A Big Rally after a Weird Week
Today is a big up day in the market after the worst week since October.
The torrid bull run had been overdue for a selloff. I’m not sure the 2.5% market selloff last week got the job done. But it’s off to the races again today. The rally is fueled by optimism about U.S. stimulus and a full recovery later this year as the vaccines get distributed.
The main event is the anticipation of a booming economy ahead. But all the news media can talk about is the “short squeeze” internet trading phenomenon that drove several stocks, most notably video game retailer GameStop (GME), into the stratosphere last week.
There have been a number of “short squeezes” lately. Groups of investors, primarily on social media platform Reddit, have been piling into stocks that hedge funds are betting against by taking short positions. The buying forces the stock price higher, which in-turn forces hedge funds to cover their short position by buying the stock, resulting in even more buying.
They have most notably affected gaming company GameStop (GME), which had risen from 17 per share to 483 in just a few weeks. Several other stocks have risen dramatically as a result of these activities, including our own BGS.
Restrictions have been put in place on such activity in the last several days. The previously targeted stocks are falling fast as traders have moved their attention to silver which is moving higher fast. I don’t know where this will go because it’s a brand new phenomenon. But I don’t see it affecting the main picture going forward.
Trades this month
Purchase AGNC Investment Corp. (AGNC) $15.52
Purchase Brookfield Infrastructure Partners (BIP) $50.63
EPD Jan 15 $20 call at $0.80 – Expired
USB Jan 15 $45 call at $2.00 – Expired
MO Jan 15 $40 call at $1.90 – Expired
Enterprise Product Partners (EPD) stock – Called
U.S. Bancorp (USB) stock – Called
Altria (MO) stock – Called
Purchase Digital Realty Trust (DLR) $149.17
Stock Portfolio Recap
AGNC Investment Corp. (AGNC) Yield 9.1%
Earnings were good. The longer-term uptrend for the stock is solid. But the main event by far is that the yield curve is steepening as longer rates are likely to rise in the months ahead as a full recovery gains traction. The stock price is still well below pre-pandemic levels while the environment is shaping up to be better than the pre-pandemic one. Mortgage REITs are not good long-term investments. But there are good and bad times to own them. This is a good time. BUY
B&G Foods, Inc. (BGS) Yield 5.0%
The fundamental story doesn’t matter much at this point. It’s now about how to play the “short squeeze” phenomenon and how it is affecting this particular stock. My sense is to take the money and run after a weird series of events delivers and unexpected profit. I suggest selling unless you wrote calls on the stock. In that case, it makes sense to simply hold on at this point. While we missed out on this unexpected upside, we still get a double digit return in a short time anyway. HOLD
Brookfield Infrastructure Partners (BIP) Yield 3.7%
There is a reason that BIP crushed the returns of both its utility peers and the overall market over the past several years. It owns incredibly reliable income producing assets in a subsector that is growing. Those wonderful trends may only accelerate going forward. The world will need to build out infrastructure in the years ahead and the subsector is becoming more popular at home as the new Administration is likely to focus on it. Recent acquisitions and asset rotations should also boost earnings this year. BUY
Chevron Corp. (CVX) Yield 5.6%
It’s been a rough week for the oil giant. On Friday, Chevron posted fourth quarter earnings that missed expectation with a $.01 EPS loss and 30% lower revenue than a year ago. But everybody already knew 2020 stunk for energy and there was likely some piling of dirty laundry into an already ugly year and quarter.
CVX fell 4.5% on the news and presents a buying opportunity ahead of what will be a much improved year. There have also been rumors about a merger with Exxon Mobile (XOM) which is unlikely anytime soon. The stock should benefit greatly as the recovery gain traction in the months ahead. This is likely the last of the crummy news from the pandemic stricken year. BUY
Digital Realty Trust, Inc. (DLR)
This one is working so far. The stock was trading near the low point of the short-term pattern in a longer-term upward trend when it was highlighted in the January issue last week. It’s a solid REIT in a growth business that doesn’t stay cheap for very long. It’s up already since being recommended last week. I will look to write a call when the stock is at a higher price in the future. BUY
Valero Energy (VLO) Yield 7.0%
This story is much the same as CVX above. It reported lousy earnings to finish a terrible 2020 but much better days lie ahead as a full recovery gains traction. But VLO is much more levered to a recovery and will likely have a lot more upside if and when it comes to fruition. I will look to write a call when the stock embarks on another upside run and surpasses the post vaccine high. BUY
Existing Call Trades
Sell BGS February 19 $27.50 call at $2.40 or higher
Recent incredible action has negated this strategy. The calls were targeted at a strike price below the market in anticipation of a wallowing stock price in the near term. But recent speculation has driven the price up into the 30’s, and well beyond what was expected, versus a strike price of 27.50. The current call price is well above the target of 2.40 at 9.60. It doesn’t make sense to buy back the calls. But if you own the shares and have not written these calls already it is a worthwhile trade, as recent speculation is likely to fade.
Even though the stock has not behaved as expected, we are set up to lock in a double digit return in a short time regardless of whether the stock is called or not on February 19th.