Stocks are turning distinctly more bearish in the near term as slower growth in China hits a market that was already teetering in anticipation of a more aggressive Fed.
But the selloff in the indexes doesn’t reflect all stocks. Some stocks have more downside left. Others will likely hold their own even if the market keeps falling. And still other stocks have already been oversold. These stocks should have less downside from here than the overall market, and recover much more quickly when the selling abates.
In this issue, I identify two oversold stocks in the portfolio. These are stocks that have already been crushed and sell at vastly reduced prices despite continuing strong earnings growth. While these stocks may fall further in the weeks ahead if the market gets uglier, I believe they both sell at deep discounts compared to where their prices are likely to be later in the year.
Market Overview
Scoop up These Two Oversold Stocks
We’re in one of those markets. The indexes have already corrected (down 10% or more from the high) and the selling appears to be getting worse. You start wondering if this is the “big one.”
The market was already teetering between positive earnings and an increasingly aggressive Fed. The recent news about covid spreading in China and likely slowing growth has tipped the scales negative. The latest headlines are converting the few bulls that remained into bears.
But what is true for the overall market isn’t necessarily true for certain sectors and stocks. Despite the down market this year, energy stocks are having a great year. That sector is up about 35% YTD. The more defensive sectors, utilities and consumer staples are also positive for the year.
Also, a selloff in the indexes doesn’t reflect all stocks. Some stocks have more downside left. Others will likely hold their own even if the market keeps falling. And still other stocks have already been oversold. These stocks should have less downside from here than the overall market and recovery much more quickly when the sell abates.
In this issue, I identify two oversold stocks in the portfolio, Global Ship Lease (GSL) and Innovative Industrial Partners (IIPR). These are stocks that have already been crushed and sell at vastly reduced prices despite continuing strong earnings growth. While these stocks may fall further in the weeks ahead if the market gets uglier, I believe they both sell at deeply discounted prices compared to where the prices are likely to be later in the year.
What to Do Now
This is a tough market. And it might be getting worse. The latest bad news is spreading covid cases in China. It’s lowering growth projections for that economy and, consequently, the global economy. The concerns hit a market that was already teetering on fears of a slower economy induced by aggressive Fed tightening to combat inflation.
The market is dangerous in the near term. The S&P 500 is approaching the previous lows made earlier this year. Breaking below the recent low would be a technical red flag and the market could have further downside. Of course, this is the busiest earnings week of the quarter. Good results could save the market, or at least give it a reprieve.
This portfolio has taken a conservative turn amidst the market volatility. Seven portfolio positions have either been called away or sold outright so far this year and fewer have been purchased. Also, many of the calls sold were in-the-money, or with a strike price below the market price at time of sale.
That way, we were able to get a high call premium despite a down market and sell several stocks near the high. Parting with some of those stocks hurt at the time. But the sales are looking like a good idea in retrospect.
The current sentiment is bearish, as investors perceive more downside risk than upside potential in the near term. This environment is bad for call prices as few investors are willing to speculate on higher prices. It’s a better market to look for oversold opportunities. As I mentioned above, all stocks could have further downside if the selling gets panicked. But two portfolio positions are well worth considering right here if you have a strong constitution in the near term.
Monthly Recap
March 30th
SOLD XEL May 20th $70 call at $3.00
April 6th
Sell GSL May 20th $30 calls at $2.30 or better - Removed
April 13th
SOLD U.S. Bancorp stock (USB) - $50.61
EPD April 14th $24 calls at $1.25 - Expired
FSK April 14th $22.50 calls at $0.90 - Expired
Enterprise Product Partners (EPD) stock - Called
FS KKR Capital Corp. (FSK) stock - Called
Featured Action
Featured Action
Buy Global Ship Lease, Inc. (GSL)
Global Ship Lease owns and charters containerships under fixed-rate charters to container shipping companies. The company deals in mid-size and smaller containerships, which are the workhorses of the of the main global containerized trade routes. Global is based in the Marshal Islands with offices in London and Athens and the stock trades on the New York Stock Exchange.
Containerships are in higher demand with more limited supply. Sure, the current supply chain problems will ease eventually. The spike in consumer demand will level off. Rates probably won’t stay this high for that long. But container shipping rates are likely to remain at higher levels than before the pandemic long after the current problems are resolved. And the current issues may linger for the rest of 2022 and possibly beyond.
