Earnings Save the Day, for Now
After a rough start to the year, the market has stabilized and recovered somewhat.
Earnings are terrific again. About 80% of S&P 500 companies have reported, with average earnings growth of around 23%. Earnings have saved and revitalized the market throughout the pandemic recovery. And this is another stellar quarter for corporate profits.
Great earnings, a still-strong economy and low interest rates are very powerful positive forces. We need them because troubles are growing.
Inflation and the Fed are problems that won’t go away. Inflation has been persistent and is getting worse. The Fed blew the call on inflation and will now have to make up for lost time by raising rates sooner and faster than a pace at which it wouldn’t bother the market. It may be too late to seamlessly cure inflation, without roiling the markets.
We will have to deal with high inflation or a slowing economy and company profits. Neither thing is good for stocks. Investors may be able to overlook these things in the middle of a booming earnings season. But inflation and a hawkish Fed will haunt this market throughout the year. Expect choppy seas ahead.
Meanwhile, energy is on fire. The market hates this inflation, but energy stocks love it. Nine of the eleven S&P 500 market sectors are lower for the year. But the energy sector is an astounding 24% higher for the year.
That’s good news for our energy positions Valero Energy (VLO), ONEK (OKE), and Enterprise Product Partners (EPD). The only other positive sector YTD is finance, which helps our stocks U, S. Bancorp (USB) and Visa (V). These stocks continue to thrive in an otherwise tough market in 2022.
The market is still uncertain in the near term. It has been positive for the past couple of weeks. But we might not be out of the woods yet. Under the circumstances, it’s a good time to sell covered calls when stock prices are high, and the opportunity arises.
This week highlights a covered call opportunity in card company Visa (V). It will be the 5th outstanding covered call in the portfolio.
Trades Past Month
January 13th
Sold USB February 25th $61 calls at $2.50
January 18th
Sold VLO February 25th $83 calls at $4.20
January 19th
SOLD AGNC Investment Corp. (AGNC) – $15.06
January 21st
QCOM January 21st $185 calls at $9.65 – Expired
January 26th
Xcel Energy (XEL) – rating change “BUY” to “HOLD”
FS KKR Capital Corp. (FSK) – rating change “BUY” to “HOLD”
February 9th
Sell V Mar 25th $230 calls at $9.00 or better
Trade Alert
Sell V Mar 25th $230 calls at $9.00 or better
Expiration date: March 25th
Strike price: $230
Call price: $9.00
Visa Inc. (V)
Visa stock had a nice spike after reporting better-than-expected earnings. The year ahead is shaping up well for Visa as the lagging global recovery is likely to catch up and international travel returns. V had a nice bounce off the low and I like the prospects for the stock over the next year.
It’s much more difficult to say how the stock will behave in the next six weeks. Much will depend on the performance of the overall market. The main objective of this portfolio is income. We can take advantage of the recent spike in price to sell an attractively priced call and assure a strong income. If the stock does continue to move higher and gets called at expiration, we will get a great total return in a short time for our troubles.
The calls are currently price about $2 below the target $9 price. It may take a few days to get there. Or perhaps the price doesn’t get reached. But we will be patient and try to get the better price,
Here are the three scenarios.
1.The stock closes above the $230 strike price at expiration.
Call premium: $9.00
Dividend: $0.375 (ex div 2/10)
Appreciation: $12.04 ($230.00 strike price minus $217.96 purchase price)
Total: $21.42 (total return will be 9.8% in 3 months)
2. The stock price closes below but close to our $230 strike price.
Call premium: $9.00
Dividends: $0.375
Total: $9.375 (total income return of 4.3% in less than 3 months)
3. The stock price declines.
The decline will be offset by the $9.375 in income. Of course, the stock price is more than $13 per share above the price at which it was added to the portfolio.
Stock Portfolio Recap
Enterprise Product Partners (EPD)
Yield 7.7%
The midstream energy partnership is having a good year and it is likely to get better. The price is up about 11% YTD. EPD had pulled back slightly during last’s month market tumult but it’s back to the recent high. From here, it still looks good. EPD still sells at a dirt-cheap valuation, the sky-high distribution is very safe, and business is good. We will look to supplement that high yield income with a call premium when the price is right. (This security generates a K1 form at tax time). BUY
FS KKR Corp. (FSK)
Yield 11.0%
Good things are happening with this Business Development Company. Despite a rough year so far for the market, the price is up over 7% for the year. Any positive price performance is a huge bonus to that stratospheric yield. The stock looks poised to get back to the recent highs of 23 and change per share. The call premiums still aren’t good enough, but an opportunity should arise if the stock moves a little bit higher. HOLD
KKR & Co., Inc. (KKR)
Yield 0.8%
This alternative asset investment manager stock fell over 6% Tuesday as earnings disappointed. Profits decreased over last year’s fourth quarter during the booming covid recovery. However, KKR bested estimates, and distributable earnings more than doubled and asset under management increased 87% from the year-ago quarter. It seems picky. But the stock had been flying high.
