The Rally Takes a Breather
The S&P 500 was up 20% in the second quarter. It was the best quarter for the market in decades. That’s what the headlines say. But they are a little misleading.
The market hit a recent high on June 8th and has since pulled back a little and moved sideways. On that day, the market had moved 46% higher in less than three months, the fastest such rise in history. The second quarter time frame tells the same story but not nearly as good.
The market couldn’t continue to rise at that pace forever. The rally was bound to sputter. But the reason for the interruption is concerning. The number of virus cases is on the rise, and many states are pulling back on the economic restart measures. The market had been factoring in a booming economy in the second and third quarters. And recent events threaten to put a real kink in that outlook.
That said, the market seems to be handling the bad news well so far. A minor pullback after that epic rise doesn’t reflect panic or even that much disappointment. Part of the reason is the fact that the bad news is being somewhat offset with good economic news. Key metrics like retail sales and payrolls grew far more last month than any economists were expecting.
It looks like an even more quick and powerful rebound than anticipated is being disrupted a little bit, temporarily. So far, the market is taking the bad virus news better than I had expected. This still looks like a market that wants to go higher.
That said, there are still a lot of risks. No one knows how the virus will play out or if there will be a second wave later in the year. There is also tremendous uncertainty regarding the election in November, and a plethora of other more garden variety risks.
For that reason, I am remaining cautious with the portfolio positions. The picks so far should offer downside resilience and/or a very quick rebound if the market turns south. The changing direction of the market does reduce the ability to get high call premiums. But we locked in good ones while the getting was good. And the market could still resume its ascent.
Portfolio Recap
AbbVie Inc. (ABBV) Yield 4.9% —The stock looks strong here, up over 40% in the last three months and close to the 52-week high. It looks good both technically and fundamentally. ABBV is well above the 50 and 200 day moving averages and expected to grow earnings 17.9% in 2020. The company’s ability to replace Humira revenues seems increasingly likely as its newly launched drugs continue to impress, the merger with Allergan adds diversification, and management expects to launch 20 new drugs and line extensions by the time Humira losses patent protection in the U.S. in 2023. Although the stock is near the 52-week high, it is still cheap at 40% below the 2018 high. BUY
Altria (MO) Yield 8.3% —Guess what? During this pandemic and recession people smoke more. Analysts estimate that smoking volume decline will fall to 1% to 2% in the second quarter, down from a projected average of about 4% to 6%. It’s also true that E-vapor sales are 25% below the 2019 peak as bad press and regulatory scrutiny hinder that business. While that’s bad for Atria’s JUUL acquisition, people smoke more cigarettes instead. This is a company that continues to grow earnings and at a better clip during this crisis. The stock price is cheap and the dividend is safe. It’s a good buy in this market. BUY
Brookfield Infrastructure Partners (BIP) Yield 4.8 —The global infrastructure company is down slightly since it was recommended in last week’s June issue. That’s okay. The stock is still in an uptrend since the lows of March and the business is well suited to endure this pandemic crisis and thrive beyond. Reliable revenue from its portfolio of monopolistic and crucial assets makes it sound in any economy and growing global infrastructure investment makes infrastructure an increasingly popular investment subsector. Because of the downward move in the price this week, the targeted call price was never reached. For now, the target price will be kept as the stock price may continue to bounce back. BUY
Enterprise Product Partners (EPD) Yield 10.0% —This American energy midstream giant closed yesterday at the same price as on the day of the June issue when it was recommended. Although the energy sector has been decimated and troubles may linger, Enterprise earns revenue from the service of piping and storing oil and gas and is not dependent on commodity prices. Operationally, this company is much more stable than its sector may indicate. In the first quarter, distributable cash flow was only down 4.5%. And the business should be quick to rebound as the economy restarts. In the meantime, the distribution is safe and you collect a 10% yield while you wait for the stock to recover. The targeted call price on this stock is still well below the current price. I will keep it in place in case the stock moves higher over the next week or so. BUY
Innovative Industrial Properties (IIPR) Yield 4.4% —The stock of this marijuana farm REIT is down a lot over the past couple of weeks (11.4%) and off slightly since was first recommended on June 2nd. The stock can be volatile with the overall market and it fell as the market sold off. It didn’t rebound because the IIPR announced a 2.68 million share offering priced at 83.85 per share. Such announcements typically have a temporary negative effect on the price as it dilutes current shareholdings. However, new offerings are to be expected for a REIT that is growing as fast as this one. Innovative has a track record of investing the money in a way that more than offsets the dilution and the price dip should be temporary. In the meantime, the call was sold at a 95 strike price (currently 88) and expires on July 17th. BUY
Qualcomm inc. (QCOM) Yield 2.9% —The 5G chipmaker has been in a strong uptrend since the low of March and it is very well positioned for the future as the rollout of 5G will boost revenue and earnings. This week it released a new Snapdragon chip for wearable devices and the market reacted positively. But the main event will be the 5G-enabled smartphones which will have the Qualcomm chips. It may bounce around with the market in the near term but a very bright future awaits in the post pandemic market. In the meantime, we were able to get the targeted call price with the 95 per share strike price. BUY
Covered Call Recap
Sold MO July 31 $42 call at $1.60
The trade is priced from June 17th, the day of that week’s update. The call currently sells at $0.55. The call is lower priced because the stock price is 1.61 lower than it was then (39.25 versus 40.86), but also because MO had more upward momentum at that time.
Sold IIPR July 17 $95 call at $3
This call trade is priced from June 3rd, the day of the special alert. However, for most of that day and the next you could have sold the call for 4, but I will use 3, the price at which I first issued the alert. That call is only at 1.20 now as the price has moved lower. There is a little more than two weeks left until expiration. If the stock does not again reach the 95 price on that day, we can write more calls in the future.
Sold QCOM September 18 $95 call at $4.30
From the June issue on the 24th, this call price is now 4.85. The stock price has moved higher by a little over 2 in the week (now at 91.21). The stock is still below the 95 strike price but could easily reach it in September if the market isn’t down. If the stock does go beyond the strike price you’ll still get a double digit return and, if not, there should be plenty of opportunity for more calls in the future.
Pending Trades
Sell BIP September 18 $45 call at $2.10 or higher
Sell EPD August 21 $21 call at $0.65 or higher
These call prices were targeted the day before a big down day and a down week. While the current prices are well below the above prices now, that could change over the next week. So, you can continue to target those prices for now.