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Income Advisor
Conservative investing. Double-digit income.

February 17, 2021

While the rest of the year looks very good for the market, a pullback is likely, if not inevitable, in the weeks and months ahead.

The Rally Continues Amidst Stunning Earnings
It’s another day and another new all-time high for the market.

The big story on this latest leg higher is earnings. They’ve been terrific so far. Analysts had been expecting S&P 500 earnings to decline by -11% on average versus the same quarter last year, as pandemic restrictions persist. But so far, earnings have averaged a year-over-year increase of 2%. Corporate profits are rebounding much faster than expected.

Think about that. Companies are already earning more than they did before the pandemic, and the economy still has one arm tied behind its back. That’s hugely encouraging ahead of what is likely to be a full recovery later in the year and an economy drowning in stimulus for good measure.

Of course, once the full recovery arrives, there are other concerns. All that growth and easy money is likely to put upward pressure on interest rates. And the Fed may become much less accommodative. As well, while the new administration will be more generous with stimulus spending, there could also be higher taxes and more regulation beyond the pandemic.

But that’s later. Wall Street doesn’t care about later. The rest of this year looks terrific. Moving beyond this pandemic is all that matters now.

Despite the rosy 2021 outlook, the Nasdaq is already 10% higher for the first six weeks of the year and the S&P is up 5%. The S&P index is also up over 20% since the beginning of November and a staggering 80% since the low of last March. This pace can’t last. And the market usually evens out the pace with a correction or consolidation, not just a slower ascent.

While the rest of the year looks very good for the market, a pullback is likely, if not inevitable, in the weeks and months ahead. Many recent stock price gains can be viewed as temporary. That’s okay. It’s a good time to write calls and ensure high premiums during the market bender. And a selloff will likely present a buying opportunity ahead of a strong year beyond the consolidation.

In last week’s issue, we wrote calls on recently high-flying Valero Energy (VLO). Be on the lookout for “Trade Alerts” in your email as there will likely be timely opportunities in the weeks ahead.

Trades this month
January 15th
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

January 27th
Purchase Digital Realty Trust (DLR) $149.17

February 10th
Sell VLO March 26 60 call at $6.50 or better

Stock Portfolio Recap
AGNC Investment Corp. (AGNC) Yield 8.8%
This high-paying mortgage REIT has been doing exactly what I thought it would do since being added to the portfolio: trending higher very slowly. Things look good going forward as interest rate spreads should continue to grow in the improving economy. Meanwhile, the stock continues to pay a huge yield on a monthly basis. We’ll look to write a call at a higher price and probably go out to an expiration date that’s further out than normal to collect more dividends. BUY

B&G Foods, Inc. (BGS) Yield 5.8%
The stock price for this packaged food company is settling in the low 30 after running amok during the “short squeeze’ trading frenzy a few weeks ago. Somehow, all the mania seems to have made investors realize that the stock was undervalued, and the price has run higher faster than I thought it would. As a result, the calls, with a strike price of 27.50 compared to the current 32.61 share price, are likely to be called on Friday. That’s okay. The BGS experience in the portfolio will still provide a total return of 13.4% in three and a half months between appreciation, the dividend and the call. HOLD

Brookfield Infrastructure Partners (BIP) Yield 3.8%
This infrastructure partnership has a rough week. BIP has fallen more than 6.5% since the close on February 4. The only news was that the partnership made an offer to buy Canadian midstream energy company Inter Pipeline for $5.6 billion. Inter scoffed at the offer as too low and nothing has yet gone through. It’s a good time to buy this company at a bargain price after a recession. The market is likely reacting negatively to the company rejecting the offer on fears that Brookfield will end up paying too much. We’ll see.

It looks like an overreaction to a stock that seldom has news. The prospects for this year still look great as earnings should be on the rise with the recovery and $2.5 billion in acquisitions from last year boosting earnings. And infrastructure stocks are likely to become more popular with investors during the new administration. BUY

Chevron Corp. (CVX) Yield 5.7%
This best-in-class energy giant has been bouncing around in a range since rising sharply after the vaccine announcement in November. I like the prospects for the rest of the year as energy companies should see sharply rising profits as the full recovery gains traction. We purchased the stock at the bottom of the current range and have an 8% unrealized gain so far. I will wait until CVX climbs near the top of the recent range to write a call. It has about another 3 per share to go. BUY

Digital Realty Trust, Inc. (DLR) Yield 3.2%
This data center REIT announced earnings that beat expectations but the stock floundered. Results were helped by last year’s acquisition of Interexion in March of last year. But margins were lower and the company didn’t forecast an improvement in 2021. Despite recent action DLR still has a lot of things going for it right now. It’s in a growth business, trading near the lower range in a long-term uptrend, and it has a beta of just 0.11, meaning it doesn’t move with the overall market. BUY

Valero Energy (VLO) Yield 7.0%
The refiner stock continues to look very strong. It is breaking out to a new post-vaccine high after running 8.5% higher so far in February. I’m very bullish on Valero’s prospects for the rest of this year as a full recovery will surely boost profits and the stock price. But it could still bounce around in the near term. And we just wrote calls on the shares at the below-market strike price of 60 per share. It sets us up for great returns in the stock no matter whether it gets called or not. BUY

Existing Call Trades
Sell BGS February 19 27.50 call at $2.40 or higher
The stock appears all but certain to be called away on Friday at a strike price of 27.50 per share (currently 32.60). As I mentioned above, a weird set of circumstances propelled the stock to higher prices than expected in the given time frame. Sure, if we could have seen into the future we would have simply taken a profit on the stock during the trading frenzy (like we did in CDI). But the consolation prize is a 13.4% income.

Sell VLO March 26 60 call at $6.50 or better
These calls closed on Friday at exactly the target price of 6.50. But the stock is likely to be higher today. It’s up 2.5% in pre-market trading. You will likely be able to get better than the 6.50 per call during the trading day. If you haven’t done so already, you can sell covered calls against the position today.

The stock could easily run away and get called, with the below current market 60 per-share strike price. But you never know what the market will do over the next six weeks. If the shares are called, you will get a strong total return in a short time. If not, you lock in a huge income and can ring the register again with more calls and dividends in the future.