The Market Reclaims its Mojo
This market looks like it wants to go higher. After selling off nearly 10% in September, the S&P 500 has resumed its uptrend and is not far from the all time high.
The market behavior looks very similar to this past June. The market had pulled back and then recovered and resumed its march ever higher. It seems counterintuitive. And it’s tough to muster a lot of enthusiasm to buy into a market near all time highs ahead of the election and with Covid still hanging around.
But the market realizes that both the election and the pandemic are temporary. It sees a booming economy in the quarters ahead with historic low interest rates and a friendly Fed. Money has no place else to go but stocks to fetch a decent return. As long as investors aren’t frightened, they will continue to put money in the market.
The current portfolio has each half telling a different story. Of the six current positions, three of them have pending calls written on them. These stocks including SBUX, BIP and V are all above the targeted strike price. SBUX and BIP calls expire Friday and are likely to be called. V still has a while to go, until November 20th.
It’s perfectly okay if BIP and SBUX do indeed get called away. The whole point of this service is to secure a high income by sacrificing potential capital appreciation for income. When the stock goes higher and gets called away, your return is higher because capital appreciation is factored into the call terms when chosen. These positions, if called, will provide returns of 9.16% for SBUX and 11.2% for BIP in a relatively short time.
It’s also worth noting that the only thing that is sacrificed is unrealized appreciation. The gains aren’t locked in unless you actually sell the stock. Those gains can evaporate in a hurry.
The other three positions in ABBV, EPD and VLO do not currently have calls written on them. The reason is that the price action in the stocks has not allowed for advantageous call premiums. Calls were already written on the position in ABBV earlier, and there should be an opportunity to write more in the future as that stock price gets moving again.
The other two energy stock positions are still wallowing. The market is shunning anything to do with traditional energy right now, even though operations are dramatically improving for these companies as the recovery gains traction. Third quarter earnings, announced in the next few weeks, could be a strong catalyst to get these stocks moving again, as the improving facts on the ground become more widely known.
Both EPD and VLO pay huge income yields while we wait for better days ahead. The opportunity to write calls in the future should bolster the income much further and make these positions very worthwhile over time.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 5.4%
The stock had been slowly declining since late August but has since stabilized and started trending back higher, albeit slowly. But the stock still remains in a longer term uptrend from the lows of the summer in 2019. We were able to write a call and keep the stock on this position. Although it has stopped falling in the near term, ABBV still has not regained its swagger. When it does, we will look to write another call on this stock and ring the register again. In the meantime, ABBV is in a great buy range if you don’t own it already. BUY
Altria (MO) Yield 8.5%
After taking a plunge during the market selloff in September, MO has been slowly climbing back while nobody is looking. Sure, the market still hates this stock. But investors can’t help but notice the dirt cheap valuation, at just nine times 2021 earnings, and the sky-high dividend that’s safe. This is a low interest rate world where the 10-year Treasury yields 0.72%. The high income alone should support this stock and the price could also do a whole lot better if some of its investments work out down the road. There will likely be an opportunity to write another call on MO in the weeks and months ahead. BUY
Brookfield Infrastructure Partners (BIP) Yield 4.1%
This infrastructure partnership just continues its relentless slow move higher. It has been on a methodical step by step upward move since early July. Investors dig the defensive business and high dividend in this still uncertain economy. And beyond the pandemic, the stock looks even better as growth projects will be accelerated and infrastructure becomes an increasingly popular subsector. However, the call options expire on Friday with a 45 strike price and the stock is currently selling at 47 per share. The shares are likely to be called. HOLD
Enterprise Product Partners (EPD) Yield 10.4%
Until there is tangible evidence of significant improvement in the energy sector, this stock is unlikely to go anywhere. Yet significant improvement is bound to occur in the near future. Estimates are for GDP growth of over 30% in the third quarter. That couldn’t happen without a strong rebound in the midstream energy space. There may be a strong catalyst for this stock when the company reports third quarter earnings at the end of this month. That could boost the stock ahead of much better days on the other side of the election and pandemic. Meanwhile, the double digit yield is safe. BUY
Starbucks (SBUX) Yield 2.0%
This coffee house stock has a business that has been remarkably resilient during the pandemic and will surely boom again as lockdown restrictions ease. The stock is benefitting mightily from the market recovery after the September selloff, and it has run up to post pandemic highs and is now within just 5% of the 52-week high. At 90 per share, SBUX is comfortably above the 87.50 strike price for the calls that expire on Friday. In the absence of a sharp selloff in the next couple of days, SBUX is likely to be called away at expiration. BUY
Valero Energy (VLO) Yield 9.5%
This story is similar to that of EPD. The market is unlikely to give this stock anything until at least the other side of third quarter earnings—which are reported next week—and maybe the other side of the election and pandemic. The third quarter economic boom that is being forecast cannot happen without significant improvement in demand for refined products. Once the increasing demand becomes obvious this stock can move, and fast. VLO is still wallowing now but much better times could be just around the corner. BUY
Visa (V) Yield 0.60%
Visa is a terrific business and a great stock to own. That’s why the call premiums for the stock were high while those of most stocks were languishing; many investors are willing to bet on a higher price for V. The stock at 204 per share is above the 200 strike price for the calls that expire on November 20th. But a lot can happen by then. We might not even know the election results by then and there could be all kinds of shenanigans taking place. At the very least, the stock gets called away and you secure a solid income return in a short amount of time during a highly uncertain period. BUY
Existing call Trades
Sell SBUX October 16 $87.50 call at $3.30
There are only two days left. The stock is well above the 87.50 strike price at 90 per share. The chances are very high this stock will be called away on Friday if you sold the calls. However, the trade will secure you a 9.16% return in just about six weeks. You’ll never go broke doing that.
Sell BIP October 16 $45 call at $1.95 or higher
The calls are likely to expire in the money, with a strike price of 45 and current price of 47. It is likely that BIP shares will be called away at that time. Based on the purchase price since the stock was originally recommended in June as well as the dividend, the 1.95 call premium and stock appreciation, the position will provide a double digit 11.2% return in about four months.
V Nov 20 $200 call at $10.00 or higher
This stock still has a ways to go before expiration. As I mentioned above, a lot can happen in the market between now and November 20th. It’s worth noting that you can still write the above calls at the targeted price of $10 or higher if you haven’t done so already. The calls would be in-the-money. The trade can act as a hedge against the possibility of a down market after the election.