A Summer Lull in a Weird and Unpredictable Year
We’re coming up on the dog days of summer. It’s a time of year when the normal rules don’t apply. People see the summer slipping away and try to squeeze in trips and fun before it’s too late. It’s a slacker’s paradise.
It’s usually a slow time in the market. People goof off and put things off until after Labor Day. Investors are distracted. The rubber usually hits the road again in September. But that’s in a normal year. Who knows how things will play out in this godforsaken blight of a year. Normal doesn’t seem to have any place in 2020.
Beyond seasonality, the market has resumed its uptrend and the S&P 500 is now back to within 3% of the all-time high. For now, it appears that Congress will likely come through with some sort of additional stimulus and the uptrend in virus outbreaks seems to have peaked, with new cases on the decline. The hideous second quarter is behind us and a rebounding economy drowning in stimulus is ahead.
Of course, there are still risks. The election is about to heat up, creating more uncertainty about the future, which the market hates. There is also a growing sense that the market might be overdue for a pullback, having run up 47% since March. We’ll see if investors get nervous, or if they wait until September to get spooked.
In the meantime, two portfolio stocks are making big moves. Qualcomm had a huge week following its earnings report and the stock soared 20%. Innovative Industrial Properties is also putting together a strong run and is now at just about the 52-week high.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 4.9% — AbbVie reported earnings last week that beat expectations on both revenue and earnings. Per-share earnings were only up 3.5% over the year-ago quarter as people have skipped doctor and hospital visits during the pandemic. Sales of cosmetic treatment Botox were down 43% for the quarter as demand for cosmetic procedures plunged. But the new drugs continue to do great. Cancer drug Imbruvica increased over 17% to $1.3 billion and last year’s new launches were strong as well. The company also raised 2020 guidance. The stock has pulled back from the recent 100 level but still looks solid. BUY
Altria (MO) Yield 8.4% — The stock seriously flirted with the 42 strike price right up until about two days before expiration but then pulled back. It appears to be poised to move higher again. Earnings are still positive and the company is easily earning that big fat dividend. The dividend last quarter was 77% of operating cash flow, compared to the historical average of 80%. There is also good growth potential in the heated tobacco IQOS product that is about to go national. I will look to write another call on the stock when the timing is right. BUY
Brookfield Infrastructure Partners (BIP) Yield 4.7% — This owner of infrastructure assets all over the world reported second-quarter earnings before the open this morning. Adjusted funds from operations were up 3% over last year’s quarter. The reason for the lower rate of growth is diminished revenue from the transportation segment during the lockdowns. But that’s as bad as it gets during an economic catastrophe. Earnings were up 3%. The company is proving its resilience and the transport sector should pick right back up as economies continue to restart across the globe. The stock is up over 1% on the day following the earnings report. BUY
Enterprise Product Partners (EPD) Yield 10.15% — The midstream energy giant reported earnings last week that I thought were fantastic. In a quarter where GDP shrank 33% in one of the worst quarters ever for the energy industry, operating income fell 7.9% and distributable cash flow was down 8.4%. Energy stocks with commodity price exposure got pulverized this quarter. This is as bad as it gets and profits were down less than 10% from last year. In the trough of the pandemic economy, Enterprise had 1.6 times cash flow coverage on the distribution. That stratospheric payout is safe and earnings should bounce back quickly as the economic restart continues. But the stock was still down a little for the week. Enjoy the distribution and take comfort in the fact that the market will wise up eventually. BUY
Innovative Industrial Properties (IIPR) Yield 4.6% — This marijuana farm REIT announces earnings after the close today. There’s no reason to believe they won’t be fantastic as the company continued to acquire new properties at a fast clip over the quarter. The stock has moved 13% higher in the past two weeks and is now within kissing distance of the 52-week high. IIPR has moved well above the 100 strike price of the existing calls (now 106). We’ll see if it can stay above 100 by the expiration on September 18. BUY
Qualcomm inc. (QCOM) Yield 2.4% — The chipmaker had a glorious week, with the stock soaring about 20%. Earnings were better than expected but the bigger news was that it settled a licensing dispute with Chinese technology company Huawei. As a result, Qualcomm will receive a $1.8 billion settlement and will receive royalties of about $1 billion per quarter going forward. It is estimated that this settlement alone will account for $1.00 or more in extra earnings per share every quarter. Although the launch of new 5G phones got pushed back because of the pandemic, they are coming. And Qualcomm should reap a windfall in the quarters ahead. BUY
U.S. Bancorp (USB) Yield 4.6% — This newest portfolio addition is one of the best-run big banks in the country during a terrible time for the industry. In the pandemic, interest rates are low, loan volume is down and defaults are likely to increase with the high unemployment rate. It is a value stock, selling 40% below the 52-week high with a price/earnings ratio of 11.36 and yield 4.6%. But it is a superior operation with an industry-leading return on equity and return on assets. It should endure the crisis as well as any other bank and will quickly bounce back as the economy comes back. BUY
Covered Call Recap
MO July 31 $42 call at $1.60 - EXPIRED
Although the stock traded above the 42 strike price just days before the expiration, MO pulled back in the nick of time and it wasn’t called. You can keep the stock and write more calls and collect more dividends and you got 4% for the call premium already in addition to the dividend.
QCOM September 18 $95 call at $4.30
The stock is running away. It’s up 20% this week to 111 per share, well in excess of the 95 strike price. When we write calls we always take the risk that the stock will run away. That’s okay. You’ll still get a double-digit return (between the dividend and call premium and appreciation) in less than three months. And of course, the market could sell down by September. You never know.
ABBV September 18 $100 call at $4.60
This call is selling way below the target price at just $1.60. 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.
USB September 18 $37.50 call at $2.00
The stock price got as high as about 38 last week and pulled back. The calls are below the targeted $2.00 price at $1.46 now, but there were many chances to get it at $2 or higher. The calls have plenty of time to reach that level again in case you missed it.
IIPR September 18 $100 call at $5.00
The stock moved a lot higher since we wrote this second covered call. With the stock price at 106 the calls are now selling at $11.17. But the market can be volatile and so can this stock. Remember, the stock traded well above the strike price of the previous call, only to come back down by expiration. We’ll see. But even if the stock never looks back, you will get a huge return between the two calls and stock appreciation.