Cyclical stocks have been getting clobbered over the past month amidst virus concerns. But I think the recent action is creating an opportunity.
The inflation and Fed contraction issues, which are good for energy and financial stocks, will outlast this latest virus strain. The virus will fade away before too long, but the other problems are much stickier. Certain stocks are being knocked back temporarily ahead of a very promising new year.
In this issue I highlight one of the very best financial stocks on the market. It’s has pulled back recently and is about 15% below the 52-week high, yet the company is poised for a fantastic 2022.
Market Overview
The Bull Versus Inflation and Omicron
It has been an amazing year in the market. The vaccines enabled the end of most lockdowns and restrictions and unleashed a booming economy. GDP grew 6.4% in the first quarter, 6.7% in the second and 2.1% in the third. The S&P 500 is up 23% for the year.
The market recovery from the pandemic has been breathtaking and rapid. The market is up over 100% from the bear market low in March of 2020. Not only has market valuation doubled in the last 21 months, but it’s also up 37% from the pre-pandemic high. Stocks have returned double the historic averages even with the pandemic factored out.
But now this incredible market is running into some problems. Inflation is getting worse. October inflation was the worst in about forty years. November’s numbers, which come out later this week, promise to be even worse, and will also mark the eighth straight month of inflation over 5%.
The recently released Producer Price Index, which measures prices before they get to the consumer, was up a whopping 9.6%. That means consumer price inflation will get worse. The Fed, who missed this call early on, is making up for lost time by speeding up its end to bond purchases and has pledged to raise the Fed Funds rates faster than previously anticipated.
Then there’s the virus. It’s spreading fast. The market sold off earlier this week on fears that it will prompt further restrictions and slow the economy. We have a high-priced market that’s facing inflation, Central Bank monetary tightening and a new virus strain.
But it’s hanging tough so far. Despite the recent volatility, the S&P is off just 3% from the high. Big deal. The appeal of a still-strong economy, stellar earnings, and still-low interest rates is too powerful to sour investors. The market appears poised to overcome this latest run of bad news.
Something interesting is happening beneath the surface. Cyclical stocks, particularly in the energy and financial sectors, have been getting clobbered over the past month amidst virus concerns. But I think the recent action is creating an opportunity.
The inflation and Fed issues, which are good for energy and financial stocks, will outlast this latest virus strain. The virus will fade away before too long, but the other problems are much stickier. Certain stocks are being knocked back temporarily ahead of a very promising new year.
In this issue I highlight one of the very best financial stocks on the market. It’s has pulled back recently and is about 15% below the 52-week high, yet the company is poised for a fantastic 2022.
What to Do Now
We were able to take advantage of several great call writing opportunities in the past couple of months. The environment has gotten tougher recently as the virus news has been spooking the market and prices have come down. But there are several stocks that may offer good opportunities soon including KKR & Co. (KKR), Excel Energy (XEL) and U.S. Bancorp (USB). Keep and eye out for “Trade Alerts” in your email.
The recent volatility has pulled several portfolio positions down to within their target buy ranges including One Liberty Properties (OLP), ONEOK (OKE) and U.S. Bancorp (USB). There are also good buying opportunities in the energy stocks including Valero Energy (VLO) and Enterprise Product Partners (EPD).
Right now, it’s a better environment to buy selectively than sell covered calls. As I mentioned above, there is a good opportunity in the cyclical stocks including the stock highlighted below. They might get knocked around a little more, but the prices are attractive relative to where they should be in six months.
Monthly Recap
November 24th
Sell QCOM January 21st $185 calls at $9.65 or better
November 26th
OKE November 26th $65 calls at $2.25 – Expired
November 30th
SOLD QCOM January 21st $185 calls at $9.65
December 17th
KKR December 17th $75 calls at $3.50 – Expired
December 22nd
Buy Visa Inc. (V)
Featured Action
Featured Action
Buy Visa Inc. (V)
The overall market has recovered tremendously from the pandemic. Visa has too. But unlike many other companies and stocks, Visa still has a huge recovery ahead. The company benefits from overseas business. But foreign countries have not had the rapid recovery the U.S. has had. That shoe will likely drop next year as the global economy catches up, and Visa will benefit.