The stock can be volatile. It tends to sell off whenever any bad headlines about global growth pop up. And then it recovers and goes higher. GSL has taken a big hit this month, down 25%. It first sold off as concerns grew about economic growth due to the likelihood of the Fed aggressively raising rates. It then started to recover but then got hit again as concerns about Chinese growth recently developed.
But this company will sharply grow profits even if shipping rates pull back. Rates are far higher than they have been in years past and are likely to stay that way even if the global economy does slow. Even after the recent selloff, GSL has posted an average annual return of 60% over the last three years. And conditions are better now than they have been through most of that period.
GSL is a bouncy stock. And entering the stock at the low side of the bounce has consistently paid off in recent years.
Buy Innovative Industrial Properties, Inc. (IIPR)
Innovative Industrial Properties is a Real Estate Investment Trust (REIT) specializing in the acquisition and ownership of properties that grow legal marijuana for medical use in the United States. The company currently operates 105 properties in 19 states under long-term leases.
Innovative has a great business model. While the cannabis sector has been struggling, IIPR has been a superstar. There’s a good reason for the outperformance. Innovative is making money, and a lot of it, right now. Most marijuana companies in the early stages of the industry are struggling to show a profit. But IIPR has been ringing the register for years.
Innovative purchases existing greenhouses and farms from marijuana growers and then leases the properties back to them. These companies often have trouble getting loans from banks and other conventional sources because marijuana is still not legal on the federal level. Innovative, by buying the properties, gives them a much-needed cash injection.
The properties are leased back under long-term contracts, currently with an average contract length of over 16 years, with triple net leases, where the operator pays for maintenance, taxes and insurance.
How has the formula worked? The company grew Adjusted Funds From Operations by over 1,500% since 2018. The quarterly dividend payout (currently yielding 3.42%) grew 600% over the same period, from $0.25 per share to the current $1.75. The stock returned 539% in the three years from the end of 2018 to the end of 2021 compared to a market return of 100% over the same period.
But the stock is cheap.
IIPR has crashed this year. It’s down over 40% YTD and nearly 50% from the 52-week high. This has been a brutal market for some of the superstars of last year. But Innovative is still doing great business despite recent short-term market gyrations.
Earnings grew 75% in 2021. That growth rate will slow somewhat. Analysts are forecasting 37% revenue growth for 2022. But the stock trades at a price/earnings ratio lower than that of the overall market with much higher growth and a high dividend. Sure, stocks and sectors go in and out of favor in the near term. This one should come back into favor. And patience should be rewarded.
This is a phenomenal REIT that should see stellar earnings growth for years to come. I believe the selling got overdone in the recent tumult. We can get in at a cheap price. Plus, IIPR generates huge call premiums.
Portfolio Updates and Income Calendar
Portfolio Updates
| 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 | $136.56 | $140.00 | 2.20% | 3.22% |
| One Liberty Properties | OLP | 7/28/21 | $30.37 | $30.54 | $33.00 | 5.89% | 4.92% |
| Xcel Energy Inc. C | XEL | 10/12/21 | $63.00 | $73.70 | $67.00 | 2.65% | 18.62% |
| Visa Inc. | V | 12/22/21 | $217.96 | $209.95 | $225.00 | 0.72% | -3.51% |
| Global Ship Lease, Inc. | GSL | 2/23/22 | $24.96 | $21.90 | $28.00 | 6.84% | -12.26% |
| Innovative Industrial Props. | IIPR | 3/23/22 | $196.31 | $156.80 | $210.00 | 4.41% | -19.44% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| XEL May 20th $70 call | XEL220520C00070000 | Sell | 3/24/22 | $3.00 | $4.68 | $5.00 | 4.76% |
| as of close on 4/25/2022 | |||||||
| 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% |
| 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 | 3/2/21 | $1.25 | 4/14/22 | $1.25 | 5.69% | |
| FSK Apr 14th $22.50 call | in-the-money | 3/10/21 | $0.90 | 4/14/22 | $0.90 | 4.09% | |
Global Ship Lease, Inc. (GSL)
Yield 6.8%
This containership company can be volatile, and this month we’ve seen the downside of that feature. It’s down over 20% since the beginning of April. GSL initially took a hit on global growth fears from the Fed’s likely aggressive rate hikes. It then started to recover strongly and then took another hit on news of covid spreading in China. The fear is that slowing global growth will negatively affect shipping rates and company profits.
