Trouble Now May Mean a Sooner Recovery
The market has been better so far this year. But it’s been a choppy ride. After an abysmal 2022 where the S&P 500 fell 19.4%, the index is up around 3.5% YTD.
While the market may not be out of the woods yet, the risk dynamic is changing. The recent banking turmoil has altered the previous order.
Just a few weeks ago investors were fretting over sticky inflation and a Fed that promised to be more aggressive than previously anticipated. Now the main market worry is turning away from Fed aggression and toward recession. That’s the big change in the market since last month.
The failings of Silicon Valley Bank and Signature Bank as well as the problems at Credit Suisse and Deutsche Bank are changing the Fed’s trajectory, at least for now. Prior to the banking issues, the Fed was intent on raising the Fed Funds rate another 0.50% at the March meeting and ultimately hiking the rate well into the 5s. But last week a more cautious Fed raised the rate only 0.25% and said that it was likely almost done with rate hikes.
The fallout from this banking situation may not be over. There is no assessment of the damage because there might be more. Even if the troubles are over, banks are likely to cut back on lending to preserve capital, thus slowing the economy.
The Fed was always intent on inflicting damage to the economy to tame this inflation. Before the banking thing, there were few signs it had accomplished that yet. But there is a long lag time before the effects of the previous rate hikes ripple through the economy. Now, stuff is breaking. It may be mission accomplished. And the Fed is pausing to evaluate the extent of the damage.
Recent events could turn out to be a good thing for stocks. It was always a cycle. The Fed raises rates. Then, the economy turns south. Then, investors sniff out the economic bottom and stocks can rally out of this bear market. Instead of enduring more months and perhaps quarters of rate hikes before the economy finally tanks, it may be happening now. The Promised Land may be far closer than thought just a couple of weeks ago.
Of course, the banking issues might not be over yet. And the timing and severity of a possible recession is still unknown. Things may get worse in the market before they get better. For now, defensive stocks that can maintain earnings growth in a worsening economy or recession are better places to be.
In this issue, I highlight a company that can thrive in both recession and inflation. The same stock has been a highly successful income generator for the portfolio in the past.. And now, it’s selling at a great price.
What to Do Now
Risk still isn’t paying off. We are in a market that doesn’t seem to give any company the benefit of the doubt. At some point later this year, that may change. But it makes sense to stay defensive for now.
An increasing number of economists are predicting a recession this year. Concern is shifting from the inflation/Fed cycle to a tanking economy and earnings pain. Average S&P 500 earnings were negative in the fourth quarter and are expected to be negative again in the first quarter.
The best place to be invested should be stocks of those companies that can continue to grow earnings in a slow economy, and also pay a solid dividend income. The cyclical stocks in the portfolio may make up for lost time before the year is out. But it is better to buy the safe stocks for now.
The current BUY-rated stocks include Williams Companies (WMB) and Brookfield Infrastructure Corp. (BIPC). These are the stocks that should weather the brewing storm best. In this month’s issue, I add another one, ONEOK Inc. (OKE). It pays great dividends and should be solid in an environment of shrinking earnings and a deteriorating economy.
OKE has been in this portfolio before. The most recent time it was purchased in May of 2022 and was called away in January of this year. Two calls were sold on the position, in October and January, for call premiums totaling $7.10 per share.
The stock was called away in January at a profit from the initial purchase price at the strike price of $65 per share. The price has since fallen to less than $60 per share, as of Friday’s close. OKE was held in the portfolio on two separate prior occasions. Both times we sold multiple calls on the position for a huge income until it was ultimately called away at a profit.
OKE is at a cheap price now ahead of a period of likely relative outperformance. Let’s pick it up cheap and milk it for a high income yet again.
Sell QCOM March 31 $130 calls at $7.00 – Remove
Medical Properties Trust - Rating change “BUY” to “HOLD”
V March 17 $220 calls at $12.00 - Expired
SOLD - Medical Properties Trust, Inc. (MPW) - $7.89
Buy ONEOK, Inc. (OKE)
Featured Action: Buy ONEOK, Inc. (OKE)
ONEOK is a large U.S. midstream energy company specializing in natural gas. It owns one of the nation’s premier natural gas liquids (NGLs) systems connecting NGL supply in the Rocky Mountains, midcontinent, and Permian regions in key market centers, and also has an extensive network of natural gas gathering, processing, storage and transportation assets. A whopping 10% of U.S. natural gas production uses ONEOK’s infrastructure.
Here are some things to like about the company and stock.
- Investment grade-rated debt
- 85% of earnings fee-based
- 26 years of stable and growing dividends
- C corporation structure (generates a 1099 and not a K-1)
Earnings are resilient because ONEOK operates in the best segments and is well positioned in the high-growth shale regions. Natural gas is a rapidly growing fuel source that is much cleaner burning than oil or coal. NGL is by far the fastest growing fossil fuel source. During the pandemic, in one of the worst years ever for the energy industry, ONEOK’s NGL and dry natural gas volumes both continued to grow anyway.
OKE pays a stellar 6.4% yield. That’s not too good to be true, for several reasons. The company has grown or maintained the payout for 26 straight years that include recession and terrible energy environments. It has also grown the dividend at a better than 8% average annual clip for the last five years.
Why buy it now?
