Stocks Look Toward Earnings
September lived up to its bad reputation. The S&P 500 fell 4.8% for the month. But September is over. Now it’s October, which is historically only the second-worst month of the year. What now?
The first week of the month is wild so far. The technology-heavy Nasdaq sold off more than 2% yesterday on inflation worries, but the index is recovering somewhat so far today. It’s still a balancing act between virus concerns, Fed tightening, and inflation versus the strong economy. But now it’s earnings season.
Earnings could save or sink the market. It’s still a great earnings environment. S&P 500 earnings are expected to grow 28% on average over last year’s quarter. It’s not the 88% growth of last quarter but it’s still light years better than average. And earnings have continually exceeded expectations. Earnings could deliver a reignited bull market.
But there’s a big issue. Supply constraints are a huge problem. Containers are stacked up in California. There aren’t enough truck drivers. Retailers can’t get the products to meet the high demand. Companies are already warning that supplies could reduce earnings. Plus, inflation is eating into margins. Disappointing earnings could tip the market toward the ugly side.
We’ll see what happens. But we might not be out of the woods yet in terms of further downside in the market. I’m still cautious in the near term. That said, I still believe a more serious selloff will be short lived. When fear inevitably wanes, investors will come back to stocks because that’s the only place to get a decent return.
In the meantime, some stocks actually like inflation and rising interest rates. Energy stocks are rallying as oil prices are hitting the highest levels since 2014. The yield curve positions, AGNC Investment Corp. (AGNC) and U.S. Bancorp (USB), benefit from higher rates and a steepening yield curve.
Trades this month
September 8
Sell USB October 15 $57.50 calls at $1.70 or better – Pending
September 17
NEE September 17 $80 calls at $3.50 – Expired
NextEra Energy, Inc. (NEE) stock – Called $80.00
September 22
Sell USB October 15 $57.50 calls at $1.70 or better – Remove
September 24
Sell USB November 19 calls at $2.30 or better
Stock Portfolio Recap
AGNC Investment Corp. (AGNC)
Yield 9.0%
The situation is improving. The flattening yield curve that pulled AGNC back is reversing. The benchmark 10-year Treasury rate has been climbing and is expected to continue trending higher. That should increase profits and the stock price for this mortgage REIT. But the stock price hasn’t really done anything yet. That’s OK. As the yield trends higher, AGNC’s price will eventually follow. In the meantime it pays 9% with monthly payouts. BUY
Brookfield Infrastructure Partners (BIP)
Yield 3.6%
This infrastructure partnership doesn’t move fast but it’s clearly trending the right way. It characteristically pulled back after making a new high in early September. It seems to be slowly climbing back toward that high recently. However, further weakness in the market could delay the recovery over the next couple of weeks. HOLD
Enterprise Product Partners (EPD)
Yield 8.2%
Energy stocks are rallying again. The price per barrel of crude oil has surged to a 52-week high and the highest level since 2014 amidst supply constraints and strong demand. This looks like the early stages of the sector rally we’ve been waiting for. EPD is moving higher, albeit slowly. The stock offers great value and a sky-high and safe dividend. Now, we can add momentum to the mix. BUY
KKR & Co., Inc. (KKR)
Yield 0.9%
The alternative investment asset manager pulled back more than 10% from the August high on fears of contagion from the Chinese real estate issues with Evergrande. If the situation escalates to a bigger crisis it would impact some of KKR’s investments. But aside from that, the company is absolutely killing it. Earnings were spectacular and future growth looks strong. KKR is expected to grow earnings by 95.9% this quarter.
