What Recession?
The economy is showing some mixed signals. But it certainly does not appear to be near a recession now. That could change. But it keeps not coming.
At the same time, the Fed is near the end of the rate hiking cycle. Sure, there’s speculation about another rate hike in the June meeting or the next one. But it is still close to the end of the hiking cycle. Inflation appears to be moderating (for now). Unless there is a big surprise with that number, the market can soon stop worrying about the Fed.
Stocks are pricing in a soft-landing scenario where inflation continues to fall, the Fed finishes hiking rates, and a recession doesn’t happen. That’s certainly possible, but much can go wrong with that hope. There’s also the artificial intelligence boom in the technology sector. The top-performing YTD sector got another boost after the Nvidia report and information technology stocks are now up over 35% YTD.
The market has a tendency to confound the greatest number of people in the short term. It certainly appears to be doing that this year. But if you’re an optimist, there is still at least even money at this point that the market will have another down leg as opposed to rallying into the next bull market soon.
It still makes sense to focus on the more defensive stocks. Although such sectors have lagged YTD, they can best weather a disappointed market. There is also opportunity arising in the energy market. In this update, I highlight a high-growth energy stock that will benefit from rising prices and tends to generate big call premiums.
Past Month Activity
May 16th
ONEOK Inc. (OKE) – Rating change “BUY” to “HOLD”
May 19th
OKE May 19th $65 calls at $2.70 – Expired
May 23rd
Sold BIPC July 21st $45 calls at $3.25
Brookfield Infrastructure Corporation (BIPC) – Rating change “BUY” to “HOLD”
June 2nd
V June 2nd $230 calls at $10.50 - Expired
June 6th
Buy Hess Corporation (HES)
Special Alert: Buy Hess Corporation (HES)
Since the start of 2021, energy has blown away every other stock sector. The Energy Select Sector SPDR Fund (XLE), which tracks energy stocks on the S&P 500, returned 132% over that period compared to a return of just 8% for the S&P 500 over the same period.
This year has been a different story. The energy sector is lower YTD, with the worst of all sectors’ returns so far. That’s because oil prices plunged from over $120 per barrel (WTI) last June to just over $70 today. But those low prices are unlikely to last.
Global oil and gas supplies remain tight relative to demand. A big reason for the price drop is because the Chinese economy shut down because of covid restrictions. But that’s ending and the Chinese economy is coming back. Supply issues remain a problem as there is a high degree of uncertainty regarding the expansion of future oil supply.
The industry has had very low capital spending and expansion in recent years. Crude oil inventories have fallen below the five-year average and are likely headed far lower, as rig counts are plunging. OPEC has pledged dramatic production cuts to push prices higher. Saudi Arabia also just pledged an additional million barrels per day in cuts. There is also a high degree of geopolitical risk. In fact, Goldman Sachs analysts are forecasting oil prices to get back to $95 per barrel before the end of this year.
Hess is a leading independent global energy company primarily engaged in exploration and production of oil and gas. Net production currently averages 72% oil and natural gas liquids and 28% natural gas. Its key assets are in the U.S. Bakken Shale, Guyana, the Gulf of Mexico, and Southeast Asia.
The stock has been a strong performer in recent years. In 2022 it returned 87% for the year, after returning 42% the year before. But HES is down so far this year. That’s because of lower energy prices.
In the first quarter, Hess earned $1.13 per share, down from $1.30 in last year’s first quarter. The average realized price per barrel of crude oil fell to $74.23 from $86.75 in last year’s quarter. Natural gas liquid prices fell to $24.25 from $39.79 and natural gas prices fell to $4.39 from $5.28 per unit. The lower prices were partially offset by increased volumes.
Hess produced 374,000 boepd (barrels of oil equivalent per day) versus 267,000 boepd last year, an increase of 40%. All four major segments had higher production than last year. But most of the growth came from Guyana with 112,000 boepd versus 30,000 boepd last year. Growth in Guyana is the main reason to buy this stock.
The Guyana property is the largest new oil province in the last decade. Hess has a 30% interest, and the rest is owned by the Operator ExxonMobil (XOM). The find is a massive underground reservoir with 11 billion boe already discovered and recoverable and many billions more likely from exploration.
Hess will have the ability to continually increase production for many years. But there’s another part that might be even better. Extraction of oil and gas from this site is dirt cheap. The shallow producing horizons require less than ½ the drilling time and costs of typical offshore deepwater exploration. The four developments already producing for Hess have average breakeven levels of $35 to $25 per barrel of Brent Crude Oil.
Guyana is positioned to be one of the highest margin, lowest carbon intensity, and highest growth production sites in the world. And growth isn’t too shabby at the other sites in Bakken Shale, GOM, and Asia.
