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Income Advisor
Conservative investing. Double-digit income.

Cabot Income Advisor Issue: October 26, 2022

Profit from a Timely Stock Near the Bottom

It remains a very tough market. Despite the recent rally, it is unlikely that the market indexes have hit bottom ahead of persistent high inflation and likely recession.

The market will likely bottom at some point in the months ahead, just not yet. Meanwhile, there are some specific areas of the market that may have already bottomed ahead of the market indexes, namely interest rate-sensitive investments.

The bear market changed its stripes on the most recent selloff. Previously buoyant defensive stocks got clobbered. The worst-performing sectors of the market over the past one-month and three-month periods have been utilities and REITs. The spike in interest rates prompted the plunge.

The benchmark ten-year Treasury rate spiked from 2.6% at the beginning of August (and 1.5% at the begging of this year) to 4.25% last week. High inflation rates have driven rates to the highest level in 15 years. Defensive, dividend-paying stocks took a hit as fixed-rate alternatives became much more attractive, and investors switched to fixed rates that haven’t been seen since the decade before last.

But now what?

Sure, interest rates could still move higher from here. But the evidence is overwhelming that the economy is likely headed toward recession in the months ahead. Recessions put downward pressure on interest rates. As the economy worsens and inflation declines, rates are likely to move lower, negating most of the damage done to conservative dividend payers over the last six weeks.

Meanwhile, utilities are among the best stocks to own ahead of a recession, as earnings remain resilient. And many of these stocks are close to the 52-week lows.

It may be a little too early for the overall market. But there are powerful reasons to believe that interest rate-sensitive stocks may have already bottomed. In this issue, I highlight one of the very best utilities on the market. The stock was at a 52-week high before the most recent overdone selloff. And it should be great in a recession.

What to Do Now

The market has rallied on a positive reaction from earnings so far. Corporate earnings have been better than feared, prompting hope that corporate profits can weather this recession with less damage than has already been priced into stocks.

But that hope may prove overly optimistic. Earnings are backward-looking. There tends to be a longer lag time for higher interest rates to slow the economy. Plus, forward guidance from companies has been distinctly negative. While these earnings could certainly induce a larger rally. I’m skeptical that the indexes have already bottomed.

Anything is possible. But the rally is unlikely to gain sufficient traction to lead us out of this bear market ahead of still-stubbornly high inflation and a likely recession in the months ahead.

That said, this rotten market is likely closer to the end than the beginning. Markets tend to anticipate six to nine months into the future. At some point in the not-too-distant future, investors will see a turnaround where inflation falls, and the Fed is done hiking rates. Many stocks are at dirt-cheap prices compared to where they will be a year from now or maybe a lot earlier. But I don’t see a turning point quite yet.

Many portfolio positions were sold or called away at much higher prices than today. As a result, many remaining positions are in cyclical stocks that have not performed well this year. The portfolio looks ugly right now, but things can change fast when the market turns. These positions are at bargain levels for longer-term investors.

But the pain in cyclical stocks may not be over. While these stocks have more upward traction longer term, there is a better near-term opportunity in the defensive portfolio positions. Most of these stocks plunged in the recent selloff as interest rates soared and fixed-rate alternatives became more attractive.

But the selling of defensive dividend payers is likely overdone. Recessions put negative pressure on interest rates as demand for loans decreases and inflation rates fall. Meanwhile, interest rates have soared to heights not seen in decades. Defensive positions in ONEOK (OKE), The Williams Companies (WMB) and Realty Income (O) are likely to rally again soon, and that rally may have already begun.

These three stocks are the only ones currently BUY rated and the rest remain a HOLD until more definitive signs of a market bottom.

Monthly Recap

September 28
Purchased Realty Income (O) – $60.37

October 21
OKE October 21 $65 calls at $3.40 – Expired

October 26
Buy Xcel Energy (XEL)

Featured Action: Buy Xcel Energy (XEL)

Yield 3.2%

Recession appears inevitable if we are not in one already. Historically, one of the very best sectors to own in a recession is utilities. People still need to heat and air condition their homes and turn on the lights regardless of the state of the economy. That’s why utilities are one of the most defensive sectors with earnings that remain resilient through economic downturns.

Xcel Energy provides all those advantages plus exposure to the fast-growing and highly sought-after alternative energy market. It has all the advantages of a utility plus much more growth than average from its sizable clean energy business.

Xcel is a regulated electric and natural gas utility serving 3.7 million electric customers and 2.1 million natural gas customers in eight states, primarily in the northern and southwestern U.S. It is also one of the largest renewable energy providers in the U.S. with about 30% of electricity sales generated from alternative energy sources.

Alternative energy is what separates XEL from the utility pack and makes it a much better investment. It enables investors to play defense and offense at the same time. You get stable earnings and low volatility along with exposure to one of the most exciting and fast-growing areas of the market.

