The Bull Breaks the Ceiling
It has been an amazing market. The S&P 500 just made a new all time high. It has rallied a staggering 55% since the lows in less than five months. The market is forward looking and anticipates a rapidly growing economy, a friendly Fed and record low interest rates and a vaccine in the months ahead.
I hope that comes true. And the market usually gets it right. It has been futile to defy this market. It wants to go higher and it means business. It has been good for this portfolio in terms of stock prices and call premiums. I hope the good times continue to roll.
But I’m still relatively cautious here. There are still risks out there like a second wave of the virus or a contested election. But forget about the risks for now. It would be normal, and actually healthy, for the market to correct and consolidate after such a massive move in a short amount of time.
I wouldn’t be surprised and I, in fact, expect a correction in the months ahead. That said, it should be a healthy move that will likely reinvigorate stocks to move still higher in the year ahead. I have been saving some dry powder because the market is high and I see a likely better opportunity ahead.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 4.9% — This stock had a tremendous run from the lows of March right back to a 52-week high of over 100 by mid July. The stock has since consolidated back in the 90’s for the last month or so. It looks like our timing of writing the call at a 100 strike price was just right. The long term prognosis for the stock is excellent and the uptrend should resume in the months ahead. BUY
Altria (MO) Yield 8.0% — Value is good. And high income is even better. The stock of this cigarette maker has both in droves. The company’s problems are more than priced into the stock. It has growing earnings and it is earning more than enough free cash to maintain the massive payout. I am looking for another opportunity to write a call on MO. BUY
Brookfield Infrastructure Partners (BIP) Yield 4.4% — I’m still looking for a good opportunity to write a call on this infrastructure company. The stock has been performing better of late and that chance may come in the weeks ahead. In the meantime, the stock is reasonably priced. The value combined with the fact that earnings are steady in an economy should make this a good downside performer. It also is in a growing popular sub sector with improving growth catalysts for the post pandemic world. BUY
Enterprise Product Partners (EPD) Yield 9.7% — The market has yet to embrace the great value in this stock. The operational performance of the company has been spectacular through this crisis and its piping and storing business will be very quick to recover as the economy gains traction. And that massive distribution yield is safe! It’s a great stock to hold for the longer term and I am looking for the opportunity to write a call and further supplement the high income when circumstances are most advantageous. BUY
Innovative Industrial Properties (IIPR) Yield 3.5% — Rating change “BUY” to “HOLD” This marijuana farm REIT is a beauty and investors realize it. The stock is breaking out in a big way. IIPR has soared almost 30% since the end of July. Some of that may be because it grew earnings over 200% in the second quarter as the economy crashed amidst the lockdowns. We did write calls with a 100 strike price and the stock is at about 120. While it looks like the position will be called away, the returns from the dividend, the two calls written and the appreciation will be over 25% in about three months. While I believe the stock price is ultimately destined still higher, the stock is volatile with the market, which is getting overdue for a correction. I am reducing the rating to HOLD. HOLD
Qualcomm inc. (QCOM) Yield 2.4% — Rating change “BUY” to “HOLD” This is another stock is breaking out and running away. Good earnings and the lucrative resolution of a dispute with Hauwei has catapulted QCOM over 110. I always believe the 5G rollout would take the stock a lot higher, but not yet. We wrote the call at a strike price of 95 and it looks like we will be called away. That’s okay. We would lock in a double digit return in a short time. But a market correction could take the stock price back down, even if it is temporary. I’m am reducing the rating to a HOLD because of the tenuous situation in the current market. HOLD
U.S. Bancorp (USB) Yield 4.6% — 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. 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
As I mentioned above, the stock is running away. The price is well about the 95 strike price at 112. The calls are in-the-money and priced at $17.83. If the stock is called away, you’ll still get a double digit return in a short time. But a market correction may bring the stock back. You never know.
ABBV September 18 $100 call at $4.60
It looks like we got this call near the short-term peak for the stock. It has since moved lower and these calls are now selling at just $0.95. 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 of 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 if 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.