The Bull Takes an Overdue Breather
Finally, the epic and unprecedented market surge gets a dose of reality.
After a stratospheric 60% rise from the March low, the S&P 500 pulled back 7% in the last few days. Cranky investors shook off the summer malaise and saw a market at all-time highs despite the fact that the virus is still with us and the economy is hobbled.
But I don’t think investors are reassessing risk. The risks are still more than offset by the fact that investors look ahead and see the pandemic on its way out and a surging economic recovery that will get hyper-turbo-charged when the virus is finally gone. And there will be record-low interest rates and a friendly Fed to boot.
I believe the rally needed a breather. Stocks can’t just rocket higher forever. Some sort of a pullback or consolidation was actually long overdue. The market needed to get it out of the way in order to continue trending higher in peace. Today’s action in the market is indicating that the selloff is over. But we’ll see.
Regardless of what happens in the near term, I’m still bullish on the market over the next year. The economy is already surpassing expectations and will likely continue to do so in the future. Meanwhile, money has no place else to go but stocks to fetch a decent return.
The timing of last week’s calls on SBUX and BIP looks perfect. We got the highest possible call premiums at the market high just before the selloff. If you acted on the recommendations in last week’s update, you probably got call premiums that were much higher than the targeted price. Even if the stocks run higher from here and get called away, you’ll still get a fantastic income return in a short time.
The only stocks in the portfolio that calls have not been written on are the energy stocks, EPD and VLO. You can’t get good premiums because the market still hates these stocks’ guts. But be patient. They still pay great dividends. And the recovery will boost the prices eventually. At some point, the facts on the ground will overwhelm the market’s snippy attitude.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 5.2%—From a short-term perspective, ABBV is in a funk. The stock has been floundering since mid-July and has drifted from over 100 per share to around 90. It had been a stellar performer in the market recovery as it ran back up to new 52-week highs. It seems to be taking a breather after a huge rally. But the fundamental story is solid. And the stock is still above the long-term moving average. ABBV sells at a 30% discount to its peers despite being a better company, and it sports a huge yield to boot. This is a great entry point if you don’t own the stock already. BUY
Altria (MO) Yield 7.9%—The stock of this cigarette maker has been in an uptrend since early May, albeit at a tortoise pace. MO isn’t lighting the world on fire but it is one of the very best high income plays on the market. That fat yield is safe. The stock is undervalued. Momentum is positive. I think a year from now investors will scratch their heads that this iconic dividend stalwart was hanging around at this price with this obscene yield for so long. I’m looking to write another call but the down market has eroded call premiums for the time being. BUY
Brookfield Infrastructure Partners (BIP) Yield 4.4%—This infrastructure giant stock is finally getting a move on. It’s been trending slowly higher for a long time and it got a boost last week when the company announced a huge purchase of cell towers in India from a huge player. It reminded investors that this stock isn’t just a defensive play; it offers growth as well. It was a brilliant coup to write calls on this stock at the market top last week, if I do say so myself. We’ll see what happens but a great income return is already locked in. BUY
Enterprise Product Partners (EPD) Yield 10.4%—This stock is an incredible value. Of course, it was a great value last week, and last month, and the month before that. The market just continues to not give a hoot. On an operational and fundamental basis, EPD deserves a much higher price. The market will catch on eventually. I just don’t know when. But don’t forget, that gargantuan 10% yield is safe. If you do nothing but hold this underachiever, you will still get a double-digit annual income. A CD doesn’t offer price appreciation either. But if one was paying 10%, the line would be half way around the planet. BUY
Innovative Industrial Properties (IIPR) Yield 3.6%—The marijuana farm REIT is only a little off the 123 per share high of last week, at 118. The stock has embarked on an unholy surge that seems only briefly disrupted by the cranky post-Labor Day market. I guess the market finally realized that a high growth stock that is making money and growing earnings at a torrid pace in a fast-growing new industry is a good thing—go figure. The bad news is that the stock will likely be called away later this month at the 100 strike price, But it was exploited to the fullest extent for income as this advisory wrote two calls on it. And the total return will be sensational in a short period of time. HOLD