Visa is a global payments technology company that provides a digital currency instead of cash and checks to individuals and businesses in more than 200 countries and over 160 currencies. It is the largest payment processor in the world with about a 50% market share of cards issued worldwide. Its systems can process 65,000 transactions per second.
It’s natural to refer to Visa as a credit card company. But that isn’t really true because Visa doesn’t loan money. You can charge things with a Visa card instead of using a debit card, but it’s the sponsoring bank that loans the money, not Visa. It’s the bank’s problem if someone can’t pay. Visa simply collects a fee on any debit, credit or mobile transaction. It rings the register every time individuals and businesses all over the world make a digital transaction with its cards.
That’s a good place to be and a great business to be in because the global trend toward cashless transactions is undeniable and unstoppable. In fact, digital payments surpassed cash transactions on a global basis a few years ago. The trend will accelerate going forward and Visa is in the ideal position to benefit.
This is a great stock to own over the long term. It has a commanding market share in the electronic payment industry that still has plenty of runway for growth. Visa’s size and scale should allow the company to improve its already sizable margins. The stock performance reflects these facts. V stock appreciated more than 790% over the last ten years, more than double the performance of the S&P 500 over the same period.
But the stock has underperformed lately. That’s what makes it a great opportunity now.
V is down 15% from the 52-week high. There are several reasons for the pullback. Earnings recovered after the pandemic, but not as much as some other companies. The reason is that Visa does a lot of international business, and the recovery overseas has not kept pace with the American recovery. The very profitable cross-border transactions have been particularly hard hit because of continuing travel restrictions.
In November, V sold off because Amazon (AMZN) announced it will stop accepting Visa credit cards issued in the U.K. starting in late January 2022. The skirmish is regarding high interchange fees that increased as European Union regulations stopped applying because of Brexit. Then the stock took another hit because of fears of further lockdowns and travel restriction from the Omicron virus.
We’ll see what happens with the virus. But the other two problems are overblown. First, the international economy will rebound. In fact, much of the rebound overseas still lies ahead. Travel will return again. It always does. The U.K. issue is incredibly minor. It doesn’t even apply to debit cards and the revenue loss will be tiny.
This is a highly regarded stock. In fact, 35 of the 39 analysts who cover the stock rate it a “buy” or “strong buy” with an average price target of $274.50 per share. That’s around 30% higher than the current price of 215 per share.
V doesn’t fit the mold for this portfolio in that it barely pays an income, with a yield of just 0.80%. But we should be able to make up for the lack of yield by the fact that the stock tends to generate high call premiums when things are going well.
In fact, this portfolio owned V about a year ago and sold profitable calls on the stock. We locked in a strong income and total return in a very short time. I think we can do something similar again by picking up V at a discounted price.
Portfolio Updates and Income Calendar
Portfolio Updates
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 12/21/21 | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp. | AGNC | 1/13/2021 | 15.52 | 14.76 | 17.00 | 9.76% | 2.99% |
| Enterprise Product Partners | EPD | 3/17/2021 | 23.21 | 20.73 | 25.00 | 8.55% | -5.04% |
| U.S. Bancorp | USB | 3/24/21 | 53.47 | 54.87 | 57.00 | 3.30% | 4.95% |
| Qualcomm Inc. | QCOM | 5/5/21 | 134.65 | 176.67 | 140.00 | 1.54% | 33.00% |
| ONEOK, Inc. | OKE | 5/26/21 | 52.51 | 56.53 | 60.00 | 6.46% | 11.20% |
| One Liberty Properties, inc. | OLP | 7/28/21 | 30.37 | 32.83 | 33.00 | 5.23% | 11.11% |
| KKR & Co., Inc. | KKR | 8/25/21 | 64.52 | 70.58 | 70.00 | 0.81% | 9.59% |
| Xcel Energy Inc. | XEL | 10/12/21 | 63.00 | 67.12 | 67.00 | 2.73% | 6.54% |
| FS KKR Capital Corp. | FSK | 10/27/21 | 22.01 | 19.92 | 24.00 | 12.34% | -6.70% |
