Earnings Explode, and the Market Yawns
It’s a crazy earnings season that the market is treating like a boring one.
The second quarter marked the near-full opening up of the economy after the pandemic. It is compared to last year’s second quarter when the economy crashed amidst the lockdowns. Analysts are expecting average earnings growth of 74% for S&P 500 companies, one of the highest quarterly growth rates ever recorded.
So far, earnings are exceeding those expectations. And the market is yawning it off. Stocks are doing the same thing as before earnings, trending slightly higher in an up and down fashion. What’s going on?
The market anticipates and already expected great earnings. That’s what the rally at the beginning of the year was about. The market cares what lies ahead. And earnings are not providing that much clarity so far.
It’s also the summer. In these waning days of summer, investors tend to focus on other things. The market tends to do whatever it was doing before investors went on vacation and stopped paying attention.
Right now, investors are more worried about growth on the other side of the pandemic recovery than inflation. There is inflation but the market seems to feel it will be temporary, at least for now. Meanwhile, it’s trying to figure out what will drive stocks higher after things normalize and growth has to be earned the old-fashioned way.
There is no major narrative that is gaining traction. And there probably won’t be for the rest of the summer. But not all stocks fit the mold of the overall market. In particular, portfolio positions NextEra Energy (NEE) and Qualcomm (QCOM) are showing strong relative strength.
That said, we’re not pulling the trigger yet and writing calls on those two stocks. There is a good chance they trend higher in the weeks ahead and I don’t want to cash in on an opportunity that is getting better every week. But things can change. Keep an eye out for Trade Alerts in your email.
Trades this month
July 14th
Sell BIP August 20th $55 calls at $2.00 or better - pending
July 16th
DLR July 16th $155 calls at $8.00 – Expired
Digital Realty Trust stock (DLR) – Called at $155
July 28th
Purchased One Liberty Properties, Inc. (OLP) - $30.37
Sell BIP August 20th $55 calls at $2.00 or better – Remove
Stock Portfolio Recap
AGNC Investment Corp. (AGNC) Yield 9.1%
The weakness continues and this mortgage REIT continues to trade around 16 per share after reaching a high of nearly 19 per share in early June. It’s all about the yield curve. AGNC benefits as the yield curve steepens and it earns more net interest income on the difference between short-term rates, at which it borrows, and long-term rates, at which it lends. The 10-year Treasury yield has fallen all the way to 1.17% from a post-pandemic high of 1.75% at the end of March.
Despite solid earnings that beat expectations, the stock continues to languish. Long-term rates continue to fall with no evidence of a shift in direction, despite a booming economy and persistent inflation. The market remains skeptical of growth and inflation beyond the pandemic recovery. That may change. For now, the economy is strong, and the dividend is solid. Plus, we milked the stock for a nice call premium. BUY
Brookfield Infrastructure Partners (BIP) Yield 3.8%
On the one hand, this infrastructure partnership is still trending higher as it makes a series of higher highs and higher lows. On the other hand, the pace of appreciation is so slow you can’t see it without a magnifying glass and the stock is currently at the same price it was in late March. But it’s a very defensive business that should grow this year as new projects come on line and its transportation assets rebound. Maybe the earnings announcement later this week will get it going. HOLD
Enterprise Product Partners (EPD) Yield 8.0%
The midstream energy partnership reported earnings last week that beat expectations but have so far failed to impress. Volumes in most products continue to increase to near 2019 levels, although there is still some weakness in export volume. It showed a continuing recovery in volumes overall and solid increases in earnings and cash flow. But it was nothing mind-blowing. EPD has been suffering a bout of weakness along with the rest of the midstream energy sector since mid-June as the cyclical trade went out of vogue. But EPD remains on a longer-term uptrend, for now. BUY
NextEra Energy Inc. (NEE) Yield 2.0%
