Investors Alley

 For investors who follow steel stocks, there may be some good news on the horizon. Steel companies have taken a hit in recent months, including Cleveland-Cliffs (CLF), which is down 14% year-to-date. However, a trader purchased what appears to be a bullish call spread in CLF options that expires in August. This 10,000-lot vertical spread …

Trade of the Week: CLF Read More »

After watching large-cap tech stocks zoom higher over recent months, don’t you wish you could jump in your time machine and buy these stocks last year?

Or even a handful of months ago, as investors bailed out on tech stocks after values had fallen by 50%, 70%, or more.

Let’s use this as a lesson to buy stocks that investors currently hate…

It is hard to believe that 2022 was a bear market for tech stocks, with steep price declines. Let’s look at some numbers for a few stocks investors hated last year. Share prices peaked in late 2021 and bottomed in October 2022. Yes, the bear market lasted for almost a year.

The Invesco QQQ Trust (QQQ) lost 38%.

Microsoft Corp. (MSFT) dropped by 39%.

Alphabet Inc. (GOOG) fell by 45%.

Tesla Inc. (TSLA) lost 75%.

Meta Platforms Inc. (META) dropped by 75%.

NVIDIA Corp. (NVDA) fell by 69%.

And yet, these are the same large-cap stocks that investors love this year.

There are a couple of essential points to understand. Most of the 2022 bear market losses had occurred by May. Absolute lows were hit in October and November. Prices didn’t start a serious recovery until January. As a result, the stock market felt ugly for eight to nine long months.

Percentage changes can be funny. The most a stock can lose is 100%, but there is no upside for a stock that goes to zero. From a 50% loss, it takes a 100% gain to return to the previous high. It takes a 300% gain to recover from a 75% loss.

Here are the results for the listed stocks since the low prices set last year:

The Invesco QQQ Trust (QQQ) is up 38%.

Microsoft Corp. (MSFT) has gained 55%.

Alphabet Inc. (GOOG) has gained 45%.

Tesla Inc. (TSLA) has rocketed 85% higher.

Meta Platforms Inc. (META) is up 198%!

NVIDIA Corp. (NVDA) has ridden the AI craze for 273% appreciation.

To make these types of gains, you needed to invest when these stocks were not the ones everyone wanted to buy. Buying and owning these stocks when the market was selling off also required patience. As I noted above, these stock prices bounced along near the bottom before starting a sustained uptrend. There were several false starts to the tech sector bull market that began in earnest in March.

The gains for the large-cap tech stocks listed above are in the past. You must look at out-of-favor sectors and industries to get in on the next sector-centric bull market. Here are three that may provide superior returns over the next couple of years…

Banking/finance is an obvious choice. Regional bank share prices have been hammered following a couple of high-profile bank failures. The iShares U.S. Regional Banks ETF (IAT) has lost 30% in the last few months and is down 50% from the late 2021 peak. IAT is an excellent way to play the regional banks. The fund also yields over 4%.

Business development companies (BDCs) offer a different type of investment in the finance sector. BDCs don’t have to worry about deposits, plus they use little debt and benefit from higher interest rates. Hercules Capital (HTGC) currently yields over 11%. And, the company pays supplemental dividends. The HTGC share price of $14.70 is 1.35 times the book value—and the book value is growing. Historically normal pricing would be at 1.5 times or higher.Real estate investment trust (REIT) share values participated in the 2022 bear market, and they have continued to fall in 2023. Specific REIT sectors (office, medical) do face challenges. However, well-run companies also have tremendous opportunities to take advantage of distressed property owners. Simon Property Group (SPG) trades for $103, yielding 7.2%. This was a $180 stock before the pandemic. Investors have not yet discovered that business is very good for Simon.

There’s a dirty game Wall Street plays.  It’s been going on for ages so this isn’t something new. But it’s something many investors may not know about.  As you’ve seen, many companies recently are handily beating earnings estimates even while consumer sentiment is hitting lows.  What’s going on here?  Well, in my Thursday video, I’ll …

The Truth About Why Companies are Beating Earnings Read More »

The financial results for the Home Shopping and QVC television retail network’s owner have been, frankly, terrible for the last two years.

But the company is almost one year into its “Project Athens” turnaround plan, and if the plan is successful, one particular security could pay off very nicely…

Qurate Retail (QRTEA) owns and operates the two home shopping networks. Qurate was part of billionaire John Malone’s Liberty Media empire. In 2018, Liberty spun off its cable TV operations and other businesses, renaming the HSN/QVC business as Qurate Retail.

Qurate was hugely profitable, earning more than $2 billion in 2019. In 2020 the company paid a special dividend in the form of a new preferred stock, the Qurate Retail 8.0% Cumulative Redeemable Preferred (QRTEP). The preferred shares have a $100 par value and pay a $2.00 quarterly dividend. Uniquely, QRTEP had a mandatory redemption at par on March 15, 2021.