We reduced our rating to HOLD based on the unfolding China situation. But the stock is up 4.4% today on the open. If China doesn’t escalate into a bigger crisis, KKR is undervalued and should make up for lost time. It will remain a HOLD until it shows evidence of maintaining the recent momentum. HOLD
One Liberty Properties, Inc. (OLP)
Yield 5.8%
This diversified industrial REIT is solid. The industrial REIT niche in general is a good one as demand exceeds current supply of the properties. It’s sort of knocked around and is up just slightly since being added to the portfolio. But it’s a defensive stock with a great yield. As the market normalizes and the recent outsized returns become much harder to get, defensive stocks should be popular again. OLP is also a more cyclical REIT that should get an extra benefit in the strong economy. BUY
ONEOK, Inc. (OKE)
Yield 6.3%
The things I said about EPD also apply to this midstream energy company. But OKE tends to move a lot faster. It’s up about 20% since late August and at a new 52-week high. It’s not a bad time to write a call on the stock. But I want to try to ride the momentum a little higher first. Keep an eye out for “Trade Alerts” in your email as an ideal situation could arise between updates. BUY
Qualcomm Corp. (QCOM)
Yield 2.1%
This is a great company that’s been running around with a bad crowd. The technology sector is again under pressure. This time it’s inflation and supply constraint issues. But I regard the sector problems as short term. Things will normalize and then technology will be where all the growth is. Another strong quarter should also help Qualcomm as it benefits from the 5G rollout. It has been a fruitless slog since QCOM was added to the portfolio. But this stock can move fast and make up for lost time. BUY
U.S. Bancorp (USB)
Yield 3.0%
Like AGNC, USB benefits from the steepening yield curve. Unlike AGNC, the stock price is moving higher already. It’s moved 10% higher in just a few weeks and is at the highest level since the spring. Rising rates should have this regional bank firing on all cylinders. USB should move higher the rest of the year. We wrote the calls after a big move and ahead of what could be more downside in the market in the near term. BUY
Existing Call Trades
Sell BIP October 15 $55 calls at $2.00 or better
These calls were written several dollars in-the-money when the stock was near the all-time high. BIP has a pattern of pulling back after making new highs. And that’s what it has done in recent weeks. The stock has been bouncing around and is now over a dollar above the strike price. But the market looks dicey. We’ll see what happens in the 10 days until expiration.
Sell USB November 19 $60 calls at $2.30 or better
The stock has been moving higher along with the rise in the 10-year Treasury, as I expected it eventually would. Ordinarily, I would refrain from writing a call and let the stock run for a while. But I don’t trust the current market. It still looks dicey, and I don’t think we’re out of the woods yet. Under the circumstances, it’s prudent to lock in the recent gains with a high call premium.
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 10/4/21 | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp. | AGNC | 01/13/21 | 15.52 | 16.07 | 17.00 | 8.96% | 10.45% |
| Brookfield Infrastructure | BIP | 01/13/21 | 50.63 | 56.59 | 53.00 | 3.60% | 14.97% |
| Enterprise Product Partners | EPD | 3/17/21 | 23.21 | 22.63 | 25.00 | 8.26% | 1.68% |
| U.S. Bancorp | USB | 3/24/21 | 53.47 | 60.53 | 57.00 | 3.04% | 15.78% |
| Qualcomm Inc. | QCOM | 5/5/21 | 134.65 | 126.68 | 140.00 | 2.11% | -5.00% |
| ONEOK, Inc. | OKE | 5/26/21 | 52.51 | 60.06 | 60.00 | 6.29% | 16.44% |
| One Liberty Properties, inc. | OLP | 7/28/21 | 30.37 | 31.37 | 33.00 | 5.79% | 4.80% |
| KKR & Co., Inc. | KKR | 8/25/21 | 64.52 | 60.27 | 0.94% | -6.59% | |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Price on 10/4/21 | Sell To Price or Better | Total Return |
| BIP Oct 15 $55 call | BIP211015C00055000 | Sell | 9/1/21 | 2.00 | 1.96 | 2.00 | 3.95% |
| USB Nov 19 $60 call | USB211119C00060000 | Sell | 9/24/21 | 2.30 | 2.71 | 2.30 | 4.30% |
| 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% |
| NextEra Energy, Inc. | NEE | Called | 2/24/21 | 73.76 | 9/17/21 | 80.00 | 10.00% |
| 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% | |
| AGNC Aug 20 $17 call | out-of-money | 6/23/21 | $0.50 | 8/20/21 | $0.50 | 3.00% | |
| OKE Aug 20 $57.50 call | out-of-money | 6/23/21 | $3.50 | 8/20/21 | $3.50 | 6.67% | |
| NEE Sep 17 $80 call | in-the-money | 8/11/21 | $3.50 | 9/17/21 | $3.50 | 4.75% | |