It looks like this alternative energy utility is benefitting as investors sour on the cyclical stocks. NEE has been trending nicely higher since the moment cyclical stocks started to weaken in June. It’s a great stock for the longer term as alternative energy continues to grow at warp speed and it gets cheaper to produce. But NEE has had an uncharacteristic subpar year in the open-up craziness. Recent strength and weakness in the stock has been anchored to short-term factors. But now, the short-term factors are benefitting NEE and the long-term prognosis is excellent. BUY
One Liberty Properties, Inc. (OLP) Yield 5.9%
This up-tending diversified industrial REIT announces earnings later this week. Anything can happen. But there is no reason not to expect good things. The business model has a long track record of delivering solid results. OLP has been trending higher in this summer market and, hopefully, earnings will provide a boost and enable us to write attractive calls in the near future. BUY
ONEOK, Inc. (OKE) Yield 7.2%
The midstream energy space has been under pressure since June and OKE has exaggerated the down move in the sector. The stock is down about 12% in the past month. But ONEOK will report earnings after the close on Tuesday. The company was extremely resilient through the pandemic. And the midstream company has seen significant upward earnings revisions ahead of the quarter, which usually precedes an earnings beat. Maybe it can turn things around. BUY
Qualcomm Corp. (QCOM) Yield 1.9%
The 5G chipmaker delivered another blowout quarter last week, thrashing estimates and raising guidance. Go figure, Qualcomm is making a fortune on royalties as 5G phones are selling like hotcakes. The company is managing to overcome the global ship shortage problem and is firing on all cylinders. QCOM soared 5% on the day of the report but has been pulling back a little since, which is normal. It hit the highest level since February and looks to be breaking out and heading back to the high. I want to give it a chance to run from here before writing calls. BUY
U.S. Bancorp (USB) Yield 3.3%
Even USB has been languishing since cyclical stocks turned lower in June. The bank reported great earnings, but that only temporarily staved off the gradual recession in price. As with AGNC, it’s about the yield curve. As a regional bank, USB makes a lot of its profits from interest rate spreads. That said, the strong economy should enable the stock to maintain the current price level. And there’s a good chance that the recent interest rate decline is overblown. HOLD
Existing call trades
Sell AGNC August 20th $17 calls at $0.50 or better
Unless the current narrative changes in a hurry, it is highly unlikely that AGNC will exceed the strike price and be called on the expiration date later this month. But the call premium represents more than four months of dividends. Plus, this is the second time the portfolio wrote a 0.50 call. The call premiums and the monthly dividends are providing a great income and there is a good chance the price trends higher from here.
Sell OKE August 20th $57.50 calls at $1.65 or better
This stock is way down and the call premiums are lightyears from the targeted price. It was good timing to write the calls near the high. It seems unlikely shares will be called at expiration because the stock is about 7 per share below the strike price. But we’ll see what happens with earnings this week.
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 8/2/21 | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp. | AGNC | 01/13/21 | 15.52 | 15.90 | 17.00 | 9.07% | 7.67% |
| Brookfield Infrastructure | BIP | 01/13/21 | 50.63 | 54.07 | 53.00 | 3.77% | 8.86% |
| NextEra Energy, inc. | NEE | 2/24/21 | 73.76 | 78.81 | 80.00 | 1.98% | 7.87% |
| Enterprise Product Partners | EPD | 3/17/21 | 23.21 | 22.35 | 25.00 | 7.98% | 0.42% |
| U.S. Bancorp | USB | 3/24/21 | 53.47 | 55.13 | 55.00 | 3.31% | 4.65% |
| Qualcomm Inc. | QCOM | 5/5/21 | 134.65 | 148.86 | 140.00 | 1.82% | 11.12% |
| ONEOK, Inc. | OKE | 5/26/21 | 52.51 | 51.35 | 60.00 | 7.20% | -0.45% |
| One Liberty Properties, inc. | OLP | 7/28/21 | 30.37 | 30.04 | 33.00 | 5.88% | -1.09% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Price on 8/2/21 | Sell To Price or Better | Total Return |
| AGNC Aug 20 $17 call | AGNC 210820C00017000 | Sell | 6/23/21 | 0.50 | 0.01 | 0.50 | 3.00% |
| OKE Aug 20 $57.50 call | OKE 210820C00057500 | Sell | 6/23/21 | 1.65 | 0.13 | 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% |
| Digital Realty Trust | DLR | Called | 1/27/21 | 149.17 | 7/16/21 | 155.00 | 5.50% |
| 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% | |
| DLR Jul 16 $155 call | in-the-money | 6/16/21 | 8.00 | 7/16/21 | 8.00 | 5.36% | |