Last week, we were watching the S&P 500 to see if it was going to break below 2,800. This week, we’re watching the S&P 500 to see if it can break above 3,000.
Why the change? Well, the bullish shift in market sentiment seems to have been driven in large part by hopes that the reopening of the U.S. economy, low-interest rates and potential treatments for the coronavirus could spark an economic recovery — even if that recovery is more “swoosh-shaped” than V-shaped.
This is great news for our portfolio because as the market rises, we can generate some extra income on our newly acquired shares of Extra Space Storage (EXR) by selling a covered call.
EXR’s First-Quarter Earnings
We’ve recommended positions on EXR before, and before we discuss its recent earnings report, we want to review how a real estate investment trust’s (REIT) earnings differ from a regular company’s.
A REIT passes along most of its net income to shareholders in the form of ordinary dividends, which makes these stocks attractive during a period of low-interest rates.
But passthrough entities like REITs require more specialized analysis when it comes to earnings. For example, if you own a bunch of real estate assets, the way you recognize depreciation and amortization expenses for tax and reporting purposes doesn’t make much sense. Real estate tends to appreciate even if it is being “expensed” over time on the income statement.
Additionally, a REIT may sell real estate for a profit, which can distort net income with inconsistent bursts of cash flow that aren’t sustainable. However, while we can’t use normal measures like earnings, we can monitor funds from operations (FFO). FFO adds back in depreciation and amortization and removes income associated with property sales.
EXR’s FFO numbers are consistently positive, and its recent earnings report was no exception. The company beat expectations, but it hasn’t seen a big jump higher in the past two weeks.
One reason might be the fact that the company pulled its guidance for 2020, and it didn’t offer any revised expectations. As we’ve discussed in the past, providing guidance — even inaccurate guidance — projects confidence and mitigates uncertainty.
EXR’s lack of guidance will likely keep it lower in the short term.
EXR’s Bounce is a Selling Opportunity
We originally purchased shares of EXR for $95 each, and we still like the stock. We don’t want to risk having it called away for a lower price if we can help it. This week, EXR bounced up off of the down-trending support level the stock has been interacting with for most of 2020, and that bounce higher means we can sell a call option with a higher strike price for a decent premium.
Daily Chart of Extra Space Storage (EXR) — Chart Source: TradingView
The best time to generate income by selling covered calls is when the underlying stock is bouncing higher. Call premiums tend to be higher when the underlying stock is making a bullish move.
If you, like us, have been holding shares of EXR, selling a covered call could be a great way to earn some extra income while you wait for the stock to recover.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.