High Income from an Optimistic Market
The market has leveled off a bit since the fabulous November rise.
That’s okay. The market can’t go up that fast for long. It needed a breather and this is healthy. And the basic story still hasn’t changed.
The vaccine is now being distributed. It should end the pandemic sooner rather than later. The ending of the lockdowns and restrictions will prompt a full recovery in 2021. That vision is keeping stock prices high and will likely drive the market higher next year.
A full recovery is a big deal. It will lift previously downtrodden real economy stocks in the energy, financial, and other sectors. Recent performance in those sectors indicates that a full recovery, or near to it, will occur in 2021. And the market, unlike the media, usually gets it right.
That said, it’s Christmas time. Investor attentions are divided. We’ll get a better idea of what investors really think when the rubber hits the road after the holidays in January. A pullback at that point is very possible. After the rise in the market since the March bottoms, and since the vaccine announcements, it would be normal and healthy.
I’m not saying a pullback is imminent. I’m just saying it would be normal. If that happens, I will consider it a buying opportunity ahead of a full recovery later in the year. It could present a great opportunity to load up on more stocks at great prices.
In the meantime, it’s a great environment to write covered calls as investors are willing to bet on higher prices in the future. All but one portfolio position has a covered call written on it at this point. This past Friday, a “special alert” was issued for a call on food packaging company B&G Foods (BGS), as that stock has recently moved higher.
High income returns are already locked in. And more will be coming. Be on the lookout.
Also, don’t forget to tune into the Cabot Retirement Club (CRC) monthly video next Tuesday, December 22nd at 2pm. This once per month video is usually on the last Thursday of the month but it was adjusted this month because of Christmas. Be sure to tune in. I promise to make it worth your while.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 5.1%
The stock has been killing it lately, up 28% since late October. But the stock still sells at a cheap valuation of less than 9 times forward earnings. While ABBV is still a great holding longer term, it may have gotten ahead of itself in the short term.
The stock trends up and down on a longer term upward trend. This latest spike higher took the stock to new recent high. Although it could always break out to a new level, the stock may very well pull back if the pattern is consistent with the recent past. For that reason, we wrote a call on the stock with a strike price of 100 per share (currently 103.35. HOLD
Altria (MO) Yield 8.2%
The market has been so good that even MO is moving higher. This is a phenomenal income stock with a great dividend that’s safe. At the very least it should deliver a high yield. There is still a big question about whether the company can compensate for smoking volume slippage longer term. The market has priced in a very negative view.
The stock has moved well beyond the strike price of the January 15th calls that have been written with a 40 per share strike price (currently 43 per share). We’ll see what happens over the next month. But no matter what, we will score a very high income return from a stock that has done very little. HOLD
B&G Foods, Inc. (BGS) Yield 6.5%
The packaged food company has recently spiked back up to the high point of the recent range. It had been floundering amidst the reopen stock euphoria. But the worsening virus outbreak seems to have given it new short-term life, as investors price in a longer lasting pandemic earnings spike.
I love this company for the longer term because earnings growth is likely to remain higher than pre-pandemic levels for a long time and the stock is still cheaply valued with a safe dividend. But the recent move higher created a great near term income opportunity in the covered call written last week. BUY
Enterprise Product Partners (EPD) Yield 8.2%
This midstream energy company is back. It’s up 30% since the end of October and 4% this past week. It had been a phenomenal value with stable and resilient earnings and a sky high (and safe) distribution yield for a long time. But the market hated it anyway. The anticipated full recovery in light of the vaccine is making this an exciting stock. That phenomenal yield combined with likely capital appreciation is making this a red-hot stock. It’s slightly above the strike price on the calls written and we’ll see what happens over the next month. BUY
U.S. Bancorp (USB) Yield 3.7%
This bank is both a great value and a vaccine stock. Profits should improve very quickly for this regional bank as the recovery gains traction next year. Interest rates are likely to rise, raising profits from net interest income. Loan demand should also increase and loan loss provisions should trend lower. The high dividend should make USB very popular with investors on the other side of the pandemic. USB has broken slightly above the 45 strike price for the January calls written. But we’ll see what happens in the next month. BUY
Valero Energy (VLO) Yield 7.0%
This refiner is now a high-leverage play on the vaccine and a full recovery. After a torrid 60% rise in a month, the stock has taken a breather in the past couple of weeks. That’s okay. It can’t rise that fast forever. It needed to consolidate. The strong uptrend is still intact and the recovery story is still the same. VLO also still has a long way to go to get to the pre-pandemic high of about 100 per share (currently 57.28). BUY
Existing Call Trades
Sell ABBV Dec 31 $100 call at $3.30 or higher
These calls only have a couple of weeks until expiration with the stock priced at 103.76 and the calls priced at 4.30. As I mentioned above, the stock could well trend below 100 by expiration in a pattern consistent with the recent past. If it closes above 100, we will get a 21% return between the two calls written and dividends. If not, we’ll prime the covered call pump again in the future.
Sell EPD Jan 15 $20 call at $0.80 or higher
The stock is selling at a buck over the strike price and calls are at 1.90. There are powerful reasons to believe the stock will be higher in three to six months. It has moved a lot recently but we’ll see what the market has in store for the New Year and where the price is on January 15th. But we’re set up to get a great return regardless of where the stock price is in a month.
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 slightly above the 2 target price at 2.20. 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 really moving for a stodgy income stock that the market hates. MO has moved well above the 40 strike price to 43 and the calls are currently priced at 3.15. Despite this being an underperforming stock, we are set up for great income returns. If the stock closes above the 40 strike price in a month, 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.
Sell BGS February 19 $27.50 call at $2.40 or higher
This is the new kid. The calls on this food company were targeted via “special alert” issued last Friday. The call are now slightly below the targeted price at 2.25.
BGS recently rallied as the virus situation gets worse in the near term. The calls are written slightly in-the-money in order to lock in a higher call premium while the stock is having a good time of it. The worsening virus situation is likely temporary and will give way to the vaccine excitement as it becomes available. We can lock in a good income return while the stock is riding high.
We are set up to get a double digit return regardless of whether the stock closes above the strike price on expiration. A close above 27.50 (currently 29.28) will provide a 13.5% return. A close below the strike will provide a 10.25% income return.