The current average analyst price target suggests 34% upside from Tuesday’s close. The stock is already bouncing back sharply and is up over 3% for the day near mid-day today. It had broken a recent downtrend prior to the earning report. We’ll see how the stock behaves over the next several days. HOLD
One Liberty Properties, Inc. (OLP)
Yield 5.9%
This industrial REIT has really been clobbered so far this year after performing exceptionally well in the prior months. Stellar earnings had propelled the stock to new highs. But the recent ugly market has taken all those gains away. It’s down about 17% from the high in early January. REITs have been one of the worst-performing sectors and OLP is a more cyclical and aggressive one. But the 6% payout should continue to make it attractive and real estate should hold up well against inflation. HOLD
ONEOK, Inc. (OKE)
Yield 6.0%
Energy is hot. And OKE just hit the highest price since November after recovering from the selloff in mid-January. OKE has underperformed the recent energy rally but that’s understandable after it had a huge year and returned 69% in 2021. It seems to be regaining its footing and should make a run at the 52-week high in the absence of more market turmoil. We’ll look to sell a call when it gets to that level, about 3 per share higher. HOLD
Qualcomm Corp. (QCOM)
Yield 1.5%
The chipmaker once again killed it on earnings this week. Qualcomm soundly beat estimates as earnings rose 49% and revenues soared 30% from last year’s quarter. It also raised estimates for the current period and received analyst upgrades. But the stock fell 4.8% on the day of the report. Of course, that selling is a little deceiving as the stock spiked sharply ahead of earnings and moved higher again after the day of the report.
If there was anything less than stellar in the report it was that auto chip sales and Internet of Things sales slightly missed estimates. But that was because of a combination of the chip shortage and Qualcomm’s logical focus on the booming handset business as 5G phone sales continue soar. Qualcomm is in great shape and should move higher again as the pressure in the technology sector abates. We could sell a call at the current price, but I think we can get more. HOLD
U.S. Bancorp (USB)
Yield 3.1%
This regional bank stock was riding high until the market got ugly last month. But it’s back in business over the past few weeks. It should move back up to the recent high in the near term. It could pull back after that, as that has been the pattern. But the stock should be poised for a good year as increasing net interest margins are likely to complement already-strong business as interest rates trend higher. HOLD
Valero Energy Corp. (VLO)
Yield 4.4%
What’s not to like? Energy is smoking hot and VLO is a high-leverage play on the sector. VLO just made another new 52-week high. The company killed it on earnings as it beat estimates by a lot. EPS grew to 2.47 per share from a loss of 1.06 and revenues more than doubled from the year-ago quarter. As anticipated, Valero is benefitting from much higher volumes and margins, and demand and pricing is strong. Meanwhile, VLO is still well below the pre-pandemic price ahead of a likely strong year. HOLD
Visa Inc. (V)
Yield 0.7%
The card company stock has been languishing in the troubled market. But it reported blowout earnings last week and the stock jumped over 10% on the day of the report. As anticipated, international business is picking up as are the very profitable cross-border transaction as travel returns. The stock should continue to have a good year as the company benefits from a fuller recovery in 2022. BUY
Xcel Energy Inc. (XEL)
Yield 2.7%
This alternative energy utility has been solid and barely budged during the market turmoil of the last weeks. Utilities have been a solid-performing market sector since things got ugly as investors seek defense and safe havens. It’s a good market to have utilities. But XEL also has the added benefit of being on an uptrend and providing a safe way to play the growth in alternative energy. XEL is strong for now and probably stronger later in the year as investors rediscover clean energy growth. HOLD
Existing Call Trades
Sell OLP February 18th $35 calls at $1.50 or better
The stock is way down and the calls are worth practically nothing, selling at just 0.05. I still like the stock and we struck with the calls while the stock was near the high. While it seems unlikely at this point that the stock will hit the strike of 35 per share by next week, currently just over 30, the 1.50 of extra income will assure a double-digit annual income.
Sell OKE February 18th $60 calls at $2.75 or better
The stock may be running away. It’s now almost 4 per share above the strike price with just ten days to go before expiration and solid momentum. That’s okay. If the stock gets called, we will have sold three calls on the position and gotten solid capital appreciation for a great return and a terrific income.
Sell USB February 25th $61 calls at $2.50 or better
This could be a close call with the stock pushing up to around 60 per share with about two and a half weeks until expiration. If the stock is called, we also sold three calls on the position and will have a strong total return to go with the great income. If not, we’ll sell another call before long and get even more income.
Sell VLO February 25th $83 calls at $4.20 or better
This stock might be running away too. The stock price in now more than 5 per share above the strike price and it has some momentum. But you never know. The market is still uncertain, and this stock can be volatile.
