Opportunities and Caution
This year was always going to be better than last year. And it’s off to a great start.
So far this month and this year, the S&P 500 is up over 4%. Some of last year’s best-performing sectors are the worst and several of last year’s dogs are among the best-performing so far in this young year. Is this a portent of things to come or just another tease?
There is optimism out there. Inflation is clearly falling. The economy is slowing but not by that much. Investors are sensing the possibility of a soft landing where inflation is falling but not at the expense of a deep recession. There is hope that we can get out of this inflation/Fed conundrum with minimal economic pain.
While that scenario is possible, and I hope it happens, it’s far from a done deal yet. It remains to be seen if inflation will continue to fall. And the bigger question is how the economy will fare after all these rate hikes. There could still be a more aggressive Fed or a deeper economic downturn than currently expected.
It may be that the worst is over, and the market won’t take another drubbing and make a new low. But, even if that turns out to be the case, it is unlikely that stocks can rally out of this bear market until there is more clarity on the extent and timing of an economic bottom.
I believe the market can and will muster a sustained rally at some point this year. But it’s too early to buy into the current rally. That’s why the portfolio continues to play it safer. There will likely be a time to load up on more aggressive income stocks. But not yet.
Of course, the current market still offers opportunities. Cyclical stocks have rallied and, for the first time in a long time, there is an opportunity to sell a covered call on one of the portfolio’s cyclical stocks. In this issue, I highlight a covered call opportunity in Visa (V) after the stock has rallied nicely.
I also highlight a fantastic income stock that has likely already made its own low even if the market turns south again. It sells at a dirt-cheap valuation with a high and safe dividend and has recently added momentum to the mix.
What to Do Now
It’s too early to buy into this rally as the one that will lead us out of the bear market and into the Promised Land. Sure, the S&P 500 is up over 12% from the October low. But there have been two such rallies before only to have the market later roll over and make new lows. Therefore, it isn’t prudent to get aggressive until the rally shows more signs of sustainability.
For that reason, the cyclical stocks in the portfolio are still rated a HOLD and new cyclical stocks are not being added. That may change later in the year. But it still makes sense to be more conservative for now.
There are still opportunities in defensive stocks Brookfield Infrastructure Corp. (BIPC) and The Williams Companies (WMB). BIPC has good momentum at this point but WMB should also be solid going forward. Realty Income (O) has rallied recently beyond the optimal buy point and has been reduced to a HOLD.
The defensive stocks have rallied over the last several months and offered good call-writing opportunities. Two stocks with calls sold on the positions were called last Friday, ONEOK Inc. (OKE) and Xcel Energy (XEL). The stocks and calls provided a solid income and total return in a bear market.
The recent rally has provided an opportunity to sell a call against one of the cyclical positions, Visa (V). While I do expect V to be a lot higher priced by the end of the year, I don’t trust this market in the near term. Plus, if the cyclical rally continues and V gets called, the other cyclical portfolio positions should benefit.
SOLD O February 17th $62.50 calls at $3.00
OKE January 20th $65 calls - Expired
XEL January 20th $65 calls – Expired
ONEOK, Inc. (OKE) – Called
Xcel Energy Inc. (XEL) – Called
Buy Medical Properties Trust, Inc. (MPW)
Sell V March 17th $220 calls at $12.00 or better
Realty Income (O) – Rating change “BUY” to “HOLD”
Featured Actions: Buy Medical Properties Trust, Inc. (MPW)
Medical Properties Trust is a healthcare Real Estate Investment Trust (REIT) that invests in hospitals and clinical spaces and leases them back to healthcare providers. It rents 434 properties in 10 countries and is the largest company to focus exclusively on hospital facilities with more than $1.5 billion in annual revenues.
The 434 properties are leased to 54 different operators primarily by a sale-leaseback arrangement. MPT buys properties from hospital operators and leases the property back to them. The arrangement provides operators with cash to fund facility improvements, make technological upgrades, and various other investments in operations. MPT gets a steady and predictable cash flow whereby operators are responsible for costs and upgrades.
