Earnings to the Rescue
It was a rough September in the market. But so far, October is making up for it.
After falling 4.8% in September, the S&P 500 is 4.8% higher for the month of October. And there are still twelve days left to go. What’s changed?
It’s earnings. Strong earnings have buoyed this market all through the pandemic recovery. Despite negative headlines, profits have soared beyond expectations every quarter and revitalized the bull market. But investors worried it could be different this time.
Supply chain issues and inflation threaten to spoil the party and limit profits. But earnings have been strong and better than expected so far. Bank earnings were stellar. This week, several other companies including Travelers Companies (TRV), Johnson & Johnson (JNJ), and Procter & Gamble (PG) reported earnings above expectations, suggesting that regular companies will overcome supply chain issues and generate strong profits.
Despite encouraging early signs, the jury is still out on earnings. It’s very early. The narrative could still shift to the dark side. But so far so good.
In the portfolio, the energy stocks, including Enterprise Product Partners (EPD) and ONEOK (OKE), have strong momentum. New position Xcel energy (XEL) and technology companies Qualcomm (QCOM) and Broadcom (AVGO) offer value in a high-growth sector.
In this update, I highlight a covered call on midstream energy company stock OKE. We can lock in a high income and possibly a great total return after a huge 30% run in the stock. Plus, we still have EPD if midstream energy stocks continue to run higher
Trades this month
September 22
Sell USB October 15th $57.50 calls at $1.70 or better – Remove
September 24
Sell USB November 19th calls at $2.30 or better
October 13
Buy Xcel Energy Inc. (XEL)
October 15th
Brookfield Infrastructure Partners (BIP) – Called
BIP October 15th $55 calls at $2.00 – Expired
October 20th
Sell OKE November 26th $65 calls at $2.25 or better
Trade Alert
Sell OKE November 26th $65 calls at $2.25 or better
Expiration date: November 26th
Strike price: $65
Call price: $2.25
These calls are targeted at a few pennies above the current market price. You may have to be patient and wait a little for the order. But you will likely get the price as the stock is still trending higher.
Here are the three scenarios.
- The stock closes above the $65 strike price at expiration
Call premium: $2.25
Dividends: $1.87 (8-16, 11-16)
Appreciation: $12.49 ($65.00 strike price minus $52.51 purchase price)
Total: $16.61 (total return will be 31.6% in six months)
- The stock price closes below our $65 strike price.
Call premium: $2.25
Dividends: $1.87
Total: $4.12 (total income return of 7.8% in six months)
- The stock price declines.
The decline will be offset by the $4.12 in income. Of course, the stock price will very likely still be above the original 52.51 per share purchase price.
Stock Portfolio Recap
AGNC Investment Corp. (AGNC)
Yield 8.8%
This yield-sensitive mortgage REIT has been floundering since making a 52-week high in June. It fell primarily because the yield curve flattened as the long interest rates plunged. But interest rates have reversed course and are likely headed higher for the foreseeable future. It looks like AGNC, which had not responded to the steepening yield curve initially, is finally starting to move higher. BUY
Enterprise Product Partners (EPD)
Yield 7.4%
The good times have finally returned for this midstream energy partnership. It had been slowly bleeding since June as the energy trade dried up. But now it’s back with a vengeance. EPD is up about 14% so far in October. It’s still a great value with a sky-high and safe distribution. Now it has momentum too. BUY
KKR & Co., Inc. (KKR)
Yield 0.9%
This alternative investment asset manager is back. It had pulled back on fears of contagion from the Chinese real estate issues with Evergrande. But those worries have abated for now and KKR has come raging back all the way to within bad-breath distance of the all-time high. Business is booming for asset managers. And KKR is in the fastest growing alternative investment segment of the business. It should run higher. BUY
One Liberty Properties, Inc. (OLP)
Yield 5.7%
This diversified industrial REIT is solid. The industrial REIT niche is a good one as demand exceeds current supply of the properties. It’s been 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 5.7%
