Investor Look to Earnings for Direction
It’s another week of more of the same. The three major indexes are very near the all-time highs, but still not really going anywhere.
The market is boring for a couple reasons. One reason is the summer malaise. The same lackluster attitude investors have about life in the summer, they have about the market. Activity tends to dry up, at least relative to the rest of the year. The other reason is earnings. Reports will start coming in and investors are waiting to see what earnings bring.
Expectations are for one of the best earnings quarters ever. The consensus estimate is that the average S&P 500 company will report 63% earnings growth over last year’s quarter. Although earnings have tended to exceed expectations, it will be pretty tough to thrill a market that already expects 63% earnings growth.
I suspect investors will be looking at forecasts for the rest of the year and beyond the pandemic. As I’ve mentioned, the market is struggling to see what the other side of the pandemic recovery will be like when growth is slowing and the stimulus slows to a trickle. Earnings forecasts could give investors a clue that they don’t really have yet.
Meanwhile, the sideways market has made it tough to find rich call premiums. But I found a good one this week. Brookfield Infrastructure Partners has been quietly approaching the all-time high. While I like the prospects for the stock over the remainder of the year, it could flounder in these summer months. It’s a great way to keep ringing the register in a sideways market.
Trades this month
June 15th
Sell DLR July 16th $155 calls at $8.00 or better
June 18th
AGNC June 18th $17 call at $0.50 - Expired
KKR June 18 $55 calls at $3.00 - Expired
USB June 18 $57.50 calls at $2.80 - Expired
KKR & Co. stock (KKR) – Called at $55
July 14th
Sell BIP August 20th $55 calls at $2.00 or better
June 23rd
Sell AGNC August 20th $17 calls at $0.50 or better
Sell OKE August 20th $57.50 calls at $1.65 or better
Trade Alert: Sell BIP calls
Sell BIP August 20th $55 calls at $2.00 or better
Expiration date: August 20th
Strike price: $55
Call price: $2.00
Brookfield Infrastructure Partners (BIP)
The stock has been trending higher and is within pennies of the all-time high. Since BIP is a slow-moving stock, it doesn’t generate particularly high call premiums. That’s why we are writing slightly in-the-money calls, the stock price is currently over 56 per share. While I do like the prospects for BIP over the remainder of the year, it may flounder in these summer months as the summer malaise meets a slow-moving stock. It’s an opportunity to ring the register for income in a sideways summer market.
The calls are currently selling slightly below the targeted price of 2.00 per call at 1.87. You may not be able to get the price right away. But there is a good chance the price is reached in the next couple of days. A little patience should deliver a higher call premium.
Here are the three scenarios.
- The stock closes above the $55 strike price at expiration
Call premium: $2.00
Dividend: $0.51 (June 30th)
Dividend: $0.51 (March 30th)
Appreciation: $4.37 ($55.00 strike price minus 50.63 purchase price)
Total: $7.39 (total return will be 14.6% in eight months)
- The stock price closes below our $55 strike price.
Call premium: $2.00
Dividend: $0.51
Dividend: $0.51
Total: $3.02 (total income return of 6% in eight months)
- The stock price declines.
The decline will be offset by the $3.02 in income. Of course, the stock price is still likely to be above the original 50.63 per share purchase price.
Stock Portfolio Recap
AGNC Investment Corp. (AGNC) Yield 8.5%
The stock has been hurt by the flattening yield curve as the 10-year Treasury rate has fallen. It was anticipated that AGNC would benefit from a rising yield as spread and profits increase, and the price rose in anticipation. I still like the stock because business is still good and will continue to be for a while in the strong economy. The high yield is safe as well. Plus, the decrease in longer interest rates may prove to be very temporary and they could rise over the rest of the year. BUY
Brookfield Infrastructure Partners (BIP) Yield 3.6%
