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Income Advisor
Conservative investing. Double-digit income.

February 23, 2022

The overall market may have a challenging year as it grapples with inflation and uncertainty about the Fed tightening.
While most companies struggle, energy and financial stocks actually thrive with inflation and rising interest rates. But there are also lesser-known areas that are also benefitting from this current bend in the road.

In this issue, I highlight a company from the shipping sector. The industry had struggled for the last decade. But the current environment is much more hospitable. Shipping rates have soared in the pandemic recovery. And these rates are likely to stay high in one particular area, container shipping.

Market Overview

Opportunity in a New Market
Things always change, especially in the market.

It’s not 2020 anymore or 2021. This is 2022. It’s a different animal. Certain superstars of the pandemic recovery are dogs this year while little-known laggards of the past are soaring. When market circumstances change so do the casualties and beneficiaries. As investors, we need to forget what worked in the past and focus on what will win going forward.

Massive disruptions have occurred with the pandemic and ensuing lockdowns. Now, the rapid pandemic recovering is hitting supply chain disruptions and inflation. The pandemic and recovery stirred the pot and mixed things up and now the move toward normalcy is throwing more curves.

The overall market may have a challenging year as it grapples with inflation and uncertainty about the Fed tightening. But certain sectors are thriving. For example, despite the fact that the S&P 500 is already down about 10% YTD and nine of the eleven index sectors are lower, the energy sector is up a whopping 22%. Financial stocks are also positive for the year.

While most companies struggle, energy and financial stocks actually thrive with inflation and rising interest rates. But there are also lesser-known areas that are also benefitting from this current bend in the road.

In this issue, I highlight a company from the shipping sector. The industry had struggled for the last decade. But the current environment is much more hospitable. Shipping rates have soared in the pandemic recovery. And these rates are likely to stay high in one particular area, container shipping.

What to Do Now
It’s been a rough year in the market. And things could get worse.

The market has had a downward bias this year. The S&P 500 was down about 9% YTD as of the close on Friday. The index is now within a whisker of correction territory (down 10% or more from the high on a closing basis). And several sectors of the market a faring much worse than the index.

A downward-trending market tends to lower call premiums, as less investors are willing to bet on higher prices going forward. Times are changing. And so is the portfolio. There were recently five outstanding covered calls. But after Friday’s options expiration, there will be zero. Many calls were targeted when the market was riding high but the fall in prices has changed things for now.

The market is grappling with inflation and a tightening Fed, and lately Russia. The inflation and Fed problems will not go away and will likely dog the market for the rest of the year. There is uncertainty about how aggressive the Fed will tighten to tame inflation. And the answer may take most of the year to discover.

This is a different market than we have seen over the last couple of years. It’s less forgiving. We need to have a shorter leash on badly performing stocks. That’s why AGNC Investment Corp (AGNC) and KKR & Co. (KKR) were sold from the portfolio.

A high-priced market is meeting some real problems. But it’s not all bad. Earnings are still stellar, and the economy is growing above trend and will likely continue to do so for several quarters. That’s powerful offsetting news. I don’t expect gloom and doom but just a choppy and sideways market for most of the year.

Market are like this. The portfolio will simply wait until good covered call opportunities arise. And they will. In the meantime, there are certain stock buying opportunities. While the overall market struggles, certain opportunities arise in select pockets.

Monthly Recap

January 26
Xcel Energy (XEL) – rating change “BUY” to “HOLD”
FS KKR Capital Corp. (FSK) – rating change “BUY” to “HOLD”

February 9
Sell V Mar 25 $230 calls at $9.00 or better – Pending

February 18
OLP February 18 $35 calls at $1.50 – Expired
OKE February 18 $60 calls at $2.75 - Expired
ONEOK, Inc. (OKE) stock - Called

February 23
Sell V Mar 25 $230 calls at $9.00 or better – Remove
KKR & Co., Inc. (KKR) - SELL

Featured Action

Featured Action

Container shipping should have a strong year.

Unlike dry bulk or liquid content, containers deal in manufactured goods of all types, including clothes, medicine, processed foods, electronics and even automobiles.

