The Market Holds Steady
After a lightning quick 46% move from the bottom, the rally has stopped. The S&P 500 has sort of been bouncing around sideways since the post-bottom high a month ago. Now what?
I think the market is showing a lot of resilience. The rally had to take a breather at some point. But given the steep rise in record time, it could have been an ugly breather. After running out of gas a month ago, the S&P 500 is only down less than 3% from the recent high. And it’s holding up despite news of increasing virus cases and stalls and stumbles in the economic restart.
It is becoming increasingly likely that the country will not go back into lockdown mode even if the virus continues to spread, or even if there is a second wave later in the year. The economy is coming back much stronger than economists thought, and the market sees a booming economy in the quarters ahead that the virus is unlikely to derail.
As of now, the S&P 500 is just a little more than 7% below the all-time high. The rally may resume, but it’s hard to see the market moving much past the all-time high in the near term. The economy may be headed in the right direction, but it’s still in shambles. There are still risks out there with this virus. Plus, uncertainty regarding the election in November is a growing concern beyond the virus.
In terms of income, this sideways market is having a negative effect on call premiums. As the market is no longer in a clear uptrend, it has become harder to find attractive call prices as fewer investors are willing to bet on higher future prices. Good premiums can still be found on a case-by-case basis, but it’s not as easy as it was a month ago.
The good news is that there are still a lot of high yields out there. The overall market has moved a lot higher in the last several months, but many stocks are still cheap and high yielding. There are still some of the highest yields in a decade. All things considered, it’s still a good environment for income.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 4.8% — The story of the week for ABBV is performance. The stock just made a new 52-week high, which is bullish for near-term performance. It is continuing a steep rise ever higher since the March bottom. The stock had been on a tear before the bear market too as investors increasingly realized it likely has enough firepower in new drugs and the Allergan merger to replace future losses of Humira revenue to generic competition. After a rude coronavirus interruption, the stock is picking up where it left off. Despite making a 52-week high, ABBV is still a good value selling over 30% below the 2018 high and at just 10 times forward earnings. BUY
Altria (MO) Yield 8.3% — You wouldn’t know it from recent performance (down 20% YTD), but this is one of those companies that is actually benefitting during the pandemic. People are smoking more and MO should see a strong increase in earnings in the next few quarters. But the market just focuses on the disastrous JUUL acquisition, even though that is already factored into the price. Altria generates more than enough free cash flow to continue to pay the dividend. The stock trades at a ridiculous valuation of 9 times forward earnings. A couple of years ago it was selling at more than 20 times forward earnings. That’s okay; if the stock doesn’t move higher by the end of the month, we’ll write another call and get more income. BUY
Brookfield Infrastructure Partners (BIP) Yield 4.7% — This global infrastructure partnership is still in an uptrend, albeit a gradual uptrend with ups and downs along the way. With 95% of revenues contracted or regulated, this is an ideal stock to own in a recession. The stock should also behave well after the economy recovers too as infrastructure investments become increasingly popular. BIP is off about a dollar since I first recommended it on June 24, so the call price is pretty far off the target. But I’ll leave the target price the same and be patient for now. BUY
Enterprise Product Partners (EPD) Yield 10.1% — This energy midstream titan does not deserve to be this low priced. EPD is down 34% for the year and it trades 57% below the 2014 high. But earnings have been growing at a good clip. Earnings growth will be interrupted for a few quarters but the trend is still higher. In the first quarter, distributable cash flow was only down 4.5%. And the business should be quick to rebound as the economy restarts. The market will realize the value eventually. In the meantime, the dividend is extremely well covered and safe. BUY
Innovative Industrial Properties (IIPR) Yield 4.4% — The stock of this marijuana farm REIT is up from where we recommended it (91.75 versus 87.62) but the stock bounces around a lot with the market. Since the purchase date on June 2, IIPR has been as high as 99.62 and as low as 86. The stock is well worth the volatility because the company is making money and growing like crazy. It now has 58 properties, the up from 45 at the beginning of this year and 11 at the beginning of 2019. Despite the volatility the stock is still up 22% YTD, and still a value at 30% below the 2019 high, when earnings were far lower than they are now. The call written expires on July 17 with a strike price of 95. If the stock closes below the price on expiration, we can write more calls later. BUY
Qualcomm inc. (QCOM) Yield 2.8% — QCOM continues to trend higher. Having recovered from the market selloff in early June, the stock just hit a post-March bottom high and isn’t that far from the 52-week high (92.14 versus 96.17). This stock should benefit mightily as 5G rolls out. It sells the only good 5G smartphone chip and has contracts with 30 different producers. As that revenue boost gets closer, the stock is behaving better. The call written has a strike price of 95 and expires in September. There is a good chance the stock closes above that price on expiration, but you never know. We’ll see what kind of mood the market is in come September. BUY
Covered Call Recap
Sold MO July 31 $42 call at $1.60
Although the stock price is only down about a dollar since the day the call was written (June 17), the call is currently priced at just $0.60, well below the $1.60 price on that day. The lower price and the expiration of time premium explain the drop. I’m perfectly happy if MO doesn’t reach the 42 strike price by the end of the month. That way we can keep the stock and collect more dividends and call premiums.
Sold IIPR July 17 $95 call at $3
The expiration date is only nine days away and the stock is more than 3 below the strike price of 95. It could easily be above 95 by July 17 and it could easily be below. A lot depends on how the market behaves. The passage of time has lowered the call premium to $1.70 at yesterday’s close. If the stock surpasses the strike price on the 17th, the stock will be called away and we’ll get a double-digit return in a short time. If not, that’s good too. As a fast-growing stock with a lot of upside potential, IIPR can fetch some fat call premiums, and we’ll do this again
Sold QCOM September 18 $95 call at $4.30
This call premium has moved higher ($5.05 at the close yesterday) since the call was written in June 24 because the price has moved higher. This stock is in an uptrend, and it is probable that the stock closes above that price by September. Of course, expiration is more than two months away and you never know how the market will be behaving by September.
Pending Trades
Sell BIP September 18 $45 call at $2.10 or higher
These two pending trades were targeted the day before the issue came out. On the issue day, the market was down significantly, and you have not been able to get these targeted prices since. In the case of BIP, it’s still worth leaving the $2.10 or higher target in place. The call is only $0.95 at the close yesterday, but September is still far away and the price could move higher in the next few weeks.
Sell EPD August 21 $21 call at $0.65 or higher – REMOVE TRADE
The stock price is down since the above call price was targeted and two weeks have gone by. As a result, this call is priced at just $0.10. It makes sense at this point to remove the trade and look to write another call when the stock has better momentum, or perhaps at a lower strike price.