Qualcomm inc. (QCOM) Yield 2.4%—Even QCOM sold off in this market. But it scarcely matters. The stock is still in a huge and intact uptrend. It is being revalued by the market as fortunes have improved. The settlement with Chinese technology company Huawei has changed the math. Unfortunately, the pick was too good. We wrote a call with a strike price of 95 (currently 113) before QCOM took off. Unless the market gets in more serious trouble in the next couple of weeks, the stock will be called away. That’s okay. It happens. We’ll still get a double-digit return in a short time. HOLD
Starbucks (SBUX) Yield 1.9%—This coffee house stock is a beautiful pick. Despite being in the restaurant business in the midst of a pandemic, it has held up very well because of brilliant adjustments in deliveries and drive-through service. It will also bounce back at warp speed as the lockdowns ease. The calls written on this stock last week may have been timed perfectly. We got a big fat premium at an 85 strike price (currently 84.60). We’ll see what the market and the stock do from here. But a great income return is already locked in. BUY
U.S. Bancorp (USB) Yield 4.6%—This is a terrific bank—perhaps the very best among its peers. But this environment hates banks, and USB is selling at a very low valuation. Low interest rates and diminished loan demand aren’t good for banks. And, despite the economy gaining serious traction, the market still hasn’t warmed up. Circumstances make USB a fantastic value and high dividend play. We also wrote a great call at a high premium that expires on September 18, with a strike price of 37.50 (currently 36.80). We’ll see what happens in the next few weeks. BUY
Valero Energy (VLO) Yield 8.0%—The market continues to treat this refiner stock like a red-headed step child. Yet, fortunes for the company are rapidly improving. Demand for gasoline and diesel fell off a cliff during the lockdowns. But that demand is recovering and rapidly approaching pre-pandemic levels. Eventually, the disconnect between the pace of the recovery and the price of this stock will be corrected. In the meantime, try not to let the hideous stock performance spook you, and collect the dividend. BUY
Call Trades
QCOM September 18 95 call at $4.30
Okay, the stock ran away. Some unexpected good news changed the math and QCOM has soared well beyond the 95 strike price (currently 114). Unless the market endures a serious selloff in the next couple of weeks, QCOM will be called away. That’s okay; if you wrote the calls you’ll still net a double-digit return in a short time.
ABBV September 18 100 call at $4.60
I’m loving it. It looks like the timing on these call couldn’t have been better. We got them at the high, on the cusp of a consolidation in the stock. ABBV is still a fantastic stock to own. It will likely have another run higher in the months ahead and we will be there to write more calls and ring the register again.
USB September 18 37.50 call at $2.00
This one is awfully close to the vest. The stock price is currently less than a dollar below the strike price, but only because of the market turbulence of the past week. It was as high as 38.75. We’ll see what happens in the next two weeks. Either the stock will be called away and we will have extracted a fat income in a short time, or we’ll keep the stock and write more calls in the future.
IIPR September 18 100 call at $5.00
This stock is also running away big time. The current 124 price is way over the 100 strike price. But it could come back in the next couple of weeks if the market sells off. We wrote two calls on the stock and collected a dividend so far. Combined with the appreciation it will provide a better than 25% total return if the stock is called away.
Sell SBUX October 16 87.50 call at $3.30
The timing of this call is looking incredible. Last week, SBUX was actually above the strike price and in-the-money. The targeted $3.30 call premium actually proved to be way lower than what you got if you acted on the recommendation the day of the update or the day after. The price has since moved lower with the market, currently 86.17. The call price is now actually still close to the original targeted price and you may get a chance to write the calls if you haven’t already.
Sell BIP October 16 45 call at $1.95 or higher
Everything I said about the SBUX calls regarding the timing and price is true of these calls too, except the situation is even better. The stock is still above the strike price at 45.42 and you can still get them above the targeted price.