The portfolio is well-diversified with no one property representing more than 3% of the total. Properties are primarily located in the U.S. (62%) with the rest in the U.K. (18%), Switzerland (6%) and several other European countries. MPT also invests in non-real-estate assets in the form of the operators themselves to a small degree (roughly 7.7% of assets) in the form of high-interest loans and equity stakes, which have been profitable. But over about 80% of revenue is derived from leases to hospitals.
Results for the company and the stock have been very good over the long term. MPW has significantly outperformed its healthcare real estate peers over the past five- and ten-year periods. The healthcare property REIT has grown its assets by a compound annual growth rate (CAGR) of 29% over the last ten years. Over the same period, MPT has increased cash from operations by 810%.
A big part of the success is the property selection process. The underwriting process identifies certain characteristics that make each facility attractive to any experienced and competent operator including physical qualities, market demographics, competition, and financials of the local area. It’s good at finding facilities that are the natural result of true community need where the proper conditions are in place for lasting profitability.
The things that make the stock particularly attractive now, namely a cheap valuation and a high yield, are the result of recent bad performance. The stock price is down more than 35% over the last year. The reasons behind the stock plunge are rising interest rates and flat guidance and concern for one of its tenants.
Rising interest rates pressure REITs in two ways. First, it makes competing fixed-rate investments more competitive for income investors. Second, it raises the cost of funding for acquisitions and expansions. The former is the more legitimate problem. REITs pay out most of their earnings in the form of dividends and need to borrow money or issue stock to raise money for expansions. Higher rates make expanding more expensive and limit growth.
The higher rates are limiting near-term growth for MPT. The REIT targets $1 billion to $3 billion per year for acquisitions and 2022 was near the low end. That limits earnings and dividend growth. But the stock sells at just nine times funds from operations (FFO) compared to about 17 times for its peers and its five-year average. Just making up most of that difference can move the stock price significantly higher.
The concerns about the tenant are overblown. Because of the superior property selection, new tenants can be easily found if it comes to that. MPT has only ever replaced 11 operators in 20 facilities from a total of 530 hospitals and those tenants were easily replaced. Investors also underestimated the value of its investments in the operators, which are very profitable and is another source of cash flow. MPT reported a great third quarter amidst the carnage with earnings growth at about 30%, which is an indication that perhaps the market has treated the stock unfairly.
MPT currently pays $0.29 per quarter, which translates to $1.16 per share annually for a current yield of 8.4%. That’s a big yield for a company this solid. The dividend has also been raised for eight consecutive years and MPT has one of the lowest payout ratios of its peers. It’s also worth noting that during the pandemic, six of its healthcare REIT peers cut the dividend by an average of 31% while MPT raised its payout by 12% over the same period.
The dividend is also solid even amid inflation and recession. Hospitals and health clinics are highly recession-resistant properties for obvious reasons. The performance through the pandemic exemplifies that strength. MPT also has inflation adjustments built into its leases and properties themselves should also hold value as hard assets during inflation.
The valuation is there. The solid and predictable recession-resistant revenues are there. But those things applied last year and the stock performed awfully. The difference now is momentum. MPW is up 24% so far this year and 40% from the October low. It provides a great dividend income and the opportunity for high-priced calls down the road.
Medical Properties Trust, Inc. (NYSE: MPW)
Security type: Real Estate Investment Trust (REIT)
Industry: Healthcare Properties
52-week range: $9.90 - $23.18
Profile: MPT is the largest healthcare REIT to focus exclusively on hospital facilities.
- Well-selected properties have a long history of success.
- Hospitals are a very recession-resistant business, and properties hold value in inflation.
- MPW sells at a dirt-cheap valuation with a high and safe dividend.
- Higher interest rates limit expansion opportunities and earnings growth.
- The company has a high amount of debt.
Medical Properties Trust, Inc. (MPW)
Next ex-div date: March 7, 2023. Est.
Sell V March 17th $220 calls at $12.00 or better
Expiration date: March 17th
Strike price: $220
Call price: $12.00
Visa Inc. (V)
This great company and stock have been elusive in this portfolio. The main reason is that it was purchased just a couple of weeks ahead of the market high in January of last year. The stock has shown signs of promise and then pulled back again. This time, after a good run, let’s lock in a high income.