Hess estimates average annual production growth of over 10% through 2027. But that may prove to be very conservative. It also estimates cash flows from operations (CFFO) to increase at a compound annual growth rate (CAGR) of 25% through 2027. That’s huge growth for an energy company. The average S&P 500 energy company is expected to post CFFO growth of negative 5% from 2022 through 2025.
Portfolio Recap
Brookfield Infrastructure Corporation (BIPC)
Yield: 3.3%
The infrastructure company is up over 11% since the beginning of May while the market is only up 2.7% over the same period. The stock got new life after a sluggish period because Brookfield reported a solid earnings quarter with funds from operations (FFOs) per share growth of 12.5% over last year’s quarter. The stock had been suffering from the lull in defensive stocks, but it won’t stay down for long. It is around the top of the recent range and the market will likely dictate near-term performance. HOLD
Global Ship Lease, Inc. (GSL)
Yield: 8.4%
It’s been a tough market for this container shipping company stock since the top early last year. But it has bounced off the bottom, and operational performance is still solid. Last quarter Global grew net revenue 3.7% and normalized earnings per share by 14.6% while continuing to expand its fleet of ships. The longer-term supply/demand dynamic is excellent and bodes well for the future. HOLD
Intel Corp, (INTC)
Yield: 1.6%
After Nvidia (NVDA) rocked the market with blowout earnings, Intel appeared to get yet another black eye. INTC fell 7% on the day of the announcement because it doesn’t really have a competitive AI chip. There’s one in the works. But it isn’t expected to launch until 2025. But INTC got new life and soared 13% over the next week as the Nvidia CEO expressed interest in using Intel’s production facilities for its chips. Intel has greatly expanded its foundry business and can benefit from the AI frenzy in another way. HOLD
NextEra Energy, Inc. (NEE)
Yield: 2.6%
This combination regulated and clean energy utility stock has bounced around all over the place for the past two years and is currently at the lower end of that range. NEE is still more than 15% below the recent high. Defensive stocks have floundered. But that might not last. This company is targeting earnings per share growth of 6% to 8% annually through 2026 and 10% per year dividend growth through at least 2024. NEE is also well positioned as a defensive stock with growth in a highly uncertain market. BUY
ONEOK, Inc. (OKE)
Yield: 6.7%
OKE has at least leveled off and even moved a bit higher after the selloff following the announcement of its purchase of Magellan Midstream Partners (MMP). The deal will turn ONEOK from a natural gas operator to a diversified midstream company that services oil and refined products as well. The market doesn’t seem to like it because the benefits are primarily longer-term. It involves the assumption of Magellan’s $5 billion in debt and $8.8 billion in new equity. That could hurt performance in the near term. But this will remain a solid performer with a high and safe dividend. HOLD
Star Bulk Carriers Corp. (SBLK)
Yield: 21.4%
The dry bulk shipping company had rallied earlier this year as shipping rates recovered somewhat. But the stock has pulled back to about even YTD as the Chinese recovery hasn’t delivered the desired effect on shipping rates. Unlike GSL, Star Bulk hasn’t massively increased its fleet size and year-over-year comparisons are tough as shipping rates have fallen. Although it is likely still the early innings of a multiyear positive cycle for shipping, the stock recently moved near the low. It has rallied in the past week as economic news has improved. Hopefully, the momentum will last. HOLD
Qualcomm Corp. (QCOM)
Yield: 2.8%
Qualcomm is definitely benefitting from the AI excitement of the last ten days. It’s up over 14% since the Nvidia report. Qualcomm describes itself as the “on-device AI leader,” as opposed to Nvidia’s datacenter chips. The company will surely benefit as investment and profits from AI are now likely to soar sooner than previously expected. The company had been reeling from falling smartphone demand. But recent developments indicate that profits beyond handsets are likely to rise sooner. HOLD
Visa Inc. (V)
Yield: 0.8%
V has been hanging very tough near the high point of the recent range. The payments processing company once again exceeded expectations on earnings. Visa grew earnings per share by 17% and revenues grew double digits versus last year’s quarter. And this is what the company does in a bear market with the economy slowing. It can really take off when the market recovers for good. V should be higher by the end of the year, but it did level off and then pull back from the recent high. HOLD
The Williams Companies, Inc. (WMB)
Yield: 6.2%
It’s been a crummy year so far for this midstream energy company stock. It’s down over 6% YTD. This year has not been kind to defensive stocks or energy stocks so far. But there’s also natural gas. Prices have fallen largely because of the unusually warm winter temperatures throughout the country and the world. But it isn’t affecting the bottom line. Williams once again delivered on earnings and beat expectations for the fourth straight quarter. Earnings per share grew a whopping 36% over last year’s quarter as natural gas volumes remained strong and growing. WMB has also had a sharp spike over the past week. BUY
Existing Call Trades
V June 2nd $230 calls at $10.50 - Expired
Call premium: $10.50
Dividends: $2.47
Total: $12.97 (total income of 6.0% in 18 months, and 11.5% with previous call)
V was just a little bit shy of the strike price at expiration. We were able to sell the second call on this position without losing the stock or even enduring a drop in share price. There will likely be more opportunities to sell more calls and prime the income pump again, possibly soon.