As the pandemic unfolded, Qurate ran into supply chain issues, worsened when its primary warehouse burned down. Profits almost completely dried up, with the company reporting losses for the last half of 2022 and the first quarter of 2023. The QRTEA value fell from above $12 in mid-2021 to below $1.00 today.

Even though it is a preferred stock, QRTEP went from trading steadily around par (actually up to $109) until October 2021 to declining along with the common stock shares. Over the last 18 months, QRTEP fell from over $100 to currently trading for about $35. From the stock prices of both shares, it looks like the market expects an eventual bankruptcy for Qurate.

In June 2022, the company announced a five-point turnaround plan dubbed “Project Athens.” The initiatives include (from the 2022 annual report):

Improve customer experience and grow relationships

Rigorously execute core processes

Lower cost to serve

Optimize the brand portfolio

Build new high-growth businesses anchored in strength

Since the start of Project Athens, the company has been working to strengthen its balance sheet. Property has been sold and leased back, debt paid down, and last week the company sold its Zulily online sales division and used the proceeds to reduce debt further.

Management’s stated goal is to return to profitability by the second half of 2023. If that goal is reached, the QRTEP share price will start to recover.

QRTEP shares offer a unique opportunity. The share price is $35 and the shares earn an $8.00 annual dividend, for a 23% current yield. The shares have a mandatory redemption for $100 in March 2031. If Qurate stays out of bankruptcy, a $35 investment now will return $160 in dividends and redemption value over 7.5 years. This is cash that must be paid if the company remains in business.

I am closely watching the quarterly results. QRTEP is on my Dividend Hunter recommended portfolio list. To see what other great income investments I’m looking at, take a look below.
Have you seen this market lately? It’s been chopping sideways for months… And according to legendary Hedge Fund Manager Stanley Druckenmiller, it could move sideways like this for the next 10 years… Meaning capital gains are DEAD… If you want any hope of increasing your wealth in a market like this, you need CASH… > >Click here to get the #1 cash income strategy for 2023.

An intriguing 3-legged options trade occurred in ride-sharing giant, Uber (UBER) last week. This strategy, known as a put spread collar, traded 24,000 times and has an August expiration. The purpose of this trade is generally to protect the downside for those that own the stock. With a put spread collar, the downside loss is …

Trade of the Week: Uber Read More »

“Buy Low, Sell High.”

That is the way all this works, right?

Buy stocks when they are low, and no one wants them.

Then, when everyone wants to buy stocks, it is a great time to sell and book your gains.

One of the great truths of Wall Street is that fortunes are born in bad markets.

The other great truth is that most people will be too afraid to buy stocks when markets are falling and unable to resist buying when everyone they know is excited about the stock market.

Right now, there is an opportunity to buy one of the most important segments of the market at a massive discount to the value of the companies in the industry.

Those that take advantage can expect to reap massive rewards over the next three to five years.

The secret of getting rich in stocks is to buy when there is blood in the street.

Are you brave enough to get rich?

Let me show you how…

For months, the share prices of most stocks have been in the doldrums or worse. Large-cap tech stocks have been the exception, posting nice gains so far this year.

Let’s check how a couple of covered call ETFs have performed compared to the most popular tech stock ETF.

It’s my favorite way of investing in tech…

The Invesco QQQ Trust ETF (QQQ) tracks the Nasdaq 100 stock index—the 100 largest companies that trade on the exchange. The portfolio is the who’s who of large-cap tech companies. Here are the top ten holdings.

Microsoft Corp. (MSFT)

Apple Inc. (AAPL)

Amazon.com Inc. (AMZN)

NVIDIA Corp. (NVDA)

Meta Platforms Inc. (META), a/k/a Facebook

Alphabet Inc. Class A (GOOGL), a/k/a Google

Alphabet Inc. Class C (GOOG), also a/k/a Google

Tesla Inc. (TSLA)

PepsiCo Inc. (PEP)

Broadcom Inc. (AVGO)

As of May 17, QQQ has gained 25.2% this year to date. For comparison, the S&P 500 has gained 8.75%, with almost all of those gains coming in January. QQQ has climbed steadily higher every month.

Covered call ETFs use an option selling strategy to generate cash income with an underlying portfolio. Selling calls can generate excellent cash income, but it also puts a cap on potential capital gains.

Two option-selling ETFs use the QQQ or Nasdaq 100 as their underlying assets.

From one website: “The Global X Nasdaq 100 Covered Call ETF (QYLD) follows a ‘covered call’ or ‘buy-write, strategy, in which the Fund buys the stocks in the Nasdaq 100 Index and ‘writes’ or ‘sells’ corresponding call options on the same index.”

The JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) throws in some active management. The fund strategy, taken from its website, says JEPQ:

Generates income through a combination of selling options and investing in U.S. large cap growth stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends

Seeks to deliver a significant portion of the returns associated with the Nasdaq 100 Index with less volatility

Constructs a long equity portfolio through a proprietary data science driven investment approach designed to drive portfolio allocations while maximizing risk-adjusted expected returns

Both funds pay monthly dividends. QYLD reports a current distribution yield of 11.63%. JEPQ quotes and SEC yield of 13.95%.

Let’s see how each has performed so far in 2023…

QYLD closed out 2022 at $15.91 per share. On May 17, it closed at $17.53. Dividends paid a total of $0.679 per share. A little math gives a year-to-date return of 14.44%.

JEPQ ended 2022 at $40.80. The May 17 close was at $46.51. Dividends paid total $1.81 per share. JEPQ has returned 18.43%.

The results show that a covered call strategy will likely lag a buy-and-hold strategy in an up market; however, in a flat-to-down market, the covered call ETFs should outperform.

JEPQ is a newer fund that launched in May 2022. In September, I recommended to my Dividend Hunter subscribers to sell QYLD and buy JEPQ. To see why, and what other income stocks I like, become a member today.
Have you seen this market lately? It’s been chopping sideways for months… And according to legendary Hedge Fund Manager Stanley Druckenmiller, it could move sideways like this for the next 10 years… Meaning capital gains are DEAD… If you want any hope of increasing your wealth in a market like this, you need CASH… > >Click here to get the #1 cash income strategy for 2023.

U.S. natural gas pipeline giant ONEOK (OKE) is set to buy Magellan Midstream Partners (MMP), which owns a pipeline network that primarily transports crude oil and refined products for $18.8 billion.

This is going to be huge for investors…

Magellan shareholders will receive $25 cash and two-thirds of an ONEOK share for each unit of stock they hold, representing a 22% premium to the company’s closing price before the deal announcement.

A Look at the ONEOK-Magellan Midstream Deal

This proposed deal will create one of the biggest oil and gas infrastructure companies in North America—a company with an enterprise value of $60 billion and a sprawling 25,000-mile network of pipelines stretching from North Dakota to Texas.

Pierce Norton, CEO of ONEOK, described the transaction as “transformational,” adding:

The combination of ONEOK and Magellan will create a diversified North American midstream infrastructure company with predominately fee-based earnings, a strong balance sheet and significant financial flexibility focused on delivering essential energy products and services to our customers and continued strong returns to investors.

Norton is right. And so is my colleague, Tim Plaehn, who loves the deal.

But don’t tell that to Wall Street, which hated the deal so much that ONEOK’s stock plunged 10% after the announcement.

Wall Street seems to be questioning the commercial logic from ONEOK in stepping out of its core natural gas transportation business to buy Magellan’s crude and refined fuels pipelines. Analysts think the businesses are so different that ONEOK management will not be able to handle it.

In a recent article about the merger, Tim wrote: “In its current form, ONEOK is a very well-managed energy midstream company. The shares yield about 6.5%, and earnings and cashflow will increase for 4% to 6% dividend growth.” Tim went on to quote a few highlights from ONEOK’s press release about the Magellan acquisition:

The transaction is expected to be earnings per share accretive beginning in 2024, with an accretion of 3% to 7% per year for 2025 through 2027.

Free cashflow (different from EPS) accretion is expected to average more than 20% from 2024 through 2027.

Free cashflow after dividends and growth capital investments will increase by about $1.0 billion yearly in the first four years after the merger.

“Bottom line,” Tim concluded, “The combined company will generate tremendous and growing free cashflow. That should lead to strong dividend growth. ONEOK has a history of dividend growth. The current rate is 28% higher than the dividend declared after the company rolled up its controlled MLP in 2017.”

I believe Magellan Midstream’s focus on crude oil and refined product logistics is a complement to ONEOK’s natural gas and natural gas liquids (NGL) franchises.

This will turn out to be a big benefit in the event that NGL pricing (which has been on the decline lately) continues to drop due to robust NGL production. Magellan’s other liquids-focused assets will pick up the slack. Keep in mind that NGLs typically make up 55% to 60% of ONEOK’s annual EBITDA.

And even if you ignore this deal, ONEOK has great growth prospects, thanks to its plans in Mexico.

The company has filed for approval for a new pipeline to connect ONEOK pipes (Roadrunner pipeline) at the U.S. and Mexican border, where a final investment decision is expected this year. Mexican gas demand growth has long been an attractive area. ONEOK’s peer TC Energy (TRP) has projected its Mexican earnings to double over the next few years.