Ever so quietly, this infrastructure partnership is moving right back toward the all-time high achieved at the beginning of this month. It is trending unmistakably higher, although in a somewhat bouncy fashion. Brookfield also should post strong earnings growth next month as new projects boost the bottom line and its transportation assets rebound in the recovery. As well, the infrastructure subsector could see a spike in investor interest if Congress passes any kind of infrastructure bill. HOLD
Digital Realty Trust, Inc. (DLR) Yield 2.9%
DLR was merrily sailing along making new all-times highs when it got slapped in the face by the REIT selloff last month. But the stock has been grittily climbing back and looks to be heading right back to those highs, albeit slowly. This is solid niche REIT in the fast-growing but highly competitive data center property business. But it’s more REIT than tech stock. It tends to move slowly, but in the right direction over time. Options expire on Friday and DLR is currently in-the-money. But it’s close. We’ll see. HOLD
Enterprise Product Partners (EPD) Yield: 7.4%
This massive American midstream energy company moves slowly. It’s also still a long way from the pre-pandemic price despite the huge rally in the energy sector. But very quietly EPD has return over 30% YTD. And things look good from here. Business should be booming in the full economic recovery, the massive distribution is rock solid, it sells at a dirt-cheap valuation, and it’s trending the right way. BUY
NextEra Energy Inc. (NEE) Yield 2.1%
I believe in alternative energy. It’s only a matter of time before the market shows the sector the love it recently did. NEE was probably the best way for conservative investors to play the high-growth trend, and the stock was an up-trending juggernaut. Performance not only blew away the utility sector but the S&P 500 as well. It’s been knocked back for now amidst the cyclical rally and I believe that presents a great buying opportunity. BUY
ONEOK, Inc. (OKE) Yield 6.7%
This midstream energy company stock, in the form of a regular corporation, is just like EPD except is moves faster and it’s more volatile. Since I expect good things from midstream energy stocks over the rest of the year, the extra volatility makes OKE even better. It still has a long way to go to get back to the pre-pandemic high, but ONEOK has much better earnings and stronger growth prospects than it did then. It’s a travesty that the stock is still this cheap. BUY
Qualcomm (QCOM) Yield 1.9%
I like the recent action in this 5G chip-maker stock. It’s not definitive. But I’ll take it. After a huge move, QCOM has been languishing along with most of the tech sector since February. I think it’s just a consolidation ahead of another surge. Last quarter’s earnings were sensational. And this quarter should be great as well. The stock might be on the move already, but it’s still too early to tell. We’ll see. BUY
U.S. Bancorp (USB) Yield 3.3%
Forget the latest yield curve trend. This is a great bank that will benefit mightily amidst the full recover even if interest rates don’t rise. The quick money may be over for the most part, but USB should continue to trend higher in a strong environment for banks that should last at least another year. Plus, there is a good chance the yield curve steepens from here. HOLD
Existing call trades
Sell DLR July 16th $155 calls at $8.00 or better
It’s been a wild ride since these calls were written when the stock was near the high. A few days later DLR came tumbling down as REITs sold off after last month’s Fed meeting. But the stock has been creeping back for a while and the price is currently over 156 per share while option expire Friday at a strike price of 155. It will be close. Either way, we’re set up for a great return.
Sell AGNC August 20th $17 calls at $0.50 or better
We wrote these call right after the other calls expired. It’s a good thing because AGNC has trended lower since and the calls are priced well below the target at just 0.14 per call. I think the pressure on the stock, like the fall in the ten-year Treasury rate, is temporary. And the call premium is the equivalent of over four months of dividends.
Sell OKE August 20th $57.50 calls at $1.65 or better