| Valero Energy Corp. | VLO | 11/17/21 | 73.45 | 68.69 | 85.00 | 5.70% | -5.23% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Price on 12/21/21 | Sell To Price or Better | Total Return |
| OLP Feb 18 $35 call | OLP220218C00035000 | Sell | 11/19/21 | 1.50 | 0.80 | 1.50 | 4.94% |
| QCOM Jan 21 185 call | QCOM220121C00185000 | Sell | 11/30/21 | 9.65 | 4.40 | 9.65 | 7.17% |
| 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 | 38.00 | 3.42% |
| Brookfield Infras. Ptnrs. | BIP | Called | 6/24/20 | 41.92 | 10/16/20 | 45.00 | 8.49% |
| Starbucks Corp. | SBUX | Called | 8/26/20 | 82.41 | 10/16/20 | 88.00 | 6.18% |
| Visa Corporation | V | Called | 9/22/20 | 200.56 | 11/20/20 | 200.00 | 0.00% |
| AbbVie Inc. | ABBV | Called | 6/2/20 | 91.04 | 12/31/20 | 100.00 | 12.43% |
| Enterprise Prod. Prtnrs. | EPD | Called | 6/24/20 | 18.14 | 1/15/21 | 20.00 | 15.16% |
| Altria Group | MO | Called | 6/2/20 | 39.66 | 1/15/21 | 40.00 | 7.31% |
| U.S. Bancorp | USB | Called | 11/25/20 | 44.68 | 1/15/21 | 45.00 | 1.66% |
| B&G Foods Inc, | BGS | Called | 10/28/20 | 26.79 | 2/19/21 | 28.00 | 4.42% |
| Valero Energy Inc. | VLO | Called | 8/26/20 | 53.70 | 3/26/21 | 60.00 | 11.73% |
| Chevron Corp. | CVX | Called | 12/23/20 | 85.69 | 4/1/21 | 96.00 | 12.95% |
| KKR & Co. | KKR | Called | 3/24/21 | 47.98 | 6/18/21 | 55.00 | 14.92% |
| Digital Realty Trust | DLR | Called | 1/27/21 | 149.17 | 7/16/21 | 155.00 | 5.50% |
| NextEra Energy, Inc. | NEE | Called | 2/24/21 | 73.76 | 9/17/21 | 80.00 | 10.00% |
| Brookfield Infras. Ptnrs. | BIP | Called | 1/13/21 | 50.63 | 10/15/21 | 55.00 | 11.65% |
| 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% | |
AGNC Investment Corp. (AGNC)
Yield 9.8%
AGNC benefits from a steeper yield curve, as they earn higher profits on the spread between short- and long-term interest rates. But interest rates have been moving lower and the yield curve is flattening. The stock has fallen below resistance levels as Omicron fears have sent the markets reeling. However, the virus surge is likely to be temporary and the pressures of inflation and a strong economy should easily outlast recent concerns and put upward pressure on interest rates. There should be a bounce back from the recent selloff, and then we’ll see if AGNC can regain prior levels. BUY
Enterprise Product Partners (EPD)
Yield 8.7%
It’s been a good year for energy stocks, but a mediocre one for EPD. The midstream energy partnership continues to flounder aimlessly after the surge in October. But the intermediate-term dynamics should favor EPD. Energy demand should remain strong. The valuation is dirt cheap. And the distribution is rock solid. This stock should have another surge in the not-too-distant future. When it does, we will sell a call and secure a decent income and total return. BUY
FS KKR Capital Corp. (FSK)
Yield 12.3%
This BDC is still knocking around near the lower point of the recent range. Smaller companies tend to suffer disproportionately from an economic slowdown due to Omicron. FSK took a hit earlier this week on renewed virus fears. But the environment beyond this latest virus surge should be good for BDCs in general. Strong economic growth is good for small companies. It only needs to get back up near the higher point of the recent range and there should be a good call writing opportunity. A solid call premium combined with that massive yield should provide a great income. BUY
KKR & Co., Inc. (KKR)
Yield 0.8%
The alternative investment asset manager stock has pulled back 15% from the high made at the very end of October. It was due for a consolidation and has been under pressure recently along with the rest of the financial sector. But we were able to milk the stock for income by selling a high-priced call and have kept the stock. And it is still a good stock to own. Business is still booming at this company, and current virus concerns are likely to give way to a strong recovery in the early part of next year. We’ll get another bite at the apple to sell another call before long. HOLD
One Liberty Properties, Inc. (OLP)
Yield 5.2%
This recently up-trending industrial REIT got clobbered earlier this week on virus hysteria. But it has been bouncing right back. It has broken out to a higher range where it is likely to remain despite the recent dip. We sold the calls at a higher high after a nice move. OLP should still stay in this new higher range, but it might take a while before it breaks out even higher. BUY
