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Income Advisor
Conservative investing. Double-digit income.

December 9, 2020

After having eclipsed the September high in mid November, the S&P 500 is continuing to make a series of new all time highs.

A Giddy Market

I’m takin’ what they’re givin’ cause I’m workin’ for a livin’
Huey Lewis and the News

This market continues to impress.

After having eclipsed the September high in mid November, the S&P 500 is continuing to make a series of new all time highs. The catalyst has been the likely distribution of a coronavirus vaccine in the near future and the likelihood of an end to this pandemic and an ensuing full recovery in 2021.

But the virus is getting worse.

Cases are skyrocketing and many states are imposing strict lockdown restrictions again. The market is giddy over the prospect of the pandemic ending sooner rather than later while it’s getting much worse at the same time. The reason is that the market tends to look ahead six to nine months and it sees a robust recovery by then regardless of what happens with the virus in the next couple of months.

There has been a huge market rotation into reopen stocks. These are real economy companies that are still hampered by the remaining restrictions but will benefit the most in a full recovery. Energy, financial, and travel and leisure stocks have been on fire.

The reopen stocks have been rallying while stocks perceived as benefitting from the pandemic have been pulling back. But as the virus continues to get worse, the reopen stocks are still hot, but now the pandemic beneficiary stocks are rallying again too. Just about everything is winning.

Markets like this are glorious. But they never last.

Don’t get me wrong. I’m a believer in the full recovery next year. And I think the economy will thrive beyond expectations. But markets don’t go straight up, especially with a lot of risks floating around. The market will pull back eventually, and that will likely provide a buying opportunity.

This is a great market in which to write covered calls. The upward bias of the market makes more investors willing to bet on higher prices going forward. And call premiums rise. That creates a great opportunity to lock in a high income return from high call premiums while the market is on a bender. And that’s what we’re doing.

However, it’s not the best market for buying stocks. That’s why the portfolio still has few stock positions with calls written on most of them right now. We take what the market gives us. It’s giving us fat call premiums and we’ll take them. If the market corrects, it will give us good entry points for new stocks positions, and we’ll take that.

Sometimes this portfolio will have a lot of outstanding calls and sometimes it won’t. There will be times when it buys a lot of stocks and vice versa. That’s the nature of the beast. But it all adds up to a superior high income over time.

Stock Portfolio Recap

AbbVie Inc. (ABBV) Yield 4.8%
This is a great pharmaceutical company with one of the best arrays of newly launched drugs and pipelines of potential new drugs in the industry. The stock is still cheap with a high dividend yield because of overblown fears of competition for its blockbuster Humira drug. But the big story in the stock right now is the price movement.

It’s up 33% since late October. Of course, it has only eclipsed the July high of 100 by 7% (currently 107.69). ABBV tends to spike higher and then pull back for a few months. The question is: how far will this latest spike take the stock? The calls written have a 100 strike price and expire on December 31st. We’ll see what the stock does in the next few weeks. HOLD

Altria (MO) Yield 8.2%
Apparently, this market has a newfound appreciation for value stocks, so much so that even this hated cigarette maker is moving higher. The stock hasn’t been this high (currently 42.40) since the summer. The calls were written with a 40 strike price and an expiration in January. There could always be bad news and ugly headline for MO, or the market could change its stripes within the next month and MO goes back under 40. Either way we locked in a great income return on a stock that has done practically nothing since being added to the portfolio in June. BUY

B&G Foods, Inc. (BGS) Yield 6.9%
After having been shunned by the vaccine rallies, this packaged food company stock had a big move higher yesterday, up 4.31% for the day. The likely explanation is the worsening covid situation and the perception that the huge lockdown earnings boost for B&G will last longer as people continue to eat at home more. The stock at 29.17 per share is a fair bit higher than the price at which it was added to the portfolio in late October (26.79). BGS still hasn’t moved enough to attractively price the calls so we’re still holding off for now. But that could change in the days and weeks ahead. BUY

Enterprise Product Partners (EPD) Yield 8.9%
This midstream energy giant is finally coming around. It has been a phenomenal value with stable and resilient earnings and a sky-high (and safe) distribution yield for a long time. But the market didn’t care until the vaccine rallies finally got the ball rolling. The stock price is up 28% since the beginning of November. EPD has broken above 21 per share and we wrote the January calls with a 20 strike price. If the stock closes above the strike price in January, we will get a 19.6% return from the stock in less the 8 months. If not, we will lock in a 9.3% income return and write more calls in the future. If you don’t already own the stock it is worth buying here, with still-great value and now, momentum. BUY

U.S. Bancorp (USB) Yield 3.9%
Arguably, the best-run bank in the county should certainly benefit in a full economic recovery. While the stock has already started moving higher, it should still have a long way to go. USB has broken slightly above the 45 strike price for the January calls written for now. But we’ll see what happens in the next month.

If we played it too conservative by writing the calls at the level we did, we will still lock in a solid income in a short time regardless of what happens. If it pulls back by options expiration in January, this stock should trend higher over the next six months and we should be able to milk it for more income along the way. BUY

Valero Energy (VLO) Yield 7.3%
The covid vaccine has radically transformed this refinery stock from a dying dog to a market superstar at lightning speed. It’s up 68% since late October. But it’s only up 13.6% since being added to the portfolio at 53.70 per share in late August (currently 61). Most of the recent price rise has made up for the deterioration in the stock price since late August. The stock still has miles to go to get to the pre-pandemic high of 100 per share.

The vaccine and full recovery story isn’t going away. And the stock is still in the midst of a powerful near-term uptrend. I’ve made a calculated decision to ride this horse longer instead of writing profitable calls at the current price. BUY

Existing Call Trades

Sell ABBV Dec 31 $100 call at $3.30 or higher
The stock keeps moving higher on this latest uptrend. The calls, originally targeted at 3.30 or higher, are now priced at 8.31. A continued upward move for the stock from here would be a true breakout from the intermediate term trend. That’s possible because this is a great company. However, it is likely that there will still be some sort of pullback in the near term.

But that pullback occurring in the next three weeks before options expiration and taking the stock below the 100 strike price is becoming increasingly unlikely. That’s okay. If the stock is called away we will get a 21% return, between the two calls written and the dividends, in about seven months.

Sell EPD Jan 15 $20 call at $0.80 or higher
These calls are current selling at 1.45 as the stock continues to trend higher. EPD is currently selling at 20.87 and the options have a strike price of 20 for January 15th expiration. I believe the stock will be a lot higher than it is now in three to six months. But it has moved a long way and we’ll see where the price is in six weeks.

If the stock closes above 20 at expiration and the stock gets called, it will provide a 19.6% return. If not, it will still provide a 9.3% income and the likely opportunity to write more calls and collect more dividends in the future.

Sell USB Jan 15 $45 call at $2.00 or higher
The stock has moved slightly above the 45 strike price but the calls are currently priced a whisker below the 2 target price. This is a great bank and the stock should continue to trend higher over the next year as the economy recovers. The current call and the dividend will provide at 5.4% income in less than two months even if it gets called.

Sell MO Jan 15 $40 call at $1.90 or higher
The stock is moving higher (currently 42.72) and these same calls are much higher at 2.90. As I mentioned above, the stock is always vulnerable to negative headlines that could knock it back. We’ll see where the price is in five weeks. But either way we win on this.

If the stock closes above the 40 strike price in five weeks, we will lock in a 16.1% return in seven and a half months (between the 3 dividends and the 2 calls). If not, we will have locked in a 15.3% income return. This stock exemplifies what this income strategy can do even with a stock that barely moves.