 | $217.96 | $234.05 | NA | 0.77% | 8.42% |
Global Ship Lease, Inc. | GSL | 2/23/22 | $24.96 | $19.67 | NA | 7.40% | -14.76% |
Star Buld Carriers Corp. | SBLK | 6/1/22 | $33.30 | $22.18 | NA | 24.18% | -23.64% |
Intel Corporation | INTC | 7/27/22 | $40.18 | $30.30 | NA | 1.62% | -21.85% |
The Williams Companies | WMB | 8/24/22 | $35.58 | $29.93 | $38.00 | 5.98% | -12.32% |
Brookfield Infrastructure Cp. | BIPC | 11/9/22 | $42.43 | $43.42 | $46.00 | 3.50% | 4.04% |
ONEOK Inc. | OKE | 3/28/23 | $60.98 | $66.30 | $63.00 | 5.76% | 8.72% |
NextEra Energy, Inc. | NEE | 4/25/23 | $78.99 | $85.00 | 2.37% | ||
EXISTING CALL TRADES |
| ||||||
Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
OKE $65 May 19th call | OKE230519C00065000 | Sell | 4/11/23 | $2.70 | $1.97 | $2.70 | 4.43% |
V $230 June 2nd call | V 230602C00230000 | Sell | 4/21/23 | $10.50 | $10.36 | $10.50 | 4.82% |
as of close on 4/21/2023 | |||||||
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% |
Innovative Industrial Props. | IIPR | Sold | 3/23/22 | $196.31 | 7/20/22 | $93 | -51.23% |
One Liberty Properties | OLP | Sold | 7/28/21 | $30.37 | 8/24/22 | $25 | -12.94% |
ONEOK, Inc. | OKE | Called | 5/25/22 | $65.14 | 1/20/23 | $65 | 2.66% |
Xcel Energy, Inc. | XEL | Called | 10/26/22 | $62.57 | 1/20//2023 | $65 | 4.67% |
Realty Income Corp. | O | Called | 9/28/22 | $60.37 | 2/17/23 | $63 | 5.41% |
Medical Properties Trust | MPW | Sold | 1/24/23 | $13.22 | 3/21/23 | $8 | -38.00% |
| 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% | |
SBLK July 15th $134 call | out-of-money | 6/1/22 | $1.60 | 7/15/22 | $1.60 | 4.80% | |
OKE Oct 21st $65 call | out-of-money | 8/24/22 | $3.40 | 10/21/22 | $3.40 | 5.22% | |
OKE Jan 20th $65 call | In-the-money | 11/25/22 | $3.70 | 1/20/23 | $3.70 | 5.68% | |
XEL Jan 20th $65 call | in-the-money | 11/25/22 | $5.00 | 1/20/23 | $5.00 | 7.99% | |
O Feb 17th $62.50 call | in-the-money | 12/28/22 | $3.00 | 2/17/23 | $3.00 | 4.97% | |
QCOM Sep 16th $145 call | out-of-money | 7/20.2022 | $11.75 | 9/16/22 | 11.75 | 8.73% | |
V Mar 17th $220 call | out-of-money | 1/24/23 | $12.00 | 3/17/203 | $12.00 | 5.51% | |
Brookfield Infrastructure Corporation (BIPC)
Yield: 3.5%
The infrastructure juggernaut has been bouncing around to nowhere since the end of 2020. The uninspired returns aren’t that bad considering it has been a bear market. The stock had been held back more recently by a strong dollar and higher lending rates, but those things have been receding and the stock might be on the move. BIPC recently hit the highest price level since last fall and is up about 13% YTD. The stock is now right around the midpoint of its 52-week price range and should be a solid holding amid inflation and/or recession. BUY
Brookfield Infrastructure Corporation (BIPC)
Next ex-div date: May 27, 2023, est.
Global Ship Lease, Inc. (GSL)
Yield: 7.4%
The container shipping company is solid with growing earnings and revenues despite the fact that shipping rates have plunged since the supply chain crisis of a couple of years ago. But the stock is still a cyclical international company, and the stock price is at the mercy of the market’s treatment of such sectors in the near term. The rate environment is improving as China has reopened and the longer-term supply/demand dynamic for shippers is solid and the sector is likely in a secular bull market. But GSL will likely not have a significant and sustainable upside move until the overall market recovers. HOLD
Global Ship Lease, inc. (GSL)
Next ex-div date: May 21, 2023, est.
