This Energy Trade Could Post Triple-Digit Gains

Investors often try to figure out themes in the financial markets once a new trading year hits.  2017 was all about low volatility, cryptocurrencies, and tax reform.  With tax reform out of the way, we still have low volatility and cryptocurrencies/blockchain tech on the board.  What else could be in store?

Obviously, the jury’s still out on what the new trends will be this year – if there are any new ones.  So far, conditions have been a lot like 2017.  However, I believe we’re going to start hearing and seeing more about inflation.

You see, the economy is already doing well.  Add in tax cuts for individuals and businesses, and there’s going to be even more money floating around.  That extra money could easily make its way into the consumer/business spending ledger.  If enough money is spent on goods and services, we could finally see a ramp up in inflation.

Investors are already showing some concern about inflation, with the move into gold this year.  So far, the price of gold is up about 8% since-mid December.  It’s the first time since last September that gold is closing in on $1,350 per ounce.  Keep in mind, gold is a very common hedge against inflation.

Here’s the thing…

Besides gold, most commodities generally serve as a good inflation hedge.  Commodity prices tend to go up as the price of the dollar goes down (a recipe for inflation).  Many investors look to precious metals in these scenarios, but energy is also a big beneficiary of inflation hedging.

Crude oil is already up close to 7% just this year (all two weeks of it).  Natural gas is up close to 9%.  What’s more, energy stocks are following suit.  The Energy Select Sector SPDR ETF(NYSE: XLE) is up over 7% year-to-date.

At least one very well-funded trader believes XLE and energy stocks are going to continue their run higher. With XLE trading around $76.50, the trader purchased 27,000 March 77 calls for $1.67.   That means the trader will start generating profits above $78.67 at expiration.

This is obviously an extremely bullish trade.  The trader is betting $4.5 million that XLE is going to keep going higher.  Every $1 XLE rises above the breakeven point will result in $2.7 million in profits.

Now, this is a nice, easy way to make a bullish bet on XLE.  However, if you want to save some money, you could also do this trade as a call spread.  Using a call spread (selling a higher call against your long call in the same expiration) would substantially reduce costs, but also cap your gains.

For example, at the time this trade was executed, you could have sold the 81 calls for about $0.50.  The total cost of the trade would have been reduced to around $1.15.  To find max gain potential you just find the width between the long and short strikes ($3) and subtract the price paid ($1.15) and you get $1.85.  That’s potential gains of 160%.  A call spread like this is an easy way to lower your risk without sacrificing too much in potential upside.

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Source: Investors Alley 

3 High Yield REITs for Retirement

Share values of real estate investment trust (REIT) companies have been dropping since the Fed announced its last Fed Funds Target Rate increase on December 13. The Fed started raising interest rates in quarter percent increments in December 2015. Each of the four rate increase announcements has been accompanied by a pull back in REIT values. These declines have been short-lived and can be viewed as buying opportunities.

2017 was an interesting year for the REIT sector. While most of the S&P market sectors had stellar returns for the year, REITs as a group returned just a positive 5.1%. In contrast, the S&P 500 gained 21.8%. With average REIT yields near 4%, the 5% total return gives the impression that REIT values did not do much in 2017. This chart of the SPDR Dow Jones REIT ETF (NYSE: RWR) shows that while the values at the start and end of the year were close to the same, there was a lot of share value action during the year.

In total, there were nine significant swings of REIT values over the run of 2017. This chart shows that to make money with REITs when the Fed is increasing rates, investors would be best served by accumulating shares during the dips. The price swings show that results for individual investors last year could range from a significantly negative total return up to close to double-digit positive total returns. Buying at lower share prices also results in an increased dividend yield, which would further boost an investor’s total returns. The REIT sector last peaked in mid-December just after the last Fed rate increase. Since then REIT values are down by 6.5%. This is the time to pick up some high-quality REITs and watch the share values for signs that prices have bottomed for this cycle. It’s not possible to pick and exact bottom, but the good news is that some very high-quality REITs are now sporting very attractive yields.

In an environment where the Fed is raising rates, the REITs to own are the ones that can and will grow their dividends at a faster rate than the interest rate increases. Here are three to consider:

Ventas, Inc. (NYSE: VTR) is one of the largest REITs operating in the healthcare sector. This REIT sector has been hard hit on the fears associated with having the Federal government as a major source of healthcare services payments.

VTR is down 23% from its 52-week high, and the shares yield 5.75%. This is a full percent above the four-year average yield for Ventas. This company should grow its dividend by 4% to 5% per year.

I’ve been in and out of VTR in my Dividend Hunter service several times for both the dividend payments as well as the share price swings bagging some nice gains each time.

MGM Growth Properties LLC (NYSE: MGP) owns casino properties that are master leased to MGM Resorts International (NYSE: MGM). MGP has increased its dividend three times since it was spun-off by MGM in spring 2016.

MGP currently accounts for 24% of total rooms and 35% of private (non-municipal) convention space on the Las Vegas Strip.

I forecast continued 6% to 8% annual dividend growth.

The MGP share price is now 10% below the 2017 high on speculation that parent company MGM may incur huge liabilities from the tragic Mandalay Bay incident last year. The shares yield 5.9%.

EPR Properties (NYSE: EPR) is now trading at 22% below its peak value. EPR functions as a triple-net lease (NNN) REIT. With this model, the tenants that lease the properties owned by EPR are responsible for all the operating costs like taxes, utilities and maintenance. EPR’s job is to collect the rent checks.

This REIT owns multiplex movie theaters, golf and ski entertainment facilities and private/charter school properties. EPR has been in growth mode over the past year: it now holds more properties in six of the 10 categories it owns, one is completely new, two have the same number of properties, and only one so saw the number shrink by two properties.

EPR is a steady 7% per year dividend growth and pays monthly dividends. The shares currently yield 6.8%.

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Source: Investors Alley