Demand for containers continues to rise and is expected to keep doing so for several good reasons. For one, the rise in e-commerce will likely continue to increase demand as finished goods are demanded at an increasing rate from all over the world. Secondly, containers lend themselves to future trends like efficiency, safety, and automation.

At the same time, delivery of containers by seaborne vessels will remain the preferred delivery method because it is by far the cheapest form of transportation. And that won’t go out of style.

Shipping rates have absolutely skyrocketed during the pandemic. Economies opened up after the shutdowns and the consumers with high savings rates and pent-up demand started buying like crazy. The global transportation network couldn’t keep up with the steep and sudden rise in consumer demand for goods.

The high demand combined with the supply chain problems. Vessels have been stuck at congested ports for weeks at a time and don’t make it back into the rotation. The demand for more deliveries and more vessels exhausted any spare capacity and rates skyrocketed.

Container shipping rates have more than quadrupled in the last two years. And there is an important thing to note. Rates for other types of shipping peaked in October and have come down sharply already. But container ship rates have barely budged and may go still higher. There’s a reason for that.

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.

Buy Global Ship Lease, Inc. (GSL)
Yield 5.7%
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 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.

The stock has had a wild ride, along with the rest of the industry, over the last ten years. But it has been showing strength and resilience in recent years. Global has consistently grown earnings and revenues over the last three years. The shipper also grew revenues and earnings through the pandemic. Revenues have more than tripled since 2018. Earnings per share grew from $1.48 in 2019, to $2.09 in 2020, to $3.01 in just the first three quarters of 2021.

Earnings grew at a great clip before and during the pandemic, even before the spike in shipping rates. There is no question that Global has benefited from higher shipping rates because many expiring charters were renewed at higher rates, and new charters fetched a much higher rate than previous ones. But global is poised for solid performance even if the high rates don’t last, just not as good.

Although full-year 2021 results have not yet been reported, consensus analysts’ expectations are for earnings growth of 165% for 2021 and growth of 134% in 2022. The reasons for the torrid growth are both external and internal.

The biggest reason internally is that Global has been growing its fleet. In fact, Global grew its fleet by more than 50% in the first three quarters of 2021 alone. The containership company purchased 23 ships, increasing the fleet from 43 to 65 ships, and also added two more ships in the fourth quarter. While the cost of the acquisitions was $498 million, charters on those ships, inherited or initiated, already more than offset the cost.

At the same time, Global has refinanced debt at lower rates and decreased cost of overall debt from 7.72% to 4.93%. Global has a debt/equity ratio of 1.65, which is reasonable for the industry. And it just got a credit rating upgrade. Global has also significantly improved profit margins over the past few years and has an impressive return on equity (ROE) of over 20%.

The external environment is shaping up well too, aside from higher shipping rates. As I mentioned, demand for containers and containerships has skyrocketed of late and will likely stay high. The global fleet is aging and there is a limited supply currently. Businesses have noticed and are ordering more ships, which could adversely affect the supply/demand dynamic and prices in the future.

But those new orders are still a while away from the market, and the order book is much smaller for the small and mid-sized ships in which Global deals. Global estimates that all current new orders would add 6.3% to the existing global fleet through 2024. But it also estimates fleet growth to be just 0.7% for small and mid-sized ships through the same period if ships older than 25 years are scrapped, which is the norm.

The small to mid-sized containership market is also highly fragmented. There are many small players that can be bought out by a larger company like Global. That makes an abundance of accretive growth opportunities going forward.

The Dividend
GSL currently yields a strong 5.7% at the current price.

The company just recently initiated a dividend in January of 2021. So, it doesn’t have a track record. But there are some very encouraging things. For one, Global just raised the next dividend by 50%, to $0.375 per quarter from $0.25. It is also triple the initial dividend. And that dividend is well supported with just a 20% payout ratio with a lot of room to grow.

