A New All-Time High
Let the good times roll.
The S&P 500 is now within 1% of the all time high. It could even make a new high today. The index has rallied 54% since the lows of March. What pandemic?
This rally has exceeded all expectations. I didn’t read or hear any economist or pundit say in March or April that the market would be right back up to the all time high by the summer. Yet here we are. It may well be forecasting an economic recovery that exceeds all expectations.
Until recently, the technology sector had driven the market recovery while most of the other sectors languished. The S&P technology sector is up over 21% for the year. But the leadership is changing. Over the past month the top performing sectors have been Industrials, Materials and Finance. These are cyclical sectors.
The cyclical outperformance reflects the market’s confidence in the economic recovery. And sector rotation is healthy for the bull market. There is still great value in stocks in those sectors. If the outperformance continues it will present great buying opportunities and high call premiums going forward.
Of course, there are still risks out there. Who knows what course the virus will take? I don’t know about a vaccine. And then there will be all the uncertainty with the upcoming election to grapple with. Plus, we’ll have to see how sobered up investors react after Labor Day to a market that is overdue for a correction.
For now, don’t fight the tape. Enjoy the bounty. But don’t get carried away in the euphoria either. While there is a good chance of a selloff not too far down the road, it will likely be short lived.
I’m somewhat cautious at this point. But I expect fantastic opportunities for income in the near future.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 5.1% — The stock of this biopharmaceutical giant was red hot but has cooled off in the past few weeks. The stock recovered from the March selloff from low 60’s to over 100 by the middle of July to a new 52-week high. But it has since sputtered back down to about 93. There’s no fundamental reason. Earnings were solid. The stock just temporarily ran out of gas. That’s fine. Nothing goes straight up. It’s a healthy consolidation. Besides, we wrote the calls near the high with a strike price of 100. It looks now like we’ll be able to keep the stock and write more in the future. ABBV still sells at a great value with a high dividend and will likely resume its upward ascent in the months ahead. BUY
Altria (MO) Yield 8.4% — The cigarette maker stock is waking up a bit. It has been in an uptrend since early May and has just made a new post pandemic high. This is a great value stock right now. The troublesome acquisitions of E-cigarette maker JUUL and marijuana company Cronos (CRON) are already in the stock price, and the discounting may have been overdone. The company is still growing earnings and is easily affording that massive payout with free cash flow. This newsletter has successfully supplemented the fat dividend with a covered call premium that expired below the strike price, enabling us to keep the stock. MO conveniently fell below the strike price on expiration date and then resumed its ascent afterwards. I will surely took to write another call when the situation becomes most advantageous. BUY
Brookfield Infrastructure Partners (BIP) Yield 4.7%— The infrastructure stock has sputtered since the market selloff of June 8th. It went down with the market but just sort of went sideways from there. But it has moved higher in the past week and is now near that post pandemic high made on June 8th. If the uptrend continues the stock will fetch much more attractive call premiums. It should move higher too. It has a great recession resistant business. But the post pandemic environment could be very good for the company as well. Governments strapped for cash after all the pandemic spending will likely want to sell infrastructure assets to shore up their balance sheets. There should be more opportunities available to acquire assets, and at cheaper prices and higher margins than before. BUY
Enterprise Product Partners (EPD) Yield 9.8% — The midstream energy giant is being greatly mistreated by this market. The business is resilient and held up remarkably well in the carnage of the second quarter. As well, piping and storing of oil and gas is a business that will recover very quickly as the economy inevitably gains traction. Meanwhile it pays a massive yield. And that yield is extremely safe as the company is earning more than enough to continue paying it even in the worst of this recession. Eventually the market will wise up. Dividends will continue to roll in and I will be on the lookout for a good time to write a call and supplement the already high income. BUY
Innovative Industrial Properties (IIPR) Yield 3.6%— This marijuana farm REIT has broken out. It’s up 23% since late July and surged to over 114 per share, a new 52-week high. The stock had been undervalued and earnings probably woke some investors up. In the virus-riddled second quarter the REIT grew revenue by 183% and earnings by 263%. That’s staggering growth for a REIT. I believe the stock is destined to move still higher as the earnings growth justifies a higher price. Having written the second call at a strike price of 100 for September 18th expiration, it look like the stock will be called away. However, there will still be good appreciation return for the trouble, in addition to the call premiums and dividend. IIPR can also be volatile with the market and if there is a selloff in September it could again go below the strike price. BUY
Qualcomm inc. (QCOM) Yield 2.4% — The stock of this chipmaker has also broken out and potentially run away. Second quarter earnings were better than expected as revenue from 5G is already starting to come in. But the biggest news was the settlement with Chinese technology company Huawei. 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. At 111 per share the stock has moved well above the strike price of $95 for September expiration. The stock is likely to be called. But you never know what sort of mood the market will be in come September. BUY
U.S. Bancorp (USB) Yield 4.4%— As a bank, this is a cyclical stock with near term fortunes that will rise or fall with the likelihood and pace of the economic recovery. So far, it’s up about 7% since being highlighted in the July issue. It is a value stock selling more that 30% below the 52-week high with a price/earnings ratio of 12 and yielding 4.4%. It is a remarkably solid bank that will endure no matter what. But it seems likely at this point that the recovery should be sufficient to drive the price higher than it currently is in the months ahead. BUY
Call Trades
QCOM September 18 $95 call at $4.30
This stock is running away, at 111 with a strike price of 95. The benefit from 5G is coming sooner than expected, and the Hauwie settlement was a huge benefit that I did not anticipate. Bu that’s fine. If the stock is called away you will get a double digit return in a short amount of time for you efforts. And of course, the market could sell down by September. You never know.
ABBV September 18 $100 call at $4.60
It looks like we got this call near the short term peek for the stock. It has since moved lower and these calls are now selling at just $0.78. We got a big fat call premium and a great chance to keep the stock and write more in the future. The stock is probably only stuck temporarily and should move higher before the end of the year and fetch more high premiums.
USB September 18 $37.50 call at $2.00
The stock has moved higher and these calls are now selling at $2.71. If you own the stock at a price near when it was recommended and still didn’t sell the call, you can do it now at the higher premium.
IIPR September 18 $100 call at $5.00
IIPR is also running away. It’s now trading over 115 per share with a strike price of 100. But as I mentioned, this stock tends to go the way of the overall market in the near term and could fall again below the strike price if the market sells off in September. If you own the stock at a lower price, below 100, and did not write the calls you can still do so at the price of around $16.45. That way you can effectively lock in the appreciation even of the stock moves lower. It’s a massive premium that will be a huge coup if the market sells off and the stock comes back down in September.