This is the first time in a while that this portfolio is selling calls on one of the cyclical positions. The recent up market is offering an opportunity. But there is still a lot of risk in the market and a pullback is very possible, if not likely, in the next couple of months. If cyclical stocks continue to rally and V gets called away, we will benefit from the other cyclical stock in the portfolio.
Here are the three scenarios.
1. The stock closes above the $220 strike price at expiration.
Call premium: $12.00
Appreciation: $2.04 ($220.00 strike price minus $217.96 purchase price)
Total: $16.04 (total return will be 7.4% in 15 months)
2. The stock price closes below but near our $220 strike price.
Call premium: $12.00
Total: $14.02 (total income of 6.4% in 15 months)
3. The stock price declines.
There will be $14.02 in income to offset the decline. Plus, the original purchase price was below the strike price.
CIA STOCK PORTFOLIO
|Open Recommendations||Ticker Symbol||Entry Date||Entry Price||Recent Price||Buy at or Under Price||Yield||Total Return|
|Global Ship Lease, Inc.||GSL||2/23/22||$24.96||$18.00||NA||8.33%||-23.53%|
|Star Buld Carriers Corp.||SBLK||6/1/22||$33.30||$22.45||NA||28.95%||-19.29%|
|The Williams Companies||WMB||8/24/22||$35.58||$31.46||$38.00||5.40%||-9.25%|
|Realty Income Corporaton||O||9/28/22||$60.37||$66.38||$63.00||4.49%||11.74%|
|Brookfield Infrastructure Cp.||BIPC||11/9/22||$42.43||$44.91||$46.00||3.34%||6.68%|
|Medical Properties Trust||MPW||1/24/23||$13.72||$15.00||8.45%|
|EXISTING CALL TRADES|
|Open Recommendations||Ticker Symbol||Initial Action||Entry Date||Entry Price||Recent Price||Sell To Price or better||Total Return|
|O Feb 17 $62.50 call||O230217C00062500||Sell||12/28/22||$3.00||$4.03||$3.00||4.97%|
|V Mar 17 $220 call||V230317C00215000||Sell pending||$12.10||$12.00||5.51%|
|as of close on 1/20/2023|
|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%|
|Brookfield Infras. Ptnrs.||BIP||Called||6/24/20||$41.92||10/16/20||$45||8.49%|
|Enterprise Prod. Prtnrs.||EPD||Called||6/24/20||$18.14||1/15/21||$20||15.16%|
|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%|
|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%|
|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%|
|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%|
|Xcel Energy, Inc.||XEL||Called||10/26/22||$62.57||1/20//2023||$65||4.67%|
|Security||In/out money||Sell Date||Sell Price||Exp. Date||$ 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%|
|QCOM Sep 16th $145 call||out-of-money||7/20.2022||$11.75||9/16/22||11.75||8.73%|
Brookfield Infrastructure Corporation (BIPC)
The infrastructure juggernaut had been sputtering but has recently gained steam. BIPC got whacked along with the other defensive stocks in September but then didn’t participate in the recovery. Just when defensive stocks took off as interest rates fell back and the economy slowed, the strong dollar kept it back. But it always had great qualities that enable profits to remain strong in both a recession and inflation. The selling got overdone and investors are realizing the value. The stock is up over 15% so far in January. BUY
Brookfield Infrastructure Corporation (BIPC)
Next ex-div date: February 28, 2023. Est.
Global Ship Lease, Inc. (GSL)
Last year was rough for a cyclical international stock like GSL. But the worst may be over. The stock is still well off the September bottom and may permanently eclipse that level. It’s also up about 10% in the last month. The longer-term supply/demand dynamic is positive for container shipping and the stocks may be in a longer-term bull market. Plus, the opening up of China could also be a positive catalyst for shipping activity and rates in the near term. HOLD
Global Ship Lease, inc. (GSL)
Next ex-div date: February 21, 2023, est.
Intel Corp. (INTC)
INTC has been a dog as it moved with the bad fortunes of the technology sector even after it had fallen a lot already. The company should be on a significantly improving trajectory longer term as it is investing heavily in growth areas. In the short term, things may be improving as well. The beleaguered chip company is well off the low of September and is again near 30 per share, the high point of the recent range. Hopefully, INTC can break out from here. HOLD
Intel Corporation (INTC)
Next ex-div date: February 4, 2023, est.
