IOI is reprising a feature Erik developed while editor of the Morningstar OptionInvestor newsletter called the “Covered Call Corner.” This spreadsheet lists stocks that Morningstar considers “Wide Moat” (i.e., having durable competitive advantages) that are trading at or below their “5-Star” price (i.e., “Recommended Buy”) and covered call / short put candidates expiring in three months or less. IOI subscribers can download recent and prior versions of the Covered Call Corner in IOI’s Research area.
Covered calls and short puts are what we term “bond replacement” investments and in the IOI 100 series course on options, we talk about how to incorporate a bond replacement allocation into a traditional stock and bond portfolio. The implied yields on these covered calls and short puts is much higher than you can get by buying a bond issued by one of these companies. If you keep in mind that these instruments are “quasi-equity” (so represent a relatively smaller portion of a bond allocation) and that the position size should be small enough to maintain adequate diversification, these “bond replacement” option sales can boost the overall yield of your portfolio.
We talk about the structural factors that inform the stock “calls” made by sell-side and third-party research providers in the IOI 101 course, and indeed, analysts at Morningstar fall prey to these structural and behavioral issues just like every other analyst on the Street. That said, from a former insider’s perspective, the “Wide Moat” “5-Star” stocks are the most carefully vetted ideas published by Morningstar, so a reasonable starting off point for this kind of a screen.
We have decided to use Morningstar’s ratings for a few reasons:
- Morningstar is value-based, so broadly aligns with IOI’s strategy of investing in valuation discrepancies
- Many of Erik’s readers have followed him since his Morningstar days and are current Morningstar clients
If you believe another stock rating company’s work is a good fit with IOI’s valuation methodology, do let us know using the button below — we’ll work on creating a similar feature using that company’s research as well.