Portfolio Updates and Income Calendar

Portfolio Updates

Open RecommendationsTicker SymbolEntry DateEntry PriceRecent PriceBuy at or Under PriceYieldTotal Return
Enterprise Product PartnersEPD3/17/21$23.21$23.49$25.007.92%9.71%
U.S. Bancorp CUSB3/24/21$53.47$57.10$57.003.22%10.11%
Qualcomm Inc.QCOM5/5/21$134.65$167.64$140.001.62%26.20%
One Liberty PropertiesOLP7/28/21$30.37$29.51$33.006.10%-0.13%
KKR & Co., Inc.KKR8/25/21$64.52$59.14$70.000.98%-7.94%
Xcel Energy Inc.XEL10/12/21$63.00$66.00$67.002.77%5.49%
FS KKR Capital Corp.FSK10/27/21$22.01$21.92$24.0011.31%2.66%
Valero Energy Corp. CVLO11/17/21$73.45$86.72$85.004.52%21.00%
Visa Inc.V12/22/21$217.96$222.69$225.000.67%2.34%
Global Ship Lease, Inc.GSL$26.18$28.005.73%
Open RecommendationsTicker SymbolInitial ActionEntry DateEntry PriceRecent Price Sell To Price or betterTotal Return
USB Feb 25 $61 callUSB
VLO Feb 25 $83 callVLO
as of close on 2/18/2022
SecurityTicker Symbol ActionEntry DateEntry PriceSale DateSale PriceTotal Return
Innovative Industrial Props.IIPRCalled6/2/20$87.829/18/20$100.0015.08%
U.S. BancorpUSBCalled7/22/20$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 CorporationVCalled9/22/20$200.5611/20/20$2000.00%
AbbVie Inc.ABBVCalled6/2/20$91.0412/31/20$10012.43%
Enterprise Prod. Ptnrs.EPDCalled6/24/20$18.141/15/21$2015.16%
Altria GroupMOCalled6/2/20$39.661/15/21$407.31%
U.S. BancorpUSBCalled11/25/20$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$6019.62%
SecurityIn/out moneySell DateSell PriceExp. Date$ 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$1.502/18/21$1.504.94%
OKE Feb 18 $60 Callin-the-money1/5/22$2.752/18/21$2.755.24%

Enterprise Product Partners (EPD)
Yield 7.9%
The midstream energy partnership had a big move higher in December and January but has since leveled off and pulled back a bit. That has been the trading MO for EPD over the past year plus. It’s been a disappointing performer and will probably continue to be so. But it also has several things going for it. Energy is strong and will be for a while. EPD is very cheaply valued in an expensive market. Business is solid. And that huge yield is very safe. Hopefully, we can find a call to sell and boost the income further in the near future. BUY


FS KKR Corp. (FSK)
Yield 11.3%
This high-yielding Business Development Company hung very tough through the recent market tumult. Despite a tough environment for most DBC peers, FSK has remained strong. It’s likely propped up by the huge yield. The stock looks poised to get back to the recent highs of 23 and change per share as long as the market is relatively stable. The call premiums still aren’t good enough, but an opportunity should arise if the stock moves a little bit higher or if the overall market resumes an uptrend. HOLD


KKR & Co., Inc. (KKR)
Yield 1.0%
Rating change “HOLD” to “SELL”
This alternative asset investment manager stock was an absolute superstar last year. It provided an 85.75% return for 2021. But this year’s market likes to take back the big gains of 2021 in some cases. KKR has been trending steadily and undeniably downhill since the high in early November with no end in sight. KKR is a growth stock that has basked in glory, and the market doesn’t like such stocks this year, despite the outperformance of the financial sector.

KKR is down 20% so far this year and has given back all of the fall surge and then some. The position was initiated in 8/25/21 and this newsletter sold a call on the position back in November for $3.50 and has received a total or $3.79 in income including the call and dividends. The stock is down from the purchase price and the position will result in a slight loss in total return. SELL

One Liberty Properties, Inc. (OLP)
Yield 6.1%
This industrial REIT has really been clobbered so far this year after performing exceptionally well in the prior months. Stellar earnings had propelled the stock to new highs. But the recent ugly market has taken all those gains away. It’s down about 17% from the high in early January. REITs have been one of the worst-performing sectors and OLP is a more cyclical and aggressive one. But the 6% payout should continue to make it attractive and real estate should hold up well against inflation. HOLD


Qualcomm (QCOM)
Yield 1.6%
It’s another attack of weakness. The chipmaker stock had been holding up extraordinarily well in a rough market where technology stocks are in the crosshairs. QCOM sold off though in January when the market got particularly ugly, and it has sold off again over the past week or so. But I still like the stock very much.

