Here Comes Earnings Season
With continuing challenges to control COVID-19 in many parts of the country, earnings season arrives with plenty of uncertainty. Many analysts continue to predict large year over year drops in earnings for most of the S&P 500 companies. The mega-cap FAANG tech stocks are generally expected to continue to do well in the current environment but beyond that, it's anyone's guess. The real question is will the markets trade flat, drop or move into rally mode? Without a really great catalyst like another huge stimulus bill from Congress or more action from the Federal Reserve, in the absence of great earnings numbers, my best guess is the market overall moves sideways into the Fall possibly setting up for a rally in the winter as the economy shows more signs of recovery. If that's the case, it's probably a great environment for buying quality companies and selling calls, since there should be minimal downside for the stock price thanks to the Federal Reserve's "easy money" policy (plenty of volatility of course but should track flat to the market) and you can keep more of your call premiums without getting exercised.
One recent addition to my portfolio was Netflix (NFLX). This Company continues to benefit from the stay at home trend and is also well situated for the long, slow recovery. I picked up some shares last week in advance of earnings on 7/16 and immediately sold slightly out of the money calls with a very nice premium and the same day the stock hit the exercise price. Either way, it will be a nice profit whether the stock stays up there and I get exercised or drops after earnings and I get to keep the stock and premium and sell more calls. Netflix is not a bad stock to hold in your portfolio long term. I am also holding Lululemon (LULU) and Lennar (LEN); both companies are leaders in their industries, have great long term upside and have solid call premiums in the meantime.
I have tried to stay away from the very speculative stocks for this strategy like the airlines, cruise ships, companies on the verge of or in bankruptcy, etc. Many of those trades may look attractive, but you always have to think of the worst case scenario especially if you are using any margin to invest. My simple rule is don't buy anything you wouldn't mind holding in your portfolio for a very long time - companies with a good secular growth story, industry leaders, strong balance sheets, etc. From my recent experience, I think the Invesco QQQ Series Trust (QQQ) (one of the best diversified ways I have found to invest in the FAANG stocks and also other great companies in the top 100 Nasdaq by market cap) and Abbvie (ABBV) (a growing pharma company with a great dividend - currently 4.77% yield) continue to look good in light of the current environment, have upside potential and also pay a dividend - these two have been particularly good for the covered call strategy over the last couple of months.
Another earnings season idea that looks interesting is Boeing (BA). This is a company that has seen it's ups and downs this past year both internally (737 Max) and externally (COVID-19 impact on airline industry). Boeing's business includes not only commercial aviation, but defense, space and security systems which gives it some diversification. It currently trades at $181, about $60 below the average of the 52 week high and low prices, so would appear to have some upside with a little good news. Earnings is scheduled for 7/22 and the 7/24 calls for $185 (slightly out of the money) are a whopping $11.35, which means for owning 100 shares you could collect $1,135 in call premium and potentially make another $400 if the stock goes above the strike price at expiration. Worst case, you keep the $1,135 and sell more calls for the following weeks - with the stock's recent volatility premiums should continue to be attractive.
Of course, you will need to do your own homework and invest where you feel comfortable. What I have provided above is simply my strategy and I'm not recommending any particular stock or strategy. Stay safe, healthy and positive. I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020.
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