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Income Advisor
Conservative investing. Double-digit income.

Cabot Income Advisor 820

It’s time to look beyond the pandemic. It may seem like it will drag on forever. And it may still be a while yet before it’s behind us. But it will pass. In the grand scheme of things, it is a very temporary situation.

The overwhelming majority of your investing career from here will be in the post pandemic environment. And the virus has created opportunities. While the market indexes are at all time highs, many of the more cyclical and real economy stocks are still historically very cheap. But these stocks will be lifted by the inevitable recovery ahead.

In this issue, I identify two industry leaders with stock prices that are temporarily depressed in the current environment. Yet, they present fantastic opportunities if we look beyond the haze.

Cabot Income Advisor 820

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Two Stocks for the Post-Pandemic World
It might be time to look past the pandemic. Do we dare?

I know it seems like it will never end. Who knows when there will be an effective vaccine available? It’s easy to get a sense that things will stay like this and that all these social distancing and lockdown restrictions are the “new normal.”

But it isn’t normal at all. And this pandemic will end. I can’t say when. It might take longer than you think. But it will end. You can count on it. In the grand scheme of things, this is a very temporary situation. Soon, this whole mess will assume its rightful place as a bad memory and a trivia question for future generations.

Consider the rest of your investment career a 26-mile marathon. The virus will just be the first mile or so. As investors, it makes sense to start seeking out stocks that will benefit in the post-pandemic world.

Sure, the S&P 500 index has already come all the way back and just made a new all-time high. But the index has been pulled higher by technology companies as many are experiencing even more growth during the lockdowns. Many of the more economically sensitive, real economy companies are still cheap.

Some of the very best of those depressed stocks present a great opportunity ahead of the inevitable recovery. In this issue I highlight two great companies that are cyclical and offer great value. Business is already soaring back during the partial economic restart and should continue to get better in the months ahead.

Monthly Recap
July 22
Purchase – U.S. Bancorp (USB) – 36
Sold – USB September 18 $37.50 call at $2 or higher
Sold – IIPR September 18 $100 call at $5 or higher

July 31
Expired out-of-the-money - MO July 31 $42 call at $1.60

August 19
Rating change – QCOM from “BUY” to “HOLD”
Rating change – IIPR from “BUY” to “HOLD”

What to Do Now
I did not suggest calls to write on the two recommendations below in this issue. The stock prices moved yesterday and knocked the call premiums out of my targeted range. But I am looking to write calls on these positions very soon. Please be on the lookout for a “special alert” in your email in the next few days, or next week.

I also continue to search for good call prices and terms for Altria (MO), Enterprise Product Partners (EPD), and Brookfield Infrastructure Partners (BIP). MO and BIP continue to trend slowly higher but I have not yet found great prices and expirations for the calls. But that could change any day.

All the stocks in the portfolio are at a higher price than recommended. The positions in Qualcomm (QCOM) and Innovative Industrial Properties (IIPR) are a lot higher. Those stocks are running away and it looks like the positions will be called away at the options expiration on September 18. But you will still get a double-digit return in a relatively short time on both if they are called.

The overall market continues to trend higher and the S&P 500 has made new all-time highs. Despite the continued lockdown restrictions in many places and the hobbled economy, the index is priced higher than it was before the pandemic. It sees a booming recovery with a friendly Fed in the months ahead.

I agree that the economy will be strong. It almost always performs better and is more resilient than most pundits seem to give it credit for. But there are still risks floating around. The virus could have another wave. The election could be contested. Aside from that, a pullback is normal and healthy after a 55% rally.

There could be some fireworks when the rubber hits the road and people start paying attention again after Labor Day. I believe we are still in a longer-term secular bull market. But I wouldn’t be surprised if things get a little choppy in the months ahead.

All the recommended positions are chosen at least partially for their resilience through market turbulence as well as the likelihood of outperformance as the economy recovers. Keep an eye out for “special alerts” as it is a good time to lock in high call premiums while prices are high.

Featured Actions

Valero Energy (VLO)
Valero Energy (VLO) is the largest petroleum refiner in the U.S. The San Antonio-based refiner operates 15 petroleum refineries in the U.S., Canada and the U.K. with a capacity of about 3.1 million barrels per day (MMbpd). It markets products in 43 states, Canada, the U.K., Ireland and Latin America and has over $100 billion in annual revenues.

In addition to the petroleum refineries the company also operates 14 ethanol refineries, a rapidly growing renewable diesel business, and midstream piping and storage assets. But the main event is still petroleum products.

That has been unfortunate. Refining companies are extremely sensitive to commodity prices and the supply/demand dynamic. It is not a good stock to own in a recession. As demand for refined products (gasoline, diesel, heating oil, jet fuel) fell off a cliff during the lockdowns, VLO crashed 58% from pre pandemic levels and about 70% from the 52-week high. The stock has recovered somewhat from the bottom but it’s still down 40% YTD.