Here are some other things to like about the stock:

  • Long-term EPS growth 5% – 7%
  • Annual dividend growth 5% – 7%
  • Dividend payout ratio 60% – 70%
  • Credit ratings in the A range.

Results support the fact that Xcel is an excellent utility stock. XEL produced average annual returns of about 12% for the last ten years. That’s far better than its peer group over the same time. But that number is after the stock had a steep plunge recently.
While the longer-term trajectory looks excellent, it’s really the recent market action that prompts the recommendation. The stock has gotten very cheap because of near-term circumstances and market gyrations that are unlikely to last.

XEL had been a positive performer and very buoyant in this bull market all year, until the recent selloff. The stock plunged more than 25% in just one month from an all-time high in mid-September. Defensive, dividend-paying stocks got crushed in that market and Utilities were the worst-performing market sector. The reason was interest rates.

Interest rates spiked higher all the way to a 12-year high. Fixed-rate alternatives became more attractive, and investors gravitated out of conservative stocks. But that situation may prove temporary. A likely recession is likely to put downward pressure on interest rates, negating some of the recent move. Plus, utilities are a safe haven and XEL is trading near the 52-week low ahead of a recession.

XEL_chart (32).png

Portfolio Updates

CIA STOCK PORTFOLIO
Open RecommendationsTicker SymbolEntry DateEntry PriceRecent PriceBuy at or Under PriceYieldTotal Return
Qualcomm Inc. QCOM5/5/21$134.65$116.38NA2.59%-11.06%
Visa Inc.V12/22/21$217.96$190.71NA0.79%-12.03%
Global Ship Lease, Inc.GSL2/23/22$24.96$17.79NA8.57%-26.03%
ONEOK, Inc.OKE5/25/22$65.14$56.31$67.006.61%-12.20%
Star Buld Carriers Corp.SBLK6/1/22$33.30$18.98NA34.03%-35.79%
Intel CorporationINTC7/27/22$40.18$27.18NA5.41%-31.66%
The Williams Companies WMB8/24/22$35.58$31.10$38.005.47%-11.43%
Realty Income CorporatonO9/28/22$60.37$59.01$63.005.04%-1.84%
Xcel Energy Inc.XEL10/26/22$61.58$65.003.20%
EXISTING CALL TRADES
Open RecommendationsTicker SymbolIntial ActionEntry DateEntry PriceRecent Price Sell To Price or betterTotal Return
as of close on 10/24/2022

SOLD STOCKS

SecurityTicker Symbol ActionEntry DateEntry PriceSale DateSale PriceTotal Return
Innovative Industrial Props.IIPRCalled6/2/20$87.829/18/20$100.0015.08%
QualcommQCOMCalled6/24/20$89.149/18/20$95.007.30%
U.S. BancorpUSBCalled 7/22/20$36.269/18/20$383.42%
Brookfield Infras. Ptnrs.BIPCalled6/24/20$41.9210/16/20$458.49%
Starbucks Corp.SBUXCalled8/26/20$82.4110/16/20$886.18%
Visa CorporationVCalled 9/22/20$200.5611/20/20$2000.00%
AbbVie Inc.ABBVCalled6/2/20$91.0412/31/20$10012.43%
Enterprise Prod. Prtnrs.EPDCalled6/24/20$18.141/15/21$2015.16%
Altria GroupMOCalled 6/2/20$39.661/15/21$407.31%
U.S. BancorpUSBCalled 11/25/20$44.681/15/21$451.66%
B&G Foods Inc,BGSCalled10/28/20$26.792/19/21$284.42%
Valero Energy Inc.VLOCalled8/26/20$53.703/26/21$6011.73%
Chevron Corp.CVXCalled12/23/20$85.694/1/21$9612.95%
KKR & Co.KKRCalled3/24/21$47.986/18/21$5514.92%
Digital Realty TrustDLRCalled1/27/21$149.177/16/21$1555.50%
NextEra Energy, Inc.NEECalled2/24/21$73.769/17/21$8010.00%
Brookfield Infras. Ptnrs.BIPCalled1/13/21$50.6310/15/21$5511.65%
AGNC Investment CorpAGNCSold1/13/21$15.521/19/22$155.92%
ONEOK, Inc.OKECalled5/26/21$52.512/18/22$6019.62%
KKR & Co.KKRSold8/25/21$64.522/23/22$58-9.73%
Valero Energy Inc.VLOCalled11/17/21$73.452/25/22$8315.53%
U.S BancorpUSBSold3/24/21$53.474/13/22$51-1.59%
Enterprise Product Ptnrs EPDCalled3/17/21$23.214/14.2022$2411.25%
FS KKR Capital Corp. FSKCalled10/27/21$22.014/14/22$2313.58%
Xcel Energy Inc. XELCalled10/12/21$63.005/20/22$7012.66%
Innovative Industrial Props.IIPRSold3/23/22$196.317/20/22$93-51.23%
One Liberty PropertiesOLPSold7/28/21$30.378/24/22$25-12.94%