ONEOK, Inc. (OKE)
Yield 6.0%
Yeah, the midstream energy stock is down lately, off about 15% from the recent high. It has fallen in sympathy with the overall energy sector on virus concerns despite the fact that inflation is raging, and the economy is still strong. But even after the recent dip, OKE has returned over 57% YTD. We also milked this position for two calls and a 14.7% income in a little over six months and still have double-digit appreciation on the stock. And we’re not done yet. Business is still strong and OKE should get hot again. We’ll sell another call and get a truly obscene income before long. BUY
Qualcomm (QCOM)
Yield 1.5%
The huge rally that drove QCOM 40% higher in a month is over. The stock is down almost 10% from the high. But I’m still bullish over the next year. Business is remarkably strong, and the company upgraded next year’s guidance. It has been pulled down by a natural consolidation coupled with a tough recent environment for technology stocks. But we still have a better than 30% gain on the stock and we sold a call near the recent high for a 7% income on the purchase price. There is also a good chance we keep the stock ahead of a perhaps another surge early next year. HOLD
U.S. Bancorp (USB)
Yield 3.3%
The yield curve has been going the wrong way, and so has USB. Although, most elements of the bank’s business are booming, the most important one, net interest income, has been weaker. But, as I mentioned above, the pressures of inflation and a strong economy combined with the Fed tapering is likely to put upward pressure on rates next year. That missing piece of the puzzle should drive the stock higher. BUY
Valero Energy Corp. (VLO)
Yield 5.7%
I know. Energy stocks have had a rough time lately, and this refiner stock is a high-leverage play on the sector. That’s why it’s down 18% from the 52-week high (not to mention 40% from the all-time high). But I believe VLO has another hot run left. Demand for gasoline, diesel and heating oil is strong and will likely remain so for a while. Meanwhile, prices are high with no end in sight. Next year should be great for the refining business. BUY
Xcel Energy Inc. (XEL)
Yield 2.8%
Despite a dip earlier this week, this alternative energy utility is still on an uptrend. It had been up 10% in December alone. The normally strong-performing utility has had a lousy year. But things are changing. Utilities have been getting stronger lately. Plus, alternative energy stocks have floundered this year despite huge growth in the sector as investors focused on the revitalized conventional energy sector. But things change and XEL is still a great way for conservative investors to play the growth in alternative energy. BUY
Existing Call Trades
Sell KKR December 17th $75 calls at $3.50 – Expired
The stock closed at 71.58 per share on Friday’s expiration and the shares were not called. KKR has been dragged down by the financial sector amidst recent virus news. That’s fine. We got a 5.6% income return in just a few months and KKR is still over 10% higher than the purchase price. Plus, I like the prospects going forward. There should be another call writing opportunity before long.
Call premium: $3.50
Dividends: $0.145
Total: $3.65 (total income return of 5.6% in less than four months)
Sell OLP February 18th $35 calls at $1.50 or better
It took a little over a week after the initial recommendation to get these calls at the targeted price. But this tends to be a slow-moving stock and we were able to lock in a high call premium when the stock was at the high after a surge. The calls still have a long way to go before expiration, but it looks like they were well-timed at this point.
Sell QCOM January 21st $185 calls at $9.65 or better
The calls were targeted in the last monthly issue at $9.65. The stock moved lower by the time the issue was available. But the calls’ price was hit, and subscribers were able to get the targeted price on November 30th and again on December 13th. The stock has been pulling back lately. It’s hard to say where the price will be at expiration in a month. But we’ll get a huge 7% income if the stock closes below the strike price and a massive almost 50% total return if shares are called.
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 January 26, 2021.