The stock also has volatility on the upside and can recover quickly when the economy rebounds. As a rapid recovery is a strong likelihood, it is worth considering VLO at these depressed prices. Gasoline and diesel will power the recovery. In fact, demand is already coming back strong. Valero reported that demand for gasoline and diesel had returned to 85% to 90% of pre-pandemic levels, from a low of 50% in April.

The stock hasn’t surged already because there is a caveat. So much excess inventory of refined product has built up that it will take a while to work through it. Valero has said that, for that reason, it will still only operate at 79% capacity during the third quarter. Therefore, the next quarter will likely be subpar as well, although much better than the second quarter. But better times are still right around the corner.

VLO is a great way to play the recovery with a still depressed cyclical stock. And it is the best of its peers and one of the very best companies in the industry. Valero is the best and most technologically advanced refiner in the country. It can take low grade crude oil and turn it into high margin refined product. It operates at lower cost and higher margins than its competitors and has a more resilient business that is sooner to turn around.

Then there’s the dividend. It yields a highly enticing 7.1% at the current price. Is the payout safe? It definitely should be. The company has a strong balance sheet with low debt levels and a strong cash position. The CFO recently said the maintaining the dividend is the “number one financial priority.” It can easily weather another crummy quarter or two.

The is a cyclical stock at a fire sale price with a safe dividend ahead of what is likely to be a strong recovery over the course of the next year.

Valero Energy Corp. (VLO)
Security type: Common stock
Industry: Energy; Refining
Price: $54.20
52-week range: $31.00 - $101.99
Yield: 7.1%
Profile: Valero is the largest petroleum refiner in the U.S.


  • The inevitable recovery should boost margins and the stock price.
  • Conditions are already rapidly improving for refiners.
  • Valero had a strong balance sheet and can maintain the dividend through the crisis.


  • The recovery could stall and there could be a second wave of the virus.
  • Conditions could remain difficult for refiners longer than expected.

Starbucks Corp (SBUX)
Starbucks is the premier roaster and retailer of specialty coffees it the U.S. and all over the world. It has over 31,000 stores worldwide where it serves coffee, tea and food. It also distributes its products in retail stores.

You know the name. Starbucks took the simple idea of a coffee house and built it into a global restaurant powerhouse with over $24 billion in annual revenues. But few industries have been hit as hard as restaurants during the pandemic. In the last reported quarter, comparable-store sales fell 40% from last year. Ouch.

The stock price fell about 50% at the bottom in March. It has since recovered a lot but it is still 17% below the 52-week high and down 10% YTD. Still, SBUX had been a great performer. In the past 10 years the stock has returned 695%, compared to 296% for the S&P 500 over the same period. And that is with the recent weakness in the stock.

I like the stock now for two primary reasons. One, the business will surely recover when the pandemic inevitably ends. And two, business will be stronger than it otherwise would have been after the pandemic because of the adjustments it’s made.

Business is already recovering substantially. After many stores were forced to close during the pandemic, over 90% had reopened by July. Comparable-store sales crashed to a low of minus-65% in mid-April but recovered to a decline of just 16% by the end of the last reported quarter. There is still further to go but sales are most of the way back already.

The company has also responded very quickly and effectively to the new lockdown economy by expanding its drive-through, mobile order and pay and delivery services. These services were a growing business and Starbucks expanded ahead of schedule. In the future, the company will benefit from a more robust offering of services, especially since demand should remain elevated for a while.

There is also still room for growth is the U.S. (which accounts for 69% of revenue) with new stores and more upscale store designs. But most of the growth potential is overseas, where Starbucks has just scratched the surface.

This is one of those stocks that is almost never cheap. It takes a bear market or a pandemic to get there. SBUX isn’t as beaten down as cheap and many other stocks because it’s already well on the way back. The dividend is small and currently only yields 2% at the current price but it has grown the dividend at an annual rate of 170% over the last five years and the stock should fetch high call premiums.

Starbucks Corp. (SBUX)
Security type: Common stock
Industry: Food service
Price: $82.28
52-week range: $50.02 - $98.14
Yield: 2.1%
Profile: Starbucks is a global coffee house chain and marketer of related products.


  • The stock is cheap ahead of a likely industry recovery.
  • Business is already coming back strong.
  • Starbucks expanded digital services, which should increase business after the pandemic.


  • It is uncertain if and when customers will return to their old ways.
  • The stock could pull back if the recovery stumbles.

Covered Calls

QCOM September 18 $95 call at $4.30
The stock has run away. It’s currently above 115. It didn’t expect the announcement of the settlement with Huawei and the ensuing rally. But this is what happens a lot when you write covered calls. It is built into the possibilities I highlight when recommending the call. Overall, we’ll likely keep more stock than get called away to generate a much higher level of current income. If the stock stays elevated and it’s called away, you’ll still get a double-digit return in just a few months.

ABBV September 18 $100 call at $4.60
It looks like we got this call near the short term peek for the stock. It has since moved lower and these calls are now selling at just $0.31. We got a big fat call premium and a great chance to keep the stock and write more in the future. The stock is probably only stuck temporarily and should move higher before the end of the year and fetch more high premiums.