EXPIRED OPTIONS

SecurityIn/out moneySell DateSell PriceExp. Date$ returnTotal % Return
IIPR Jul 17 $95 callout-of money6/3/20$3.007/17/20$3.003.40%
MO Jul 31 $42 callout-of-money6/17/20$1.607/31/20$1.604.03%
ABBV Sep 18 $100 callout-of-money7/15/20$4.609/18/20$4.605.05%
IIPR Sep 18 $100 callin-the-money7/22/20$5.009/18/20$5.005.69%
QCOM Sep 18 $95 callin-the-money6/24/20$4.309/18/20$4.304.82%
USB Sep 18 $37.50 callin-the-money7/22/20$2.009/18/20$2.005.52%
BIP Oct 16 $45 callin-the-money9/2/20$1.9510/16/20$1.954.65%
SBUX Oct 16 $87.50 callin-the-money10/16/20$3.3010/16/20$3.304.00%
V Nov 20 $200 callin-the-money9/22/20$10.0011/20/20$10.004.99%
ABBV Dec 31 $100 callin-the-money11/18/20$3.3012/31/20$3.303.62%
EPD Jan 15 $20 callin-the-money11/23/20$0.801/15/21$0.804.41%
MO Jan 15 $40 callin-the-money11/25/20$1.901/15/21$1.904.79%
USB Jan 15 $45 callin-the-money11/25/20$2.001/15/21$2.004.48%
BGS Feb 19 $27.50 callin-the-money12/11/20$2.402/19/21$2.408.96%
VLO Mar 26 $60 callin-the-money2/10/21$6.503/26/21$6.5012.10%
CVX Apr 1 $95.50 callin-the-money2/19/21$4.304/1/21$4.305.02%
AGNC Jun 18 $17 callout-of-money4/13/21$0.506/18/21$0.503.21%
KKR Jun 18 $55 callin-the-money4/28/21$3.006/18/21$3.006.25%
USB Jun 16 $57.50 callout-of-money4/28/21$2.806/18/21$2.805.24%
DLR Jul 16 $155 callin-the-money6/16/21$8.007/16/21$8.005.36%
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%
USB Nov 19 $60 callout-of-money9/24.2021$2.3011/19.2021$2.304.30%
OKE Nov 26 $65 callout-of-money10/20/21$2.2511/26/21$2.254.28%
KKR Dec 17 $75 callout-of-money10/26/21$3.5012/17/21$3.505.42%
QCOM Jan 21 $185 Callout-of-money11/30/21$9.651/21/22$9.657.17%
OLP Feb 18 $35 Callout-of-money11/19/21$1.502/18/22$1.504.94%
OKE Feb 18 $60 Callin-the-money1/5/22$2.752/18/22$2.755.24%
USB Feb 25 $61 callout-of-money1/13/22$2.502/25/22$2.504.68%
VLO Feb 25 $83 callin-the-money1/18/22$4.202/25/22$4.206.13%
EPD Apr 14th $24 callin-the-money3/2/22$1.254/14/22$1.255.69%
FSK Apr 14th $22.50 callin-the-money3/10/22$0.904/14/22$0.904.09%
XEL May 20th $70 callin-the-money3/30/22$3.005/20/22$3.004.76%
SBLK July 15th $134 callout-of-money6/1/22$1.607/15/22$1.604.80%
OKE Oct 21st $65 callout-of-money8/24/22$3.4010/21/22$3.405.22%
QCOM Sep 16th $145 callout-of-money7/20.2022$11.759/16/2211.758.73%

Global Ship Lease, Inc. (GSL)

Yield 8.6%
The massive dividend should be safe. That’s the good news. Earnings are strong as recent acquisitions have been locked in at higher prices than existed in years past. It’s also likely a secular bull market in shipping as container ship demand should continue to eclipse supply down the road. But the market doesn’t seem to care about that in the near term as recession risk pervades everything right now. The pain may not be over yet but this stock provides a fantastic income and has a future that should be bright. HOLD

GSL_CIA_10-26-22-1024x667.png

Global Ship Lease, inc. (GSL)
Next ex-div date: November 22, 2022, est.

