A Weird Earnings Season
It’s earnings season. And this is a weird one.
It’s been a crazy second quarter. So far, this earnings season is not having a big effect on the overall market. Everybody knows the quarter was bad. But, unlike most quarters, this one doesn’t really portend any future trend. The quarter is a one-off disaster that the market has been looking past for a long time now.
Of course, earnings reports can still have a big effect on certain individual stocks and help determine the near-term direction of the share price. All but one company in this portfolio will announce earnings either this week or next. And most of the stocks have covered calls written on them. That means that the next couple of weeks could have a big effect on call prices, and perhaps the likelihood of calls being exercised.
I have been cautious on the market so far in this advisory. The S&P has come almost all the way back to all-time highs even as there is still a massive amount of uncertainty floating around out there. The financial impact of this pandemic has not been realized or fully understood by many companies. The quarterly reports will provide valuable insight into how they’re faring and what they’re thinking.
Many stocks out there are still very cheap and high yielding. But many dividend cuts will be forthcoming as the financial impact is realized. The quarter should provide much clarity about which high-yielding stocks have dividends that can weather the storm. It is likely that this quarter’s results will green-light some high-yielding investment that I have avoided so far.
The environment for income is good, and about to get better.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 4.9% — The drug maker announces second-quarter earnings before the bell on Friday. It beat estimates the last four quarters but it is expected to take a bit of a hit this quarter from Covid-19 because of reduced hospital and doctor visits during the pandemic. The main thing to look for is the progress of newly launched drugs as well as 2020 guidance, which the company is expected to report. The stock has returned 14% YTD and 50% over the past year but it is still reasonably valued at just 10 times forward earnings. BUY
Altria (MO) Yield 8.3% — Altria reported earnings yesterday that were generally well received by the market, as the stock was up about 1% on a down day. Earnings were above expectations; the dividend was raised 2.4% and heated tobacco product IQOS was approved by the FDA to be marketed as a “modified risk” product. The company has nationwide distribution plans. Altria also issued guidance for the full year at 0% to 4% earnings growth. Cigarette volume slid 8% despite the fact that overall nationwide volume only fell 2% to 3.5% as cash-strapped smokers opted for cheaper brands. The company is in good financial shape, with $3 billion in cash. It looks like it will grow earnings through the pandemic. And the IQOS news is positive for future growth. The calls expire on Friday and the stock is in the money right now. More on that below. BUY
Brookfield Infrastructure Partners (BIP) Yield 4.7% — Brookfield continues to generate reliable revenues from crucial assets with long-term contracts and government-regulated rates. The pandemic has put a crimp in the acquisition strategy for growth temporarily as the situation has sort off gummed up the works and a recent deal fell through. But looking ahead, cash-strapped governments and companies are likely to offer assets at cheap prices. In the meantime, the recent sideways trend has dried up the call premiums for now. That could change when Brookfield announces earnings early next month. BUY
Enterprise Product Partners (EPD) Yield 9.8% — This energy infrastructure partnership reported earnings this morning for what the company called “one of the most challenging quarters in the history of the U.S. energy industry.” And yet, Enterprise’s losses were rather modest: the company reported that operating income fell 7.9% and distributable cash flow (DCF) fell 8.4% compared to last year’s quarter. That’s it. DCF of $1.6 billion provided 1.6 times distribution coverage. As well, the company reported that business is rapidly improving so far in July and two new projects are just coming on line this quarter.
In what may be one of the worst quarters the company will ever endure, key metrics of earnings and profitability fell less than 10%. The strong fee-based business and the utilization of extra storage capacity hedged some of the volume declines. In the trough of the recession, Enterprise is easily earning enough to not only pay the dividend but save a bunch of cash. The stock is up 1% in pre-market trading. BUY
Innovative Industrial Properties (IIPR) Yield 4.6% — This fast-growing marijuana farm REIT is back up to the post-pandemic high of over 99 per share. The long-term trajectory of IIPR should be fabulous and match its high rate of earnings growth, but the stock can bounce around a lot in the near term. We wrote the second call at a $100 strike price for an expiration in less than two months. Whether the stock will get there will be determined by the market’s mood come September. But we are set up to win either way. BUY
Qualcomm inc. (QCOM) Yield 2.8% — The chipmaker will announce earnings today after the market close. The company beat estimates the last two quarters and estimates have been moving higher for this quarter, which is a good sign. But, unless there is some game-changing news, I don’t think this quarter matters much. The main storyline is the rollout of the 5G phones, which has been delayed by the pandemic. But investors are anticipating solid revenue growth from 5G in the quarters and years ahead. The virus-riddled second quarter probably won’t change that either way. BUY
Covered Call Recap
Sold MO July 31 $42 call at $1.60
This call expires on Friday. As of the close yesterday, it’s in the money, with a stock price of 42.52. Unless the stock price falls below 42 by the market close on Friday, it will be called away. It’s close though. It could still very conceivably fall below 42 by then. We’ll see. It’s also worth pointing out that if you want to keep the stock, you have the option to buy back the call ($0.70 at yesterday’s close). This will likely still net you a profit on the call and you can keep the stock. However, this portfolio will keep the call in place, losing the stock with a Friday close above 42.
Sold QCOM September 18 $95 call at $4.30
This call premium is currently below the target at $3.60. The stock price is higher than when the call was written on June 24 but some time value has been lost. Plus, the stock price moved down yesterday. The company still has earnings to report and a long way to go until September. But you might get a chance to write the call at the targeted price if you haven’t already in the days ahead.
Sold ABBV September 18 $100 call at $4.60
This call is selling below the target price at $2.52. The stock price has moved lower by a few dollars since the trade. But with a lot of time left to go, you may get another chance to write a covered call at $4.60 in the days and weeks ahead. The stock had a nice run prior to the call writing date and it is possible it has topped out for a while.
Sold USB September 18 $37.50 call at $2.00
The targeted price could not be had on the day it was highlighted in last week’s issue. However, it did reach the target the following day. At this point, the call is below the target price at $1.49. However, it may well reach the target again, giving you a chance to write it if you haven’t done so already.
Sold IIPR September 18 $100 call at $5.00
These calls sell at a higher price than when originally written, at $6.72. If you own the stock at a lower price and have not sold these calls already, it is still a good opportunity. After the last call was sold on this stock, the stock price moved well above the strike price only to come back down by the expiration date. It’s a volatile stock and market, so you never know.