This midstream energy stock has been flying amidst the energy rally. It’s up over 30% since late August to a new post-pandemic high. That’s a huge move in a short time for a high-income midstream energy stock. I do like the prospects for OKE over the next six months or so. But it may have gotten a little ahead of itself in the near term. It’s a good time to milk the recent surge for a high income and possibly a very high total return, which is why calls are being sold on the stock with a strike price around the current price. HOLD
Qualcomm Corp. (QCOM)
Yield 2.1%
This 5G chipmaker has bounced off the bottom of a recent selloff. The last down leg was likely caused by the slowdown in China and lower Apple (AAPL) smartphone sales because of chip supply issues. But earnings have been killing it as profits roll in from huge 5G phone royalties. And that should continue for several quarters. Qualcomm reports earnings in about two weeks. Hopefully, the report will be a catalyst for an upsurge in the stock price. BUY
U.S. Bancorp (USB)
Yield 3.0%
The regional bank reported earnings last week that beat consensus estimates for both earnings and revenue. But it wasn’t good enough and the stock fell over 2% on the day of the announcement. Slightly lower revenues and higher costs are the primary concern. Higher labor costs and tangible expenses rose and have not yet been offset by higher net interest income, as rates only spiked at the very end of the quarter. The stock has somewhat regained its footing since the announcement. HOLD
Xcel Energy Inc. (XEL)
Yield 2.8%
I like this newest portfolio addition alternative energy utility stock in both the short and long terms. This is a great way for conservative investors to play the huge growth in alternative energy. XEL has been a stellar performer until investors forgot about alternative energy in the pandemic recovery as other long-neglected sectors got hot. But it should be favored again when things normalize. In the short term, the stock was purchased near the bottom of the recent range. It should get a nice bounce even before it comes back into favor. BUY
Existing Call Trades
BIP October 15th $55 calls at $2.00 - Expired
The calls expired and the stock was called as it closed 2.46 per share above the strike price on the expiration date last Friday. I do like the stock longer term. But it tends to move higher very slowly, and in a bouncy fashion. We were able to get a great income and solid return from the position in a relatively short amount of time.
Call premium: $2.00
Dividends: $1.53 (4-15, 7-15, 10-15)
Appreciation: $4.37 ($55.00 strike price minus $50.63 purchase price)
Total: $7.90 (total return will be 15.6% in eight months)
Sell USB November 19th $60 calls at $2.30 or better
The calls are currently below the targeted price as the stock pulled back over the past week. The calls enable a strong income from the stock. If shares are called at expiration, it will provide a stellar total return as well.
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 10/18/21 | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp. | AGNC | 01/13/21 | 15.52 | 16.34 | 17.00 | 8.81% | 12.31% |
| Enterprise Product Partners | EPD | 03/17/21 | 23.21 | 24.57 | 25.00 | 7.42% | 10.40% |
| U.S. Bancorp | USB | 3/24/21 | 53.47 | 60.58 | 57.00 | 3.04% | 15.87% |
| Qualcomm Inc. | QCOM | 5/5/21 | 134.65 | 130.12 | 140.00 | 2.09% | -2.42% |
| ONEOK, Inc. | OKE | 5/26/21 | 52.51 | 65.19 | 60.00 | 5.74% | 26.38% |
| One Liberty Properties, inc. | OLP | 7/28/21 | 30.37 | 31.90 | 33.00 | 5.66% | 6.57% |
| KKR & Co., Inc. | KKR | 8/25/21 | 64.52 | 67.13 | 70.00 | 0.88% | 4.05% |
| Xcel Energy Inc. | XEL | 10/12/21 | 63.00 | 64.68 | 67.00 | 2.83% | 2.67% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Price on 10/18/21 | Sell To Price or Better | Total Return |
| USB Nov 19 $60 call | USB211119C00060000 | Sell | 9/24/21 | 2.30 | 1.86 | 2.30 | 4.30% |
| OKE Nov 26 $65 call | OKE211126C00065000 | Sell pending | 2.22 | 2.25 | 4.28% | ||
| 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% |
| Brookfield Infras. Ptnrs. | BIP | Called | 1/13/21 | 50.63 | 10/15/21 | 55.00 | 11.65% |
| 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% | |
| BIP Oct 15 $55 call | in-the-money | 9/1/2021 | $2.00 | 10/15/21 | $2.00 | 3.95% | |