OKE returned a solid 16.46% in 2022. That was about on par with the rest of the midstream energy subsector. But performance had been much better than its peers. The stock returned a stellar 68% in 2021. The lower relative performance last year was for two reasons. One, after the huge 2021 performance, it didn’t have as much ground to make up. Two, earnings didn’t grow as strongly as much of the sector last year because they never decreased very much during the pandemic.
But despite higher earnings and better prospects, OKE still sells below the pre-pandemic high. Demand for natural gas should remain steady even in a recession because of shortages in Europe and Asia. OKE is a safe stock in a rough market that should continue to perform well while paying a high and safe income.
ONEOK is one of very few companies that can thrive in an environment of inflation and/or recession.
ONEOK Inc. (OKE)
Next ex-div date: April 27, 2023, est.
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||$18.08||NA||8.30%||-19.74%|
|Star Bulk Carriers Corp.||SBLK||6/1/22||$33.30||$21.31||NA||24.16%||-23.01%|
|The Williams Companies||WMB||8/24/22||$35.58||$28.74||$38.00||6.33%||-14.52%|
|Brookfield Infrastructure Cp.||BIPC||11/9/22||$42.43||$43.87||$46.00||3.49%||5.72%|
|EXISTING CALL TRADES|
|Open Recommendations||Ticker Symbol||Intial Action||Entry Date||Entry Price||Recent Price||Sell To Price or better||Total Return|
|as of close on 3/24/2023|
|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%|
|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||$8||-38.00%|
|Security||In/out money||Sell Date||Sell Price||Exp. Date||$ 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)
The infrastructure juggernaut has bounced around and gone nowhere for the last two years. It has been hurt by the strong dollar and higher interest rates as the company does a lot of business overseas and has a relatively high credit balance. But the dollar has been weakening since November and interest rates may have topped out. BIPC has been forming a solid base at current levels. The stock is well below the 52-week high made last April and it still has very resilient earnings, a great track record, and a safe dividend. The consistent earnings should serve the stock well as the S&P 500 is likely to suffer another year-over-year earnings decline in the next quarter at least. BUY
Brookfield Infrastructure Corporation (BIPC)
Next ex-div date: May 27, 2023, est.
Global Ship Lease, Inc. (GSL)
The container shipping company has bounced around and generally trended higher since the low of last July. After reaching the highest price since the spring of last year, GSL has pulled back again in the month of March. The souring economic forecasts have gotten the better of the stock lately but the company is still benefitting as Chinese economic activity ramps up after the covid lockdowns. Shipping is also likely in a longer-term secular bull market as the supply/demand dynamic for ships is very favorable. HOLD
Global Ship Lease, inc. (GSL)
Next ex-div date: May 21, 2023, est.
Intel Corp, (INTC)
This beleaguered stock continues to provide evidence that it has bottomed. The news has been even worse so far this year with the dividend cut and lower-than-expected earnings. But the stock was very beaten down already. Even with all this bad news the stock has rallied about 17% over the past month and it’s up 12% YTD. 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. Meanwhile, the stock sells at a fire-sale price at just above book value. HOLD
Intel Corporation (INTC)
Next ex-div date: May 4, 2023, est.
Star Bulk Carriers Corp. (SBLK)
Like GSL, SBLK has gotten new life this year. SBLK moved up a lot in February despite it being a tough month for the overall market. The shipping company has pulled back in March for reasons similar to GSL. It is benefiting from more Chinese traffic as the country opens again. 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)
This is a great longer-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 the stock is getting pushed around by this market and is vulnerable to weakness in the overall technology sector. It falls when investors turn negative on the Fed/inflation conundrum and rises when investors turn positive, like since the banking crisis emerged. At some point this year, the market should start sniffing out the recovery. And QCOM can make up for lost time fast when it moves. HOLD
Qualcomm Inc. (QCOM)
Next ex-div date: June 1, 2023, est.
Visa Inc. (V)
V is tied to the fortunes of the more cyclical stocks in the near term. But it tends to outperform that group. It held up nicely in a very tough 2022 with a -3.4% return for the year, it’s up 25% since the September low, and it has a positive return YTD. Of course, it could be under pressure if the economic situation deteriorates. But the stock is still relatively cheap and it should fly when the market eventually senses the end of this cycle and the next recovery. HOLD
Visa Inc. (V)
Next ex-div date: May 9, 2023, est.
The Williams Companies, Inc. (WMB)
This midstream energy company has struggled YTD with a -11% return. WMB had been a strong performer, returning over 30% in 2022 and 38% in 2021. Williams reported solid earnings last quarter with 21% full-year growth over 2021. The issue is that the company expects slower growth of just 3% in 2023 as the benefit of recent acquisitions draws tougher comparisons. But the dividend is rock solid with 2.37 times coverage from cash flow and future growth is likely to resume at a stronger clip in the years ahead. It also has an inflation and recession-resistant business that should help it to outperform the market through the rest of this year. BUY
The Williams Companies, Inc. (WMB)
Next ex-div date: June 10, 2023, est.
Active Covered Call Trades
Sell V March 17 $220 calls at $12.00 - Expired
Call premium: $12.00
Total: $14.02 (total income of 6.4% in 15 months)
The calls helped get a higher income. But this stock still only provided a 6.4% income in 15 months. That’s because it was purchased just before the market turned south at the beginning of 2022. But we’re not finished with this stock yet. It has plenty of upside when the market turns around. Plus, there may be more call writing opportunities even before it takes off. This position may still provide a splendid income and return at some point in the not-too-distant future.
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 April 25, 2023.