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Recent Price | Buy at or Under Price | Yield | Total Return |
| Enterprise Product Partners | EPD | 3/17/21 | $23.21 | $24.10 | $25.00 | 7.72% | 12.56% |
| U.S. Bancorp C | USB | 3/24/21 | $53.47 | $59.58 | $57.00 | 3.09% | 14.89% |
| Qualcomm Inc. | QCOM | 5/5/21 | $134.65 | $178.59 | $140.00 | 1.52% | 34.84% |
| ONEOK, Inc. C | OKE | 5/26/21 | $52.51 | $62.73 | $60.00 | 5.96% | 25.35% |
| One Liberty Properties C. | OLP | 7/28/21 | $30.37 | $30.34 | $33.00 | 5.93% | 1.84% |
| KKR & Co., Inc. | KKR | 8/25/21 | $64.52 | $66.38 | $70.00 | 0.87% | 3.07% |
| Xcel Energy Inc. | XEL | 10/12/21 | $63.00 | $68.84 | $67.00 | 2.66% | 10.02% |
| FS KKR Capital Corp. | FSK | 10/27/21 | $22.01 | $22.46 | $24.00 | 11.04% | 5.19% |
| Valero Energy Corp. C | VLO | 11/17/21 | $73.45 | $88.49 | $85.00 | 4.43% | 23.47% |
| Visa Inc. | V | 12/22/21 | $217.96 | $227.94 | $225.00 | 0.66% | 4.58% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| OLP Feb 18 $35 call | OLP220218C00035000 | Sell | 11/19/21 | $1.50 | $0.05 | $1.50 | 4.94% |
| OKE Feb 18 $60 call | OKE220218C00060000 | Sell | 1/5/22 | $2.75 | $3.00 | $2.75 | 5.24% |
| USB Feb 25 $61 call | USB220225C00061000 | Sell | 1/13/22 | $2.50 | $0.57 | $2.50 | 4.68% |
| VLO Feb 25 $83 call | VLO220225C00083000 | Sell | 1/18/22 | $4.20 | $7.87 | $4.20 | 6.13% |
| V Mar 25 $230 call | V220325C00235000 | Sell pending | $6.95 | $9.00 | 4.10% | ||
| as of close on 2/08/2022 | |||||||
| 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 | 3.42% |
| Brookfield Infras. Ptnrs. | BIP | Called | 6/24/20 | $41.92 | 10/16/20 | $45 | 8.49% |
| Starbucks Corp. | SBUX | Called | 8/26/20 | $82.41 | 10/16/20 | $88 | 6.18% |
| Visa Corporation | V | Called | 9/22/20 | $200.56 | 11/20/20 | $200 | 0.00% |
| AbbVie Inc. | ABBV | Called | 6/2/20 | $91.04 | 12/31/20 | $100 | 12.43% |
| Enterprise Prod. Prtnrs. | EPD | Called | 6/24/20 | $18.14 | 1/15/21 | $20 | 15.16% |
| Altria Group | MO | Called | 6/2/20 | $39.66 | 1/15/21 | $40 | 7.31% |
| U.S. Bancorp | USB | Called | 11/25/20 | $44.68 | 1/15/21 | $45 | 1.66% |
| B&G Foods Inc, | BGS | Called | 10/28/20 | $26.79 | 2/19/21 | $28 | 4.42% |
| Valero Energy Inc. | VLO | Called | 8/26/20 | $53.70 | 3/26/21 | $60 | 11.73% |
| Chevron Corp. | CVX | Called | 12/23/20 | $85.69 | 4/1/21 | $96 | 12.95% |
| KKR & Co. | KKR | Called | 3/24/21 | $47.98 | 6/18/21 | $55 | 14.92% |
| Digital Realty Trust | DLR | Called | 1/27/21 | $149.17 | 7/16/21 | $155 | 5.50% |
| NextEra Energy, Inc. | NEE | Called | 2/24/21 | $73.76 | 9/17/21 | $80 | 10.00% |
| Brookfield Infras. Ptnrs. | BIP | Called | 1/13/21 | $50.63 | 10/15/21 | $55 | 11.65% |
| AGNC Investment Corp | AGNC | Sold | 1/13/21 | $15.52 | 1/19/22 | $15 | 5.92% |
| 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./01/2021 | $2.00 | 10/15/21 | $2.00 | 3.95% | |
| USB Nov 19 $60 call | out-of-money | 9/24.2021 | $2.30 | 11/19.2021 | $2.30 | 4.30% | |
| OKE Nov 26 $65 call | out-of-money | 10/20/21 | $2.25 | 11/26/21 | $2.25 | 4.28% | |
| KKR Dec 17 $75 call | out-of-money | 10/26/21 | $3.50 | 12/17/21 | $3.50 | 5.42% | |
| QCOM Jan 21 $185 Call | out-of-money | 11/30/21 | $9.65 | 1/21/22 | $9.65 | 7.17% | |