Intel Corp. (INTC)

Yield 5.4%
One day in the not-too-distant future the absurdly low valuation and the 5.4% yield in this stock will have been a huge, missed opportunity for many investors. The problem is the dream may take a while to realize. These markets require a longer-term orientation to make money. The near-term frustration should be well compensated for over time. The stock continues to be under pressure along with the rest of the tech sector in a market where value and fundamentals don’t matter right now. The short term is ugly, but the dividend should continue to be safe with a very low payout ratio. HOLD

INTC_CIA_10-26-22-1024x666.png

Intel Corporation (INTC)
Next ex-div date: November 4, 2022

ONEOK, Inc. (OKE)

Yield 6.6%
OKE has a positive total return YTD and has vastly outperformed the overall market. But it is miles from the 52-week high, down 25%. The stock has also underperformed its midstream energy peers this year. The sector took a drubbing in the recent selloff, along with just about everything else. But this lagging performance is still hard to explain. Earnings in this natural gas arena are resilient and continued to grow through the pandemic. It pays a huge dividend and has automatic inflation adjustments built into its contracts. This is a high-paying stock that can endure inflation and recession. BUY

OKE_CIA_10-26-22-1024x663.png

ONEOK, inc. (OKE)
Next ex-div date: October 31, 2022

Realty Income Corp. (O)

Yield 5.0%
This legendary monthly income payer recently hit the 52-week low and remains a long way from the pre-pandemic high, despite having higher earnings. REITs have been under pressure from rising rates as it raises costs for growth projects. But Realty just made a large acquisition and should get strong growth because of that over the next year. Like other defensive, dividend-paying stocks, O had been buoyant until the recent selloff. But now it’s dirt cheap ahead of a recession that will put downward pressure on interest rates. It has averaged a better than 14% average annual return since its inception in 1994. But that performance is a lot higher when it was purchased near the 52-week low. BUY

O_CIA_10-26-22-1024x663.png

Realty Income Corp. (O)
Next ex-div date: October 31, 2022

Star Bulk Carriers Corp. (SBLK)

Yield 34.5%
Most of what I said about GSL above is also true for SBLK. The intermediate-term prognosis remains excellent for dry bulk shipping while the market is struggling with worries about the U.S. and global economies. But dry bulk shipping still has a highly favorable supply/demand dynamic despite rates having dipped recently. Half of the position was sold to be cautious in this turbulent and unpredictable market. The stock also has another massive dividend coming next month. HOLD

SBLK_CIA_10-26-22-1024x665.png

Star Bulk Carriers Corp. (SBLK)
Next ex-div date: November 24, 2022, est.

Qualcomm Corp. (QCOM)

Yield 2.6%
It might take a while longer, but technology will be back. After all, we are in a technological revolution and that sector is where most of the earnings growth is. When that happens, QCOM should be among some of the very first stocks to spike higher. The operational performance has been spectacular. Even with falling smartphone sales, Qualcomm anticipates earnings growth of 23% in the second half of the year. Meanwhile, QCOM is dirt cheap for the growth it offers. HOLD

QCOM_CIA_10-26-22-1024x660.png

Qualcomm Inc. (QCOM)
Next ex-div date: November 30, 2022, est.

Visa (V)

Yield 0.8%
V tends to bounce back quickly when the market stabilizes for good reason. Earnings remain strong even in a weakening economy. The reason is that the rebound in international business resulting from the removal of covid restrictions outweighs the drag of a slowing economy. Also, Visa should be a huge beneficiary of the eventual market turnaround and the other side of the recession. It’s been a drag along with everything else of late, but V should pay off in the not-too-distant future. HOLD

V_CIA_10-26-22-1024x664.png

Visa Inc. (V)
Next ex-div date: November 12, 2022, est.

The Williams Companies, Inc. (WMB)

Yield: 5.5%
This midstream energy company in the form of a corporation has been strong so far this month. It also managed to stay above the 52-week low during the selloff. Williams announced that it expected a strong third and fourth quarter and reaffirmed 2022 guidance near the high end of the previous range as the natural gas assets remain strong performers. WMB had great momentum before the recent selloff because it’s ideal for the current environment of inflation and recession. Hopefully, the stock will remain strong over the rest of the year. BUY

WMB_CIA_10-26-22-1024x662.png

The Williams Companies, Inc. (WMB)
Next ex-div date: December 8, 2022, est.

Existing Covered Call Trades

OKE October 21st $65 calls at $3.40 – Expired

Call premium: $3.40
Dividend: $0.94

Total: $4.34 (total income of 6.67% in 5 months)

These calls were sold in late August when the market was much higher and OKE was still riding high. It was an ideal time to lock in a high call premium and likely keep the stock. Sure, the stock has fallen and is now over 8 per share below the strike price. But OKE is still well worth keeping going forward, as explained above. Plus, we were able to lock in a high income in a dreadful market.

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.

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The next Cabot Income Advisor issue will be published on November 23, 2022.

Tom Hutchinson is the Chief Analyst of Cabot Dividend Investor, Cabot Income Advisor and Cabot Retirement Club. He is a Wall Street veteran with extensive experience in multiple areas of investing and finance.