The Market Parties Like It’s 2021
This has been quite a year. As the virus rages and the election outcome remains uncertain, the market soars to a new all time high. Go figure.
The market rallied this week on news of positive late stage trial results on a coronavirus vaccine by biotechnology company Moderna (MRNA). It is the second big vaccine announcement in a week. A second vaccine candidate makes it more likely that there will indeed be a vaccine coming in the near future.
The vaccine should end this pandemic sooner rather than later. That’s good news for the market because it means that the economy can accelerate well beyond current levels next year as restrictions and lockdowns are removed.
At the same time, lockdowns and restrictions are increasing as the virus spread is increasing. But the market tends to look beyond that and ahead six to nine months. At that point it sees a booming economy, low interest rates and a friendly Fed. The market is rallying based on the anticipated positive environment by mid 2021.
The recent vaccine rally has done what the previous market recovery had not, include real economy stocks like energy and finance. While technology has thrived, those stocks have floundered in the limited recovery so far. These previously downtrodden stocks are coming alive.
That’s great news for some of the high dividend paying stocks in the portfolio, namely Enterprise Product Partners (EPD) and Valero Energy (VLO). These stocks have been moving higher quickly in the past couple of weeks. For the first time in a while, there are good covered call writing opportunities.
But it’s tricky. On the one hand, I don’t want to limit an upside that can continue much higher in the weeks and months ahead. At the same time, it could be that these stocks have gotten ahead of themselves in the near term. It’s impossible to know.
In this issue, I split the difference. I am writing a call on EPD to secure an income and possible appreciation after a big spike higher. But I am refraining from writing a call on the faster moving VLO in order to benefit from a continued move higher.
There are two “Special Alerts” in this issue for covered calls on ABBV and EPD.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 5.2%
This best-in-class pharmaceutical company that already had a cheap valuation and a stellar dividend recently added momentum to its list of attributes. The recently floundering stock got new life this month after terrific earnings and a post election rally in the sector. It’s up over 18% in November and within bad breath distance of the 52-week high.
I love this stock as a longer term holding. But the purpose of this newsletter is to generate income. After a big spike in the price that has driven it near the very top of its recent range, the time is ripe to write another call on the stock and reap the income bounty that it currently offers. The call terms are outlined below. BUY
Altria (MO) Yield 8.4%
The cigarette maker stock also had a nice move 14% higher since late October as the market has been more friendly to dividend stocks. Earnings were mostly good. Sure, Altria wrote almost the rest of the initial JUUL investment, but that was already baked into the stock. The quarter was impressive and better than expected aside from that. This company continues to easily earn the massive dividend that has been raised every year for the past half century. The stock should be, at the very least, a great income stock going forward, and perhaps more. The call premiums are still unappetizing at this point. But that could change in the weeks and months ahead. BUY
B&G Foods, Inc. (BGS) Yield 7.1%
The package food company is at about the same price it was added to the portfolio at the end of October. It hasn’t benefitted from the recent market. The reason is that the stock has returned 56% YTD and 73% over the last year, and the market sees this as a beneficiary of the pandemic. While it certainly benefits as people eat at home more during the lockdowns, a higher level of growth that previously existed should endure well beyond the pandemic. And the stock is still cheaply valued below the five year average valuations. BUY
Enterprise Product Partners (EPD) Yield 9.3%
This resilient midstream energy stalwart has finally come alive as the vaccine is causing the market to revalue real economy companies that will see a tangible benefit in the anticipated next phase of the recovery. The stock is up 18% in less than two weeks. EPD has also moved above the initial purchase price in late June and well above where it has averaged since its been in the portfolio. It has also paid two sizable dividends. After a big rally in the sector that may have gotten ahead of itself, it’s a good time to write a call. The details are listed below. HOLD
Valero Energy (VLO) Yield 7.8%
This very cyclical refining stock has been struggling in this recession. The stock was down over 50% YTD at one point. But it has rallied with a vengeance since the vaccine announcements. VLO is up 40% in the last ten days. The stock is ugly during a recession but moves higher fast when things improve. While the call premiums are juicy at this point, I prefer to ride the stock for now. There is simply too much upside potential to limit with a covered call at this point. The ride could be rocky in the near term, but there is a great chance this stock moves a lot higher in the next few months. BUY
Visa (V) Yield 0.61%
This is one of the very best stocks to own over the longer term. The business continues to grow as the world moves increasingly cashless. It was relatively cheap when purchased in late September. At the time, the environment was highly uncertain as the election loomed close and the virus remained unpredictable. V presented a way to get a high income from writing a call premium while the stock could go either way by the November 20th expiration. Since then, the election turned out to the markets liking and the vaccine has come through. As a result, V has moved well above the strike price and it likely to be called away on Friday. HOLD
Existing Call Trades
V Nov 20 $200 call at $10.00 or higher
These calls are well in the money with the stock at 210 per share. The expiration is on Friday and the position is highly likely to be called, unless the market turns seriously ugly in the next couple of days. Who knows in a year like this? Even if it is called you will have secured a 5.5% income in just a couple of months in a very uncertain market.
Special Alert
Sell ABBV Dec 31 $100 call at $3.30 or higher
Expiration date: December 31st
Strike price: $100
Call price: $3.30 or higher
This is the second bite at the apple. The stock was purchased in the portfolio on June 2nd at 91.04. A call was written for $4.60 that expired out-of-the-money and the stock was kept. We also received two dividends since the purchase date.
1. The stock goes above $100
- Call premium: $3.30
- Call premium $4.60 (exp. 9/18)
- Dividend $1.18
- Dividend $1.18
- Appreciation: 8.96 ($100 strike price minus $91.04 purchase price)
- Total: $19.22 (total return will be 21% in seven months)
2. The stock price stays the same
- Call premium: $3.30
- Call premium $4.60
- Dividend $1.18
- Dividend $1.18
- Total: $10.26 (total income return will be 11.3% in seven months)
3. The stock price declines
- You will be down by how ever much the stock is down less the $10.26 from the dividends and the calls. The stock could also be below the $100 strike price but above the 91.04 purchase price for a positive unrealized gain and a double digit income.
Special Alert
Sell EPD Jan 15 $20 call at $0.80 or higher
Expiration date: January 15th
Strike price: $20
Call price: $0.80 or higher
This is a tough call because the stock could easily move higher in the next couple of months as the vaccine gets distributed and the recovery gains steam. As I mentioned above, I’m splitting the difference and not writing a call on VLO. If the stock goes above the strike price, you will have gotten a near 20% return from an out-of-favor stock. If the stock does decline, you squeeze a near double digit income from the stock in seven months and live to collect more dividend and write more calls on the stock in the future.
1. The stock goes above $20
- Call premium: $0.80
- Dividend $0.445
- Dividend $0.445
- Appreciation: $1.86 ($20 strike price minus $18.14 purchase price)
- Total: $3.55 (total return will be 19.6% in seven and a half months)
2. The stock price stays the same
- Call premium: $0.80
- Dividend $0.445
- Dividend $0.445
- Total: $1.69 (total income return will be 9.3% in seven and a half months)
3. The stock price declines
- You will be down by how ever much the stock is down less the $1.69 from the dividends and the call. And the position will live to pay more dividends and write more calls in the future.