And at its core, both ONEOK and Magellan Midstream are still energy pipeline businesses. And both companies own increasingly rare assets. Let me explain…

The Future of the Pipeline Business

For pipeline builders, the shale era brought a wealth of opportunities. As gushers of oil and natural gas suddenly erupted in places such as North Dakota and Pennsylvania, the need for a vast expansion of the plumbing that moves fuel around the country was obvious. That’s what led to a decade-plus-long boom that produced thousands of miles of new pipelines.

The shale growth story is not over in the U.S. oil and gas patch, but it is slowing. And for certain, the associated pipeline building boom has pretty much run its course. An increasingly inhospitable regulatory environment has delayed or canceled a number of major projects.

These circumstances make acquisitions one of few remaining paths to growth. ONEOK management understands the current reality—and it is correctly looking at its future prospects, considering the energy transition.

ONEOK is starting to look for new growth opportunities in moving around low-carbon fuels, such as hydrogen and biofuels or transporting carbon dioxide from carbon capture and storage projects…even though none of those businesses currently exists in scale. In discussing the Magellan deal, ONEOK’s CEO, Pierce Norton, told analysts that the new company’s larger size would make it better prepared for the big changes coming “down the pipe,” adding: “Scale does matter going into the future, especially going into wherever energy is going.”

Norton continued: “As far as hydrogen and…renewable fuels, those kind of things that can move through these [pipelines]. The future is going to determine that. It’s going to be determined by what the customers are desiring and the cost. But having these two companies combine sets us up for that opportunity.”

I agree with Tim Plaehn’s assessment…there will likely be high single-digit to double-digit dividend increases starting next year for the combined companies. If you buy shares of OKE now, you will be happy with the investment for the next decade. Buy it under $62 a share.
Have you seen this market lately? It’s been chopping sideways for months… And according to legendary Hedge Fund Manager Stanley Druckenmiller, it could move sideways like this for the next 10 years… Meaning capital gains are DEAD… If you want any hope of increasing your wealth in a market like this, you need CASH… > >Click here to get the #1 cash income strategy for 2023.

 Some stocks are good for investing and others are better for trading. Bitcoin has become a popular trading instrument and may end up being at least somewhat uncorrelated with other asset classes. Currently, ProShares Strategy Bitcoin ETF (BITO) is a popular way to trade bitcoin (that uses bitcoin futures). Coming in June, the 2x Bitcoin …

Trade of the Week: Bitcoin Read More »

Last week, when ONEOK Inc. (OKE) announced it would acquire Magellan Midstream Partners LP (MMP) in a $18.8 billion deal, the market disliked the news and the stock dropped by 10%.

The market is wrong about this tie-up.

I can prove it with one word…

ONEOK is an energy infrastructure company focused on natural gas and natural gas liquids. The company provides gathering, processing, and transporting services. Magellan Midstream Partners owns a pipeline network that primarily transports crude oil and refined products. There is little or no overlap between the services provided by the two companies. The combined company will offer a much broader range of services than either would as a standalone. Also, ONEOK is organized as a corporation, and Magellan is a master limited partnership.

The deal, which was announced Sunday night, is a cash and stock transaction, with Magellan unit holders receiving $25.00 per unit in cash plus 0.6670 shares of OKE. The implied value as of May 12 was $67.50 per MMP unit. The MLP closed that Friday at $55.41.

ONEOK is on the list of recommended investments for my Dividend Hunter service, and I was pleased to get the press release announcing the deal. However, the market was not of the same mindset. OKE closed on May 12 at $63.72, and at the close on Tuesday, May 16, the stock price was at $56.58, giving an 11% decline over the two days. I suspect the amount of OKE shares given per MMP unit may be adjusted.

As I read the press release and reviewed the presentation slides, one word shows the power of this deal for OKE investors: “accretive,” meaning “adding to.”

In its current form, ONEOK is a very well-managed energy midstream company. The shares yield about 6.5%, and earnings and cashflow will increase for 4% to 6% dividend growth. The press release notes these benefits of the Magellan acquisition:

The transaction is expected to be earnings per share accretive beginning in 2024, with an accretion of 3% to 7% per year for 2025 through 2027.

Free cashflow (different from EPS) accretion is expected to average more than 20% from 2024 through 2027.

Free cashflow after dividends and growth capital investments will increase by about $1.0 billion yearly in the first four years after the merger.

Bottom line: The combined company will generate tremendous and growing free cashflow. That should lead to strong dividend growth. ONEOK has a history of dividend growth. The current rate is 28% higher than the dividend declared after the company rolled up its controlled MLP in 2017.

I will be looking for high single-digit to double-digit dividend increases starting next year. If you buy shares of OKE now, you will be happy with the investment for the next decade.
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