The midstream energy company stock is bouncing around. This week it bounced down. As a result, the calls have fallen below the target price at 1.35. It’s too early to tell where the stock price will be a month from now when the options expire. But if the price moves above the strike price by expiration, chances are the other midstream energy stocks will be up too. And we’ll still own EPD.
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 7/2/21 | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp. | AGNC | 01/13/21 | 15.52 | 16.94 | 17.00 | 8.50% | 13.87% |
| Brookfield Infrastructure | BIP | 01/13/21 | 50.63 | 56.09 | 53.00 | 3.64% | 12.93% |
| Digital Realty Trust | DLR | 1/27/21 | 149.17 | 150.27 | 155.00 | 3.09% | 2.33% |
| NextEra Energy, inc. | NEE | 2/24/21 | 73.76 | 74.28 | 80.00 | 2.07% | 1.77% |
| Enterprise Product Partners | EPD | 3/17/21 | 23.21 | 24.59 | 25.00 | 7.35% | 8.36% |
| U.S. Bancorp | USB | 3/24/21 | 53.47 | 57.57 | 55.00 | 3.20% | 9.28% |
| Qualcomm Inc. | QCOM | 5/5/21 | 134.65 | 142.58 | 140.00 | 1.91% | 6.43% |
| ONEOK, Inc. | OKE | 5/26/21 | 52.51 | 57.39 | 60.00 | 6.52% | 9.29% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Price on 7/2/21 | Sell To Price or Better | Total Return |
| DLR Jul 16 $155 call | DLR210716C00155000 | Sell | 6/9/21 | 8.00 | 2.55 | 8.00 | 5.36% |
| AGNC Aug 20 $17 call | AGNC210820C00017000 | Sell | 6/23/21 | 0.50 | 0.38 | 0.50 | 3.00% |
| OKE Aug 20 $57.50 call | OKE210820C00057500 | Sell | 6/23/21 | 1.65 | 2.20 | 1.65 | 3.14% |
| SOLD STOCKS | |||||||
| Security | Ticker Symbol | Action | Entry Date | Entry Price | Sale Date | Sale Price | Total Return |
| Innovative Industrial Props. | IIPR | Called | 6/2/20 | 87.82 | 9/18/20 | 100.00 | 15.08% |
| Qualcomm | QCOM | Called | 6/24/20 | 89.14 | 9/18/20 | 95.00 | 7.30% |
| U.S. Bancorp | USB | Called | 7/22/20 | 36.26 | 9/18/20 | 38.00 | 3.42% |
| Brookfield Infras. Ptnrs. | BIP | Called | 6/24/20 | 41.92 | 10/16/20 | 45.00 | 8.49% |
| Starbucks Corp. | SBUX | Called | 8/26/20 | 82.41 | 10/16/20 | 88.00 | 6.18% |
| Visa Corporation | V | Called | 9/22/20 | 200.56 | 11/20/20 | 200.00 | 0.00% |
| AbbVie Inc. | ABBV | Called | 6/2/20 | 91.04 | 12/31/20 | 100.00 | 12.43% |
| Enterprise Prod. Prtnrs. | EPD | Called | 6/24/20 | 18.14 | 1/15/21 | 20.00 | 15.16% |
| Altria Group | MO | Called | 6/2/20 | 39.66 | 1/15/21 | 40.00 | 7.31% |
| U.S. Bancorp | USB | Called | 11/25/20 | 44.68 | 1/15/21 | 45.00 | 1.66% |
| B&G Foods Inc, | BGS | Called | 10/28/20 | 26.79 | 2/19/21 | 28.00 | 4.42% |
| Valero Energy Inc. | VLO | Called | 8/26/20 | 53.70 | 3/26/21 | 60.00 | 11.73% |
| Chevron Corp. | CVX | Called | 12/23/20 | 85.69 | 4/1/21 | 96.00 | 12.95% |
| KKR & Co. | KKR | Called | 3/24/21 | 47.98 | 6/18/21 | 55.00 | 14.92% |
| EXPIRED OPTIONS | |||||||
| Security | In/out money | Sell Date | Sell Price | Exp. Date | $ Return | Total % Return | |
| IIPR Jul 17 $95 call | out-of money | 6/3/20 | 3.00 | 7/17/20 | 3.00 | 3.40% | |
| MO Jul 31 $42 call | out-of-money | 6/17/20 | 1.60 | 7/31/20 | 1.60 | 4.03% | |
| ABBV Sep 18 $100 call | out-of-money | 7/15/20 | 4.60 | 9/18/20 | 4.60 | 5.05% | |
| IIPR Sep 18 $100 call | in-the-money | 7/22/20 | 5.00 | 9/18/20 | 5.00 | 5.69% | |
| QCOM Sep 18 $95 call | in-the-money | 6/24/20 | 4.30 | 9/18/20 | 4.30 | 4.82% | |
| USB Sep 18 $37.50 call | in-the-money | 7/22/20 | 2.00 | 9/18/20 | 2.00 | 5.52% | |
| BIP Oct 16 $45 call | in-the-money | 9/2/20 | 1.95 | 10/16/20 | 1.95 | 4.65% | |
| SBUX Oct 16 $87.50 call | in-the-money | 10/16/20 | 3.30 | 10/16/20 | 3.30 | 4.00% | |
| V Nov 20 $200 call | in-the-money | 9/22/20 | 10.00 | 11/20/20 | 10.00 | 4.99% | |
| ABBV Dec 31 $100 call | in-the-money | 11/18/20 | 3.30 | 12/31/20 | 3.30 | 3.62% | |
| EPD Jan 15 $20 call | in-the-money | 11/23/20 | 0.80 | 1/15/21 | 0.80 | 4.41% | |
| MO Jan 15 $40 call | in-the-money | 11/25/20 | 1.90 | 1/15/21 | 1.90 | 4.79% | |
| USB Jan 15 $45 call | in-the-money | 11/25/20 | 2.00 | 1/15/21 | 2.00 | 4.48% | |
| BGS Feb 19 $27.50 call | in-the-money | 12/11/20 | 2.40 | 2/19/21 | 2.40 | 8.96% | |
| VLO Mar 26 $60 call | in-the-money | 2/10/21 | 6.50 | 3/26/21 | 6.50 | 12.10% | |
| CVX Apr 1 $95.50 call | in-the-money | 2/19/21 | $4.30 | 4/1/21 | $4.30 | 5.02% | |
| AGNC Jun 18 $17 call | out-of-money | 4/13/21 | $0.50 | 6/18/21 | $0.50 | 3.21% | |
| KKR Jun 18 $55 call | in-the-money | 4/28/21 | $3.00 | 6/18/21 | $3.00 | 6.25% | |
| USB Jun 16 $57.50 call | out-of-money | 4/28/21 | $2.80 | 6/18/21 | $2.80 | 5.24% | |