Great News for the Losers
What a week!
The market got game-changing news on Monday. Pfizer (PFE) along with German biotech company BioNTech announced highly encouraging results for a COVID-19 vaccine. Final FDA approval could be just weeks away. And large scale distribution could begin before the end of the year.
The market was giddy. The Dow rocketed 5% at one point on the day. A vaccine is huge because it could mean the end of the pandemic sooner rather than later. In the market’s view, it may remove a massive uncertainty about the course of the virus and usher in a booming economic recovery in the quarters ahead.
The economy is already rebounding, and at a stronger pace than was expected. But it still has one arm tied behind its back with the remaining restrictions and lockdowns. Plus, with the indexes not far from all time highs, the market had likely risen as much as it was going to before the next phase of the recovery came into view.
On the other side of this pandemic, there will likely be an absolutely booming economy, low interest rates and a friendly Fed. The previously long overdue recession and bear market is over with. Beyond the pandemic, we should see excellent conditions in the still early phases of a new bull market. It should be glorious.
This was no ordinary rally either. Stocks that had not participated in the market recovery were the biggest winners. The market indexes had been driven by the technology sector, which has been booming as people rely on technology more than ever during the lockdowns. But the more cyclical sectors had been wallowing in oblivion.
The dogs of 2020 were the biggest winners. Travel and hospitality stocks soared. Indexes for the beleaguered energy and financial sectors rocketed near the biggest one day gains in history. These sectors are still hurting with the limited recovery so far, but should come back when the recovery becomes complete.
Sure, the euphoria could be premature. The vaccine could stumble. There could be more trouble with the contested election. We might not be out of the woods yet. But the market just gave us a taste of things to come.
A rally in some of the most beaten down sectors of the market will present a huge opportunity for income and this newsletter. Capital gains will be had as prices move higher. Opportunities for big fat call premiums in the highest dividend paying stocks may lie ahead in the near future.
Good days are ahead. The only question that remains is whether they come sooner or later.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 5.3%
We’re back in business baby. After floundering for several months, ABBV is returning to its badass ways. Earnings were fabulous. AbbVie earnings beat expectations and rose 21.5% over last year’s quarter. The company also raised the dividend by 10.2%. Then the election all but eliminated the possibility of a health care overhaul, and the whole sector got a huge shot in the arm.
Because of the double dose of good news, ABBV soared 20% since the end of October, from 80 per share to near 100. The call options still aren’t priced that great. Plus, the stock could well have further to go in this latest run. Let’s ride this horse. For those reasons, I am not yet writing another call on the stock. BUY
Altria (MO) Yield 8.7%
Even this hated cigarette pusher is up 9% since the end of October. The JUUL write-off is already backed into the price and earnings were surprisingly strong. As well, the vaccine rally has been very good for stocks that had underperformed in the recovery so far. This dividend is safe, with more than sufficient cash flow and a track record that spans more than half a century says so. I’m tempted to write another call on the stock. But I think there is a good chance that we get a better opportunity than exists today in the next few weeks. BUY
B&G Foods, Inc. (BGS) Yield 7.1%
Despite the strong market, the packaged food company stock has fallen about 7% in the last several days. There is a reason – the vaccine. The normally slow growth and stodgy B&G has been growing earnings better than 30% in the last two quarters as people buy more food to prepare at home during the lockdowns. The market fears earnings will come back down to earth after the pandemic. And they certainly will.
B&G was never going to grow earnings at 30% forever. That was always temporary. However, there are very good reasons to believe this company will continue to generate a higher level of earnings than it did pre pandemic for years to come. And the stock still sells below the five year average valuations. It is now a better growth company with a dividend that is now very safe. This dip is simply a short term market reflex to the vaccine news. BUY
Enterprise Product Partners (EPD) Yield 9.8%
The times they are a-changing. And that’s the market singing, not Bob Dylan. The Energy Select Sector SPDR Fund (XLE) is up 18% in the days since the vaccine announcement. That’s a huge move for an entire sector in just a few days. This perennial abused dog sector is rising from the dead. I don’t know if the momentum will last. But it certainly provides a taste of what may lie ahead.
The market is surging because it sees a robust recovery as virus restrictions are lifted. The recovery simply cannot take place without greatly improving conditions in the energy sector. Even if these stocks regain just half of what they lost this year, that will be a huge move from here. And Enterprise is actually growing earnings in this mess. And the massive distribution is safe. BUY
Valero Energy (VLO) Yield 7.8%
This refiner stock long ago became a high leverage play on the next phase of the recovery. The vaccine announcement and the ensuing market rally reflect expectations that a gear shift will occur sooner rather than later. VLO is more cyclical and volatile than most energy stocks. It can move higher fast as conditions improve. We got a taste of that this week as VLO shot up 32% in one day. If the pandemic indeed fades with the vaccine and the economy kicks it up a notch, VLO will be a great stock to own.
The market agrees, and call premiums are juicy. You can get about an 8% premium at a 50 strike price (currently 49.60) with a January 15th expiration. But I think we can do better in the future. This stock has too much upside to trade at this point. So, I’m holding off for now. BUY
Visa (V) Yield 0.60%
V shot up to the current 212 per share over the past week. Since the stock was initially purchased in the portfolio at around 200 per share in late September, it’s been all over the place. The stock fell to about 180 by late October and has since soared back up to 212. It has mirrored and exaggerated the market moves of late.
This is a great company. Its stock is seldom cheap. If things got ugly in the market, I have no doubt that this stock would come roaring back before long. It made the stock a great choice as a vehicle to generate a significant income during very uncertain times in the market. The calls, written with a 200 strike price, expire a week from Friday. It looks like the stock will be called, but we’ll see. It could pull back with a market decline. BUY
Existing Call Trades
V Nov 20 $200 call at $10.00 or higher
These calls are well in the money with the stock at 212 per share. The calls that were sold at 10 or higher are now priced at 13.02. The time value has eroded and that price doesn’t reflect a bargain here. In the absence of a strong reason to believe the market will pull back strongly in the next week and a half, it doesn’t make sense to write the calls now. We’ll see what happens.