Lock in a High Income Ahead of a Risky Fall
Summer is over. The post-Labor Day market begins this week. What can we expect?
The market has been nearly impossible to predict over the past several years. There was the pandemic crash, the recovery that began shortly after the lockdowns began, the 2022 bear market, and the surprising return to a bull market this year.
What will the sobered up and refocused investor see in the market this week?
They’ll see a bull market that consolidated somewhat in August. On the positive side, they will see a likely soft landing that may enable the market to escape the steepest rate hiking cycle in decades without much economic pain. There is also a catalyst for another tech boom from the frantic spending on artificial intelligence.
But there are also perils. Interest rates are near the highest level since 2007. The Fed is still sounding hawkish as inflation isn’t licked yet. If these high interest rates don’t slow the economy down, they will probably rise further until the economy does peter out. And overall earnings have been shrinking for three straight quarters. It will be tough for the market to build on the 30% rally from last year’s bottom with that backdrop.
Anything is possible. But it probably isn’t prudent to expect exciting returns for the market between now and the end of the year. A sideways scenario is more likely. Under the circumstances this newsletter has been trying to lock in a high income by taking advantage of portfolio stocks that have recently surged and are near the 52-week high.
The recent rallies lead to high call premiums that can be locked in ahead of a very uncertain fall market. Recently targeted covered calls include Hess Corporation (HES), Digital Realty Trust (DLR), and Intel (INTC).
Past Month Activity
August 8
Sold Star Bulk Carriers Corp. (SBLK) - $18.22
August 18
V August 18 $235 calls at $9.00 – Expired
GSL August 18 $20 calls at $1.25 – Expired
Visa Inc. (V) stock – Called
August 22
Purchased Xcel Energy inc. (XEL) - $57.95
Sell HES October 20 $155 calls at $9.00 or better
August 29
Sold Global Ship Leasing (GSL) - $19.11
September 5
Sell DLR October 20 $130 calls at $6.00 or better
Sell INTC October 20 $35 calls at $3.00 or better
TRADE ALERT
Sell DLR October 20 $130 calls at $6.00 or better
Expiration date: October 20
Strike price: $130
Call price: $6.00
Digital Realty Trust, Inc. (DLR)
DLR has been hot and made a new 52-week high after securing over $2 billion to pay down debt and secure the dividend. It is also benefitting from the AI craze which adds another powerful upside catalyst. But this market remains highly uncertain heading into the fall. It’s a prudent and conservative move to use the latest surge in DLR to secure a high income and possible high total return.
Here are the three scenarios.
1. The stock closes above the $130 strike price at expiration.
Call premium: $6.00
Dividends: $1.22
Appreciation: $12.69 ($130 strike price minus $117.31 purchase price)
Total: $19.91 (total return will be 17% in 3 months)
2. The stock price closes below but near our $130 strike price.
Call premium: $6.00
Dividends: $1.22
Total: $7.22 (total income of 6.2% in 3 months)
3. The stock price declines.
There will be $7.22 in income to offset the decline. Plus, the original purchase price was more than $12 per share below the strike price.
TRADE ALERT
Sell INTC October 20 $35 calls at $3.00 or better
Expiration date: October 20
Strike price: $35
Call price: $3.00
Intel Corporation (INTC)
This beleaguered stock has rallied 10% in the last week and 40% YTD. I believe the stock should have a good future. But it is very near the 52-week high and it has retreated from this level the last two times. Plus, September and October markets can be cranky. If the stock is called it will deliver a breakeven return. If not, we can start to generate income from this position.
Here are the three scenarios.
1. The stock closes above the $35 strike price at expiration.
Call premium: $3.00
Dividends: $1.47
Appreciation: -$5.18 ($40.18 purchase price minus $35 strike price)
Total: -$0.71 (total return will be -1.8% in 15 months)
2. The stock price closes below but near our $130 strike price.
Call premium: $3.00
Dividends: $1.27
Total: $4.27 (total income of 10.6% in 15 months)
3. The stock price declines.
There will be $4.27 in income to offset the decline.