Sell BIPC July 21st $45 calls at $3.25 or better
Shares are hanging tough at the high end of the recent range after a surge in May. We’ll see if the stock tops out or continues to rally from here. Either way, we locked in a high income.
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 | $115.62 | NA | 2.76% | -9.95% |
| Visa Inc. | V | 12/22/21 | $217.96 | $228.79 | NA | 0.79% | 6.19% |
| Global Ship Lease, Inc. | GSL | 2/23/22 | $24.96 | $18.30 | NA | 8.43% | -19.06% |
| Star Buld Carriers Corp. | SBLK | 6/1/22 | $33.30 | $18.64 | NA | 21.41% | -31.31% |
| Intel Corporation | INTC | 7/27/22 | $40.18 | $31.31 | NA | 1.61% | -18.92% |
| The Williams Companies | WMB | 8/24/22 | $35.58 | $30.23 | $38.00 | 6.15% | -11.44% |
| Brookfield Infrastructure Cp. | BIPC | 11/9/22 | $42.43 | $47.11 | $46.00 | 3.32% | 13.81% |
| ONEOK Inc. | OKE | 3/28/23 | $60.98 | $58.74 | NA | 6.71% | -2.27% |
| NextEra Energy, Inc. | NEE | 4/25/23 | $77.50 | $73.85 | $85.00 | 2.56% | -4.50% |
| Hess Corporation | HES | 6/6/23 | $133.67 | $140.00 | 1.36% | ||
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| BIPC $45 July 21st call | BIPC230721C00045000 | Sell | 5/23/23 | $3.25 | $3.13 | $3.25 | 7.66% |
| as of close on 6/02/2023 | |||||||
| 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% |
| Xcel Energy Inc. | XEL | Called | 10/12/21 | $63.00 | 5/20/22 | $70 | 12.66% |
| Innovative Industrial Props. | IIPR | Sold | 3/23/22 | $196.31 | 7/20/22 | $93 | -51.23% |
| One Liberty Properties | OLP | Sold | 7/28/21 | $30.37 | 8/24/22 | $25 | -12.94% |
| ONEOK, Inc. | OKE | Called | 5/25/22 | $65.14 | 1/20/23 | $65 | 2.66% |
| Xcel Energy, Inc. | XEL | Called | 10/26/22 | $62.57 | 1/20//2023 | $65 | 4.67% |
| Realty Income Corp. | O | Called | 9/28/22 | $60.37 | 2/17/23 | $63 | 5.41% |
| Medical Properties Trust | MPW | Sold | 1/24/23 | $13.22 | 3/21/23 | $8 | -38.00% |
| 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 | 3/2/22 | $1.25 | 4/14/22 | $1.25 | 5.69% | |
| FSK Apr 14th $22.50 call | in-the-money | 3/10/22 | $0.90 | 4/14/22 | $0.90 | 4.09% | |
| XEL May 20th $70 call | in-the-money | 3/30/22 | $3.00 | 5/20/22 | $3.00 | 4.76% | |
| SBLK July 15th $134 call | out-of-money | 6/1/22 | $1.60 | 7/15/22 | $1.60 | 4.80% | |
| OKE Oct 21st $65 call | out-of-money | 8/24/22 | $3.40 | 10/21/22 | $3.40 | 5.22% | |
| OKE Jan 20th $65 call | In-the-money | 11/25/22 | $3.70 | 1/20/23 | $3.70 | 5.68% | |
| XEL Jan 20th $65 call | in-the-money | 11/25/22 | $5.00 | 1/20/23 | $5.00 | 7.99% | |
| O Feb 17th $62.50 call | in-the-money | 12/28/22 | $3.00 | 2/17/23 | $3.00 | 4.97% | |
| QCOM Sep 16th $145 call | out-of-money | 7/20.2022 | $11.75 | 9/16/22 | 11.75 | 8.73% | |
| V Mar 17th $220 call | out-of-money | 1/24/23 | $12.00 | 3/17/203 | $12.00 | 5.51% | |
| OKE May 19th $65 call | out-of-money | 4/11/23 | $2.70 | 5/19/23 | $2.70 | 4.43% | |
| V Jun 2 $230 call | out-of-money | 4/21/23 | $10.50 | 6/2/23 | 10.5 | 4.82% | |