Realty Income Corp. (O)
The legendary income REIT isn’t exciting but it tends to deliver as advertised over time. O has delivered a positive return over the last year while the overall market is down double digits. It also returned about 17% over the last three months and has finally overtaken the elusive 65 per share level. Hopefully, the stock can break out and run for more. But much depends on the overall market. A down market could spoil the party. But this is a popular and defensive income stock that should hold its own in the event of a recession next year. HOLD
Realty Income Corp. (O)
Next ex-div date: January 30, 2023
Star Bulk Carriers Corp. (SBLK)
SBLK is up to the highest price since August. It could be somewhat of a breakout. The longer-term situation should be very good for shippers with a very favorable supply/demand dynamic. But, as cyclical international companies, shipping stocks got crushed in last year’s market. But slowing business has already been factored into the price of the stock. This is likely still the early innings of a multiyear positive cycle for shipping. Plus, the likely opening of China should be a positive catalyst in the near term. HOLD
Star Bulk Carriers Corp. (SBLK)
Next ex-div date: February 28, 2023, est.
Qualcomm Corp. (QCOM)
QCOM was up big on Monday and has cracked the 130 per share level for the first time since September. It has been trending higher along with the technology sector so far this year, but it also got a big upgrade as Barclays came out with a very positive report on the stock’s prospects this week. The analyst said that the worst is over for chip stocks and QCOM should be among the first in the sector to rebound. Before long, the market, which tends to anticipate six to nine months ahead, may start pricing in a real recovery in the sector. HOLD
Qualcomm Inc. (QCOM)
Next ex-div date: March 1, 2023
Visa Inc. (V)
The payments processing company stock has been loving the market rebound. It’s always among the first of its kind to recover when the market situation improves. V is up over 20% in the last three months and is now at the highest level since early April. V held up remarkably well last year with a -3.4% return and should thrive in the likely rebound this year. However, there is a strong chance the market gets bumpy again before it delivers a rally out of this bear market. That makes this a good point to sell a call and generate a strong income while the going is good. HOLD
Visa Inc. (V)
Next ex-div date: February 9, 2023, est.
The Williams Companies, Inc.
WMB has been a bit of a dud lately. It held up much better than its midstream energy peers when the sector took a hit in the fall. But it has been a laggard since the sector’s performance improved. The market seems to like its defensive characteristics best and it tends to rally with the more defensive plays. But defense has been taking a back seat of late. The defensive performance could be a great thing if the current rally rolls over. It pays a big income and thrives amid inflation and recession. Prospects for this year remain excellent. The company posted strong earnings because of resilient natural gas demand. BUY
The Williams Companies, Inc. (WMB)
Next ex-div date: February 8, 2023, est.
Covered Call Trades
OKE January 20th $65 calls at $3.70 - Expired
Call premium: $3.70
Appreciation: -$0.14 ($65.00 strike price minus $65.14 purchase price)
Total: $5.43 (total return of 8.35% in 8 months, or $8.83 and 13.56% if you sold the earlier call that expired in October)
The stock was called away and I do like the prospects for the rest of the year. That said, we got a better than 13.5% income and return, if you sold both calls, in eight months in a bear market. Plus, we sold out of a stock after a nice run when the market is still highly uncertain in the months ahead.
XEL January 20th $65 calls at $5.00 – Expired
Call premium: $5.00
Dividends: $0.4875 (1-20)
Appreciation: $2.43 ($65.00 strike price minus $62.57 purchase price)
Total: $7.92 (total return of 12.7% in 3 months)
A 12.7% return in three months in a bear market is nothing to sneeze at. We also cashed in with in-the-money calls at a time when defensive stocks were riding high. Those stocks have been under pressure so far this year and XEL has pulled back significantly from the recent high.
Sell O February 17th $62.50 calls at $3.00 or better
The stock finally got above the 65 level after topping there for the past two months. As I mentioned above, O could continue to break out further unless the market turns south. We’ll see what happens. There are still four weeks to go before expiration.
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 21, 2023.