Portfolio Recap
AbbVie Inc. (ABBV)
Yield: 4.0%
The cutting-edge biopharmaceutical company stock leveled off in the ugly August market after a sharp rise from the bottom in July. I like the way the health care sector is set up ahead of a slowing economy and perhaps a further correction in the market this fall. Meanwhile, AbbVie reported earnings that beat on both earnings and revenue and raised guidance for the year. The report emboldens the notion that the revenue drop from the Humira patent expiration will be temporary and AbbVie will turn the corner sooner than expected. BUY
Digital Realty Trust (DLR)
Yield: 3.7%
This data center REIT has been firing on all cylinders. It’s up over 30% YTD, 5% in the last week, and just hit a new 52-week high. DLR was also immune to the down market in August. Digital reported better-than-expected earnings because of strong data center demand and solid growth. Even more importantly, the company assuaged fears that had driven the stock price down earlier this year by executing capital recycling plans that raised over $2 billion by selling joint venture assets. The move strengthens the balance sheet and secures the dividend. Now the REIT is poised to benefit from accelerating data center demand growth prompted by the AI craze. BUY
Hess Corporation (HES)
Yield: 1.1%
HES was hot stuff in July before oil prices pulled back in August. As an exploration and production company Hess is highly levered to energy prices. But prices spiked higher again last week and reached the highest level since last fall. Many are predicting further increases as global production has been cut and U.S. inventories are low amid high demand. The call premiums are still below the targeted price. But that price can easily be reached this week if the oil price rise continues. BUY
Intel Corp, (INTC)
Yield: 1.4%
INTC has been a dog in this portfolio. But it has gotten hot lately. It’s up 40% YTD and over 10% in just the past week. The stock was driven higher by the fact that the company raised third-quarter earnings guidance. Intel receive a prepayment from a “large unnamed customer” to secure capacity at its foundry for producing semiconductors. It demonstrates the tangible viability of the company’s foundry plans and makes success and higher revenues for the business likely to come sooner, perhaps in the second half of this year. BUY
NextEra Energy, Inc. (NEE)
Yield: 2.8%
The weakness continues. This combination regulated and clean energy utility stock just hit a new 52-week low. The utility sector remains under pressure both in the broadening rally and the August selloff. But the operational performance is solid. The utility grew earnings 8.6% in the second quarter and 11% in the first half versus the same periods last year. It also has predictably solid earnings going forward because of a considerable project backlog. NEE has historically blown away not only utility sector performance but the overall market as well. It’s selling near a multi-year low and is poised for a strong rebound. BUY
ONEOK, Inc. (OKE)
Yield: 5.8%
The midstream energy company reported earnings that beat on EPS and missed on revenue. ONEOK also raised earnings guidance for the year. The stock had nice upside after the report after pulling back for two weeks prior as the overall market weakened. OKE leveled off in August after an uptrend since the end of May. We’ll see if the stock can regain some upside traction in the fall. Longer term, the stock looks solid as the company is expected to grow revenue by an average of 10% per year over the next three years. HOLD
Realty Income Corp. (O)
Yield: 5.5%
It isn’t only hard times for utility stocks. Conservative REITs remain out-of-favor as well. This legendary monthly income stock is flirting very close to the 52-week low, last achieved when the market bottomed last October. It may be a new bull market for the indexes, but it is still a bear market for O. Yet, earnings were solid with a stellar 99% occupancy rate for its properties and an additional $3.1 billion invested in the quarter in 710 properties. This is now a very cheap and high-yielding stock with an excellent historical track record in a very uncertain market and economy. BUY
Qualcomm Corp. (QCOM)
Yield: 2.8%
Not only has it been an ugly market for technology stocks this month, but Qualcomm reported earnings results that the market hated. Earnings were down 37% year over year and revenues fell 23%. It’s because of lower smartphone sales as the 5G upgrade cycle ended and economic conditions tightened. However, smartphones sales may be close to bottom as they are expected to increase in 2024 and Qualcomm is expected to resume earnings and revenue growth. This slump was expected and that’s why QCOM has underperformed. But it is cheap now. BUY
The Williams Companies, Inc. (WMB)
Yield: 5.2%
The midstream energy company reported earnings that surpassed estimates and the stock got a further boost on the news. Volumes of throughput were solidly higher, and earnings grew 8%. That’s a far cry from the 30%-plus earnings growth of last quarter, but this lull in acquisitions coming online was expected. It’s solid growth under the circumstances. In addition, recent expansion and acquisition activity bodes well for growth in 2023 and 2024 beyond what was expected. The stock is now up over 20% since the end of May and made a new 52-week high in August while the market was selling off. WMB has leveled off lately. We’ll see if WMB continues the good momentum in the fall. BUY
Xcel Energy Inc. (XEL)
Yield: 3.7%
This clean energy utility hasn’t fared any better than NEE in a very tough market for utilities. XEL has been trending lower since the beginning of April and is wallowing near the 52-week low. But things change and XEL is cheap and one of the best utility stocks to own. These are dark days for utilities. But things always change and XEL and NEE are selling at 52-week lows in an expensive market and ahead of a likely slowing economy. BUY
Existing Call Trades
Sell OKE Sep 15 $65 calls at $3.20 or better
OKE is teetering on the brink with 10 days to go before expiration. It’s selling at pennies above the strike price coming into the post-Labor Day market. Much will depend on what the market does over the next week and a half to determine if the stock gets called. Either way, we have secured yet another round of great income from this stock.
Sell HES October 20 $155 calls at $9.00 or better – Pending
This call premium never hit the $9 target since they were targeted in the monthly issue. But oil prices started moving higher again and HES was up in a significant way last week. Another spike higher this week could easily move these calls to the target price. We will leave the $9 target order as it is and see what this week brings.