But profitability is on the rise even if rates take a hit. Shipping rates remain far higher this year as demand for containers and ships that transport them remain strong amidst limited supply. And that situation should last a while. Despite the recent weakness, GSL is still only down less than 3% YTD and has returned 67% over the past year and averaged an annual return of 60% over the last three years. GSL takes a hit every time new growth concerns develop. But then it recovers after fear wanes and investors realize that container shipping and company profits will remain strong. It’s a good entry point for the stock. BUY
Global Ship Lease, inc. (GSL)
Next ex-div date: May 19, 2022, est.
Innovative Industrial Properties, Inc. (IIPR)
Yield 4.4%
This is a great company with strongly growing earnings that has gotten caught up in the whirlwind of this year’s market volatility. It’s down about 40% YTD. This market has been very unforgiving to stocks that were stellar performers last year. Even after being down considerably from the high, IIPR has returned an average of 57% per year over the last five years. BUY
Innovative Industrial Properties, Inc. (IIPR)
Next ex-div date: June 30, 2022, est.
One Liberty Properties, Inc. (OLP)
Yield 5.9%
This superior industrial REIT had taken it on the chin earlier this year as the REIT sector struggled. But REITs recovered a bit from the early months of this year. OLP had a good few weeks and rose sharply off the recent low. But it has been wallowing a bit again of late. It’s still a tricky environment, but One Liberty still has a strong and growing business. I expect the stock to come back into favor at some point in the months ahead. Perhaps the earnings report in early May will get it going. BUY
One Liberty Properties, Inc. (OLP)
Next ex-div date: June 23, 2022, est.
Qualcomm Corp. (QCOM)
Yield 2.2%
This former superstar performer hit the skids and is still wallowing near the recent low, down nearly 30% since the beginning of February. Tech has been under considerable pressure as inflation, rising rates and slower growth put the hurt on future earnings growth projections. The worry with Qualcomm is slowing smartphone sales in 2023. But the company anticipated revenue growth of 27% and earnings growth of 39% in 2022 and it still sells at just 12 times forward earnings. The good should outweigh the bad, especially considering the stock already got the stuffing kicked out of it. Qualcomm reports quarterly earnings later this week. A good report could get the stock moving up again. HOLD
Qualcomm Inc. (QCOM)
Next ex-div date: June 1, 2022
Visa (V)
Yield 0.7%
This global payments company stock has been bouncing around in a similar fashion as GSL, although not as volatile. V too took a hit on global growth fear from Fed tightening. Then is started to recover and got knocked back again this past week amid concerns about China growth. But the international business is picking up strongly as covid restrictions have largely been removed. The company reports earnings after the close today and I expect strong results from the global pick up. Hopefully, that gets the stock back on track. HOLD
Visa Inc. (V)
Next ex-div date: May 10, 2022, est.
Xcel Energy Inc. (XEL)
Yield 2.6%
The market has been so crummy it even stopped XEL from making new highs. The stock has leveled off since early this month and even pulled back a little in the volatility of recent days. I do like the stock longer term as safety is unlikely to go out of style in this tumultuous year. It’s also a great way for conservative investors to play the growth of alternative energy. But the stock can be bouncy in the near term and may pull back further. That’s why we sold calls at a strike price below the market when the stock was riding high. HOLD
(XEL) Xcel Energy
Next ex-div date: June 14, 2022, est.
Existing Call Trades
Sell XEL May 20th $70 call at $3.00 or better
We sold these calls at a strike price below the current market on the anticipation of a pullback after a big surge in the stock. XEL is finally showing some kinks in the armor. It has leveled off since early this month and even pulled back a bit in the recent volatility. Although I still like the prospects for XEL for the rest of this year and beyond, XEL typically pulls back after a big surge. The calls are currently selling at over $4 and are still worth selling if you haven’t done so already.
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 25, 2022.