Intel Corp, (INTC)
Yield: 1.6%
Several important technology companies are scheduled to report earnings this week and the results may have a significant impact on the near-term direction of the sector. The recent trend has been falling inflation and interest rates and tech stocks are benefitting as the sector is the top performing on the market YTD. Technology stocks slumped ahead of the overall market and may recover before the indexes.
INTC soared over 30% in the month of March and broke out to the highest level since last summer. Part of it is a rally off the bottom as the stock sunk to book value after lousy earnings and guidance and a dividend cut. Intel is still a powerful industry player and its recent attempts to catch up to its competitors should succeed to a least some degree over time. The company also appears to have solved its production issues, which bodes very well for new products on the launchpad and a sooner return to profitability. HOLD
Intel Corporation (INTC)
Next ex-div date: May 4, 2023
ONEOK, Inc. (OKE)
Yield: 5.8%
After strongly outperforming the market and its peers for the last two calendar years, OKE has been floundering this year and is barely above even YTD. But OKE has been strong lately. It’s up 13% in the last month. It has leveled off recently but has moved to the upper levels of the recent range. The stock may be at the mercy of the market in the near term but has sound fundamentals. ONEOK continues to post strong earnings and is well-suited to endure inflation and/or recession. BUY
ONEOK Inc. (OKE)
Next ex-div date: April 28, 2023
Star Bulk Carriers Corp. (SBLK)
Yield: 24.0%
This shipping company is benefitting from favorable longer-term industry dynamics as well as an uptick in rates as a result of China like GSL. But it is a cyclical stock that can be at the mercy of market mistreatment of such stocks in the near term. The longer-term prognosis is excellent but a big move is unlikely until the overall market recovers. Lower shipping rates and a slower global economy have already been factored into the stock and it is likely still the early innings of a multiyear positive cycle for shipping. HOLD
Star Bulk Carriers Corp. (SBLK)
Next ex-div date: May 27, 2023, est.
Qualcomm Corp. (QCOM)
Yield: 2.7%
The chip company stock recently raised the quarterly dividend to 0.80 per share from 0.75. This is a great long-term stock of a company with a huge share of mobile 5G chips and strong exposure to some of the fastest-growing areas in technology. Meanwhile, it sells at a very cheap valuation by historical standards. But QCOM is also vulnerable to the overall technology sector in the near term. It is likely that a tech recovery should come sooner than an overall market recovery as interest rates and inflation recede in a slowing economy. Plus, QCOM can move up fast when the sector eventually really recovers. HOLD
Qualcomm Inc. (QCOM)
Next ex-div date: May 31, 2023
Visa Inc. (V)
Yield: 0.8%
V has an amazing track record and should be an excellent stock for the longer term going forward as well. Cashless transactions are growing, and Visa has the biggest market share of that business. It can be cyclical in that a recession would reduce the number of transactions. But that possibility has likely been holding back the stock. V is up over 12% YTD after a solid performance in a bear market last year. The stock has also moved to its highest price since last summer. HOLD
Visa Inc. (V)
Next ex-div date: May 9, 2023, est.
The Williams Companies, Inc.
Yield: 6.0%
WMB has been a struggling stock this year because of natural gas prices, which have crashed. Although the company is not highly levered to energy prices, it is affected by turbulence in its industry. Prices have fallen largely because of the unusually warm winter temperatures throughout the country and the world. Demand for the fuel has been far less than anticipated and stockpiles have built up. But it is a temporary problem for a fuel source that should own the next decade. And WMB has gotten cheap. BUY
The Williams Companies, Inc. (WMB)
Next ex-div date: June 10, 2023, est.
Existing Call Trades
Sell OKE May 19th $65 calls at $2.70 or better
OKE has moved about 9% higher since being added to the portfolio. The stock should have the right stuff for inflation and or recession, but it has been very bouncy. The portfolio has already sold four calls on this same stock on earlier occasions, and it can provide an excellent vehicle for high income going forward as well. The stock has spiked in price in a very uncertain market, and it makes sense to seize the opportunity to sell a call.
Sell V June 2nd $230 calls at $10.50 or better
The market is up so far this year. But it has been choppy. There is also a strong possibility of a recession later this year, along with other risks. The high point of the recent range is a good opportunity to sell a call in this market. Even if the stock doesn’t go anywhere for a while we can continue to milk this position for a great income.
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 May 23, 2023.
