Stocks Hang Tough
Not much has really changed with the market over the past week, except for more verification of the same dynamic.
The market rally has stalled. The S&P 500 and the Dow are still lower than they were at the beginning of June. But in the face of a lot of bad news, the market isn’t going lower, it just stopped going higher. All three indexes are establishing or holding key technical levels.
The virus news is bad. Cases are on the rise in much of the country and many states are rolling back reopening plans. This was a potential risk the market seemed to be ignoring. But now, the risk is actually coming true and the market is still blowing it off. It seems like all the bad news is just keeping the market from running a lot higher.
It is encouraging that the market is strong enough to handle a major risk coming to fruition. At the same time, good news surprises are prompting the market to rally. Yesterday it rallied on a suggestion of more asset purchases from the Fed (like quantitative easing of years past). Today it is rallying on positive trials for a coronavirus vaccine.
At this point, it looks as though, in the absence of some horrible development, the market should have an upward bias going forward. We’ll see if it lasts as the election comes more into focus. But the market looks solid, at least for now.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 4.8% — The stock of this drug maker is still in an uptrend since the lows of March. This is an important distinction because the uptrend for the S&P 500 has ended, at least temporarily. ABBV continues to slowly move higher in defiance of the rest of the market and is just slightly below the 52-week high. But the stock isn’t exactly running away either. It’s only a wee bit higher than it was a month ago.
In this update, I am writing a call on ABBV at a strike price of 100, just slightly above the current price. I’m not losing faith in the stock. I still consider it well worth buying here. But it is trading at the top of the recent range ahead of a possibly turbulent September. We might be able to steal a nice call premium and keep the stock. BUY
Altria (MO) Yield 8.3% — This cigarette company is paying you to be bored to tears. After a nice bounce off the March low, the stock has been wallowing in Neverland. It’s still at the same price it was in early April. The good news is that the astronomical yield is absolutely safe and, combined with the $1.60 call premium collected about a month ago, the stock is really paying us well. MO doesn’t have to run away because we’ll just keep on milking it for income. BUY
Brookfield Infrastructure Partners (BIP) Yield 4.7% — The rally in this infrastructure giant has petered out. The stock has been going sideways and it is trading at the same price it was a couple of months ago. That’s okay. Few stocks go straight up, especially conservative income-paying stocks like this. The important thing to remember is that times are very uncertain and this company has assets including cell towers, data centers, natural gas pipelines, ports, toll roads and other super reliable income generating stuff that will continue to churn out income in any economy. For now, lack of an uptrend has significantly reduced the value of the call premiums. I will remove the pending call trade and look for another opportunity going forward. BUY
Enterprise Product Partners (EPD) Yield 10.4% — There are two important things to know about this energy infrastructure stock. One is that the market will ultimately realize the value. And two, it is showing absolutely no signs of doing so yet. EPD continues to wallow in undervalued oblivion with valuation measures at about half the five year averages. In the meantime, I believe the distribution is safe. That means that EPD will give you a double digit income just for holding it and collecting the distribution. As well, we can take advantage of any upside momentum by writing a call in the future. BUY
Innovative Industrial Properties (IIPR) Yield 4.7% — It is looking like the stock of this marijuana farm REIT will not hit the strike price of 95 by the time the calls expire on Friday. It’s currently 91.54. Of course, you never know. This stock can move fast. But it seems likely that you will keep the stock, along with the $3-plus call premium, as well as the $1.06 per share dividend that will be paid today. I’ll be happy if we get past expiration below the strike price. I believe this is a stock that is destined to go higher over time and the high degree of volatility makes the call premiums fat and juicy. If the stock survives expiration, I will look to write another call ASAP. BUY
Qualcomm inc. (QCOM) Yield 2.8% — This chip maker has a bright future in the months and quarters ahead. It makes the only good 5G chip for smart phones, including for Apple (AAPL). Although the release of the new 5G-enabled phones got pushed back because of the pandemic, the phones are coming by the end of this year, and so are the royalties QCOM will get. In the meantime, the stock has been decent, up 22% over the past year and positive YTD. The calls written don’t expire until September at a strike price of 95, versus the current 92.28. We’ll see what kind of mood the market is in by September. BUY
Covered Call Recap
Sold MO July 31 $42 call at $1.60
The call is currently valued at 0.79. The stock price has less than a dollar to go in a little over two weeks to get called. While that is easily reachable in that time frame, it is also very possible the stock won’t reach it. We’ll see. If MO gets called, you’ll get a nice return in a short time. If not, we’ll write more calls and collect more dividends.
Sold IIPR July 17 $95 call at $3
As I mentioned above, there are only two days to go until options expiration and the stock is still about 4% below the strike price. It will take a continuing strong market and/or positive news on the stock to get there. The call is now priced at just 0.55. The market doesn’t consider it a likelihood but we’ll see.
Sold QCOM September 18 $95 call at $4.30
This call premium has mover 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 - REMOVE TRADE
The stock has lost its uptrend and the call prices have really dried up. Even the September 18 $40 call, which is 1.81 in-the-money, is only selling at a little over 2. The $45 calls are only priced at 0.35. I will remove this trade and wait for the stock to get some upward momentum and write another call under a new set of circumstances.
Special Alert
Sell ABBV September 18 $100 call at $4.60 or higher
Expiration date: September 18
Strike price: $100
Call price: $4.60 or higher
I will assume you purchased the stock at the current 98.87 per share. Here are the return possibilities.
1. The stock goes above 100
- Call premium: $4.60
- Dividend: $1.18 (the pay date is August 14th)
- Appreciation: $1.13 ($100 strike price minus $98.87 purchase price)
- Total: $6.91 (total return will be 7% in two months)
2. The stock price stays the same
- Call premium: $4.60
- Dividend: $1.18
- Total: $5.78 (total return will be 5.84% in two months)
3. The stock price declines
You will be down by however much the stock is down less the $5.78 from the dividend and the call. And the position will live to pay more dividends and write more calls in the future.
Important note
The above returns are calculated if you purchase the stock at the current price (Tuesday’s close of 98.87). The price was a lot lower when ABBV was recommended to BUY in the first issue on June 2. The closing price that day was 91.04. Using that price, the above returns are significantly higher with a lower cost basis and much more profit if the stock is called at the 100 per share strike price. Here are the returns under the three scenarios above assuming you purchased the stock when it was recommended.
- Total $14.74 (total return would be 16.2% in three and a half months)
- Total $5.78 (total realized return would be 6.35% in three and a half months)
- The $5.78 collected would reduce the cost basis on the stock to 85.26.