Qualcomm once again killed it on earnings. The company soundly beat estimates as earnings rose 49% and revenues soared 30% from last year’s quarter. It also raised estimates for the current period and received analyst upgrades. Qualcomm is in great shape and should move higher again when the pressure in the technology sector abates. HOLD


U.S. Bancorp (USB)
Yield 3.2%
This regional bank stock has been indecisively bouncing around. It took a hit in the recent down market and is attempting a recovery from there. But I think the environment should be very supportive this year as the economy still grows above trend and interest rates likely rise. There is no good reason for USB to be lower priced now than it was in the fall. It’s tough to say what the stock will do in the near term, but I expect it to be higher six months from now. In the meantime, this newsletter already sold three calls on the same position and has derived a huge income. There will be more going forward too. HOLD


Valero Energy Corp. (VLO)
Yield 4.5%
The refiner stock has pulled off the recent high, but it still looks strong. It has been trending sharply higher since the beginning of December and there should be more left in the tank. The company killed it on earnings as it beat estimates by a lot. As anticipated, Valero is benefitting from much higher volumes and margins and demand and pricing is strong. Refining crack spreads, the difference between the cost and price of refined products, recently hit multi year highs. Yet the stock is still below the pre-pandemic highs. HOLD


Visa Inc. (V)
Yield 0.7%
The card company stock has leveled off since getting a big bump on earnings. The stock jumped over 10% on the day of the report and 14% for the week. As anticipated, international business is picking up as are the very profitable cross-border transactions as travel returns. The stock should continue to have a good year as the company benefits from a fuller recovery in 2022.

It’s worth noting that the calls highlighted two weeks ago never achieved the targeted price. That happens. The market got ugly again after we targeted the calls. V pulled back and call premiums in general fell. Time value has since eroded and the dynamic surrounding this call and the price have changed. We will remove the trade and look to target another call in the future under a renewed set of circumstances. BUY


Xcel Energy Inc. (XEL)
Yield 2.8%
This alternative energy utility had been solid and barely budged during the market turmoil of the last week. But it has since begun to mimic similar stocks that are lower yielding. The down move over the weeks could be a blip. But this is not a market to trifle with. This former superstar utility has been inheriting the fate of the sector in general and may continue to do so for a while yet. But don’t forget, XEL is also an alternative energy stock and a great way for conservative investors to play the trend. Clean energy will come back into vogue eventually and XEL should benefit. HOLD


Existing Call Trades
Sell OLP February 18 $35 calls at $1.50 - Expired
Call premium: $1.50
Dividends: $0.90
Total: $2.40 (total income return of 7.9% in less than seven months)

The timing was good on this one. We sold the calls when the stock was near the high and was still looking strong. The tumultuous market has not been kind to OLP, and the stock lost the recent gains. But it is still a strong REIT and should regain its footing. In the meantime, we got a great income.

Sell OKE February 18 $60 calls at $2.75 - Expired
It’s well worth noting that the numbers below do not include the previous two calls written on this same position earlier for a total of $5.75. If you sold those calls, you can add another 11% to the total return.
Call premium: $2.75
Dividends: $2.80 (8-15, 11-15, 2-15)
Appreciation: $7.49 ($60.00 strike price minus $52.51 purchase price)
Total: $13.04 (total return will be 24.8% in nine months)

The stock got away. It isn’t far above the strike price, but I like the prospects over the rest of the year and would have preferred to keep the stock. But we were able to generate a huge income on this position and get a strong total return as well.

Sell USB February 25 $61 calls at $2.50 or better
These calls expire on Friday and USB is currently more than 3 per share below the strike price. At this point, it appears likely that we will keep the stock and secure yet the third call sold on this same position. The environment over the rest of the year should be good for USB and we will get a chance to sell yet another call before long.

Sell VLO February 25 $83 calls at $4.20 or better
It looks like this stock will be called on Friday. VLO is currently more than 3 per share above the strike price with only a few days left. That’s OK. We’ll get a stellar income and a strong total return in a short amount of time. Plus, this market is crazy, and you never know what will happen over the course of the week.

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 March 23, 2022.