USB September 18 $37.50 call at $2.00
The stock has been bouncing around in a similar range. The calls have lost some time value and are now selling at $0.88. That’s fine. We locked in a good call premium when it was advantageously priced. The stock has lost some momentum in the near term but it is still well positioned longer term.

IIPR September 18 $100 call at $5.00
IIPR is also running away. It’s now trading over 122, similar to what’s happening with QCOM. We did get a chance to write two calls on this stock. If it does get called away, between the dividend, the two call premiums and the appreciation, the return will be over 25% in a little over three months. Of course, this stock can be volatile with the market and we’ll see what happens in September.

Portfolio Updates

AbbVie Inc. (ABBV)
Yield 5.0%
Things are solid for this biopharmaceutical giant. The merger with Allergan helped to diversify the company from Humira. The newly launched drugs are selling very well and earnings are projected to grow at a strong 17% clip this year. The stock had been on a tear from the March lows until mid-July but has since run out of gas and pulled back slightly, from a high of 101 to the current 94.50. That’s okay. It can’t go straight up forever, and a breather is normal. The long-term prognosis for the stock is excellent and the uptrend should resume in the months ahead. Meanwhile, we sold calsl for September expiration with a 100 strike price and we may be able to keep the stock. BUY


Altria (MO)
Yield 7.9%
The best thing about Altria is the high yield. And the dividend is safe as the company continues to earn more than enough free cash flow to maintain the average payout it has had over the past 50 years. The stock has also been in a slow and steady uptrend since early May and is up about 10% since it was added to this portfolio. MO is still a great value at the current price, selling over 40% below the 2017 high and near a five-year low. BUY


Brookfield Infrastructure Partners (BIP)
Yield 4.3%
This global infrastructure partnership continues to forge higher ever so slowly. BIP just hit a post-virus high of about 46—still below the 52-week high of 50, but it looks like it will crawl back there before too long. I’m surprised the stock isn’t doing better. It has defensive and reliable revenues from crucial infrastructure assets in transportation, utilities, energy and data communications. It also has solid growth prospects in the future as infrastructure spending becomes more privatized as governments are increasingly strapped for cash. BUY


Enterprise Product Partners (EPD)
Yield 9.8%
That massive yield is safe. In the worst economic quarter maybe ever and one of the worst for the energy sector, Enterprise earned funds from operations that covered the distribution by 1.6 times. The distribution has been raised every year since 1998 and it is easily covered in even the most challenging quarter. The energy infrastructure company still delivered a profit and earnings fell less than 10% from last year’s quarter. As well, the business will be quick to bounce back as the economy inevitably recovers. Unfortunately, the price isn’t going anywhere for now. Eventually the market will see the value and I will look to write a call on the stock when it becomes most advantageous. BUY


Innovative Industrial Properties (IIPR)
Yield 3.5%
This is a spectacular REIT in the fast-growing marijuana industry. And the market is starting to price in that fact. The legal marijuana industry is growing like crazy. But many other stocks in the sector are having trouble turning a profit in this infant industry. Innovative has a different formula, where it collects rent from marijuana farmers. Not only has this REIT been making money all along, but it is growing the business and earnings like crazy. Earnings grew 263% in the second quarter compared to a year ago. The company can also sustain a high level of growth for a while. The bull market is bringing out the true value of this stock. Two calls have already been written in IIPR and the last one has a strike price of 100 (currently 121) for September expiration. It looks now like the stock will be called away, at a solid profit, but you never know. A market selloff in September could pull the stock back. HOLD


Qualcomm inc. (QCOM)
Yield 2.4%
The stock has soared 25% over the past month and broken out. The rollout of 5G always held huge potential for earnings growth in the quarters ahead. But the stock had been held back by anti-trust suits with its licensing business. The favorable ruling and settlement with Chinese technology company Huawei goes a long way to eliminating a major obstacle for the company and the stock. Qualcomm is still rolling into an earnings boom from 5G. But now it is on that path with one of the biggest risks to the company virtually eliminated. QCOM is likely to be called away at a 95 strike price for September expiration as the stock is currently 121. But the call premium, dividend and capital appreciation will provide a double-digit return in a short amount of time. HOLD


U.S. Bancorp (USB)
Yield 4.6%
This is truly one of the best banks in the country. But banks are in the crosshairs of the pandemic as interest rates crashed and economic activity fell off a cliff. As a regional bank, USB doesn’t have the trading desks of the large money center banks to offset the damage by making profits in the market. But if you believe the economy will come back, you believe USB will come back. It won’t go out of business and will manage to make a profit if the crisis lingers. And it is destined for much better days. Meanwhile, it’s dirt cheap, selling more that 30% below the 52-week high with a price/earnings ratio of 12 and yielding 4.6%. BUY


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.

SEPT Calendar CIA 820

OCT Calendar CIA 820

The next Cabot Income Advisor issue will be published on September 23, 2020.

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