January 18, 2023

Watch the Earnings Forecasts

Earnings season is here again. It’s that time of the quarter that has so often buoyed and reinvigorated the market. But this one is unusual because average earnings are expected to shrink.

Earnings boomed after the pandemic. But now there are much tougher year-over-year comparisons and a slowing economy. The average earnings for S&P 500 companies are expected to decline 3.9% from last year’s fourth quarter.

Of course, the realization of that 3.9% decline per se shouldn’t bother the market. After all, we are in a bear market largely because investors expected inflation and Fed hawkishness to cause this. Earnings are mostly about expectations. These earnings are particularly important for what they portend for the rest of the year.

Most CEOs are dour about the economy for 2023. Worse-than-expected guidance for the rest of the year could roil the markets. Earnings are part of the economic story, which is becoming a bigger factor than the inflation/Fed conundrum that has been the main catalyst for the past year.

With inflation falling and the Fed chilling, recession is taking center stage. Most economists are forecasting a recession this year, but a mild one. It could be deeper or longer lasting than currently expected. Earnings could lend some insight.

There is a good chance the market continues to bounce around, in 2022 fashion, until there is more clarity on when the bottom will occur and when the recovery might begin. Until then, the portfolio is remaining conservative, with a high cash allocation, mostly defensive stocks, and more fixed-income positions.

Recent Activity

January 11^th
Purchased Vanguard Long-Term Corp. Bond Fund VCLT) - $80.35

Current Allocation
Stocks 30%
Fixed Income 20%
Cash 50%

High Yield Tier

Enterprise Product Partners (EPD – yield 7.6%) – The midstream energy partnership has been on a roll since just before Christmas. It’s up about 10% in four weeks and at the highest level since the summer. Midstream stocks sold off with all dividend stocks as interest rates soared in the late summer, but, like many defensive dividend stocks, have come roaring back. EPD returned 18.4% in 2022 while the S&P 500 delivered a -19.4% return. I expect the market outperformance to last well into 2023. (This security generates a K1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.3%) – This midstream energy stock has made a huge 38% move higher from the September low. The stock has broken out to the highest level since the spring and is within 6% of the 52-week high. It’s worth noting that OKE is still farther below the pre-pandemic high, which was achieved with significantly lower earnings than the company has now. Revenues are both recession and inflation resistant. The high dividend is safe. And the stock is still reasonably valued. BUY

Realty Income (O – yield 4.7%) – After surging in late October through early November, O had been bouncing around and could never get above the 65 per share level. But last week it finally broke above 65 for the first time since the summer. Hopefully, it can run for a while longer. Investors appear to be appreciating a defensive and legendary income stock amid the current uncertainties. I expect more of the same in the early part of this year as we move toward a recession. BUY

The Williams Companies, Inc. (WMB – yield 5.2%) – WMB has been a bit of a dud lately. It held up much better than its midstream energy peers when the sector took a hit in the fall. But it has been a laggard since the sector’s performance improved. The market seems to like its defensive characteristics best and it tends to rally with the more defensive plays. That could be a great thing if the current rally rolls over. It pays a big income and thrives amid inflation and recession. Prospects for this year remain excellent. BUY

Medical Properties Trust, Inc. (MPW – yield 9.0%) – This undervalued and high-paying hospital REIT has moved well off the low and is at the high point of the recent range. It’s on the cusp of the highest price level since the summer. That’s huge because the stock has a lot going for it. The company delivered terrific earnings last quarter with profits up 30% over last year. The hospital business is also defensive and good for a recession. With that dividend and some momentum, this becomes a very good stock. HOLD

Dividend Growth Tier

AbbVie (ABBV – yield 3.9%) – ABBV was one of the very best stocks to own as the markets struggled in the fall. But it has lagged during the recent rally. Its near-term fortunes seem to be tied to the desirability of defensive stocks. That could be a good thing if the market turns south again. And ABBV also has some powerful longer-term factors going for it. AbbVie has 11 other drugs besides Humira that are on track to top $1 billion in net revenue this year. It also continues to sell at an extremely cheap valuation. HOLD

Broadcom Inc. (AVGO – yield 3.2%) – This software and chip company goliath has been trending consistently higher since October. It’s made a very big move and is up about 40% from the low. Its fortunes are somewhat tied to the technology sector but it has done a lot better than its peers of late. That could be because Broadcom reported 21% revenue growth and a 34% earnings increase over last year in the last quarter. AVGO should continue moving higher as the overall tech environment improves. HOLD

Brookfield Infrastructure Partners (BIP – yield 4.2%) – The infrastructure juggernaut has made a nice move off the low and is up over 11% already this month. The stock had been a laggard for a defensive stock, largely because of the strong dollar and its negative effect on overseas revenues. But a recession is likely in 2023. And Brookfield has crucial assets likely to perform very well in a recession as well as growth projects coming online. A strong dollar is already reflected in the price and Brookfield’s recession and inflation resilience should rub off on the stock in the months ahead. (This security generates a K1 form at tax time). BUY

Eli Lilly and Company (LLY – yield 1.2%) – After a phenomenal 2022 where LLY returned 34%, it is lagging the rally so far this year as investors have favored more cyclical stocks over defensive plays. But that will probably change. Plus, Lilly has a lot of other things going for it. Not only is Lilly expected to deliver annual earnings growth of 19% over the next five years, but it also has two incredible drugs in the pipeline that are potential future mega-blockbusters. HOLD

Intel Corporation (INTC – yield 4.8%) – INTC has had a nice move of the low and is up 14% so far this month. It’s also close to price levels not seen since late summer. It may be early to declare that the bottom is in but it’s certainly possible. The situation will surely improve for technology at some point. Hopefully, the big turnaround isn’t that far off. Intel’s individual prospects should significantly improve as growth investments come to fruition. HOLD

Qualcomm Inc. (QCOM – yield 2.5%) – QCOM is up well over 10% so far this year after a terrible year in 2022. Is this market rally for real and sustainable? I have my doubts. That said, there’s a great chance that 2023 will be a strong year for QCOM. Technology will likely recover at some point during the year and QCOM should have strong leverage to the upside when that happens. The bear market rallies give you a preview of how fast QCOM can move higher when the situation improves. Before long, the market, which tends to anticipate six to nine months ahead, may start pricing in a real recovery in the sector. HOLD

Visa Inc. (V – yield 0.8%) – Things are looking up for V. The stock is now over 220 per share and at the highest level since last April. V is also up over 25% from the fall low. Last year’s bear market was terrible for cyclical and financial stocks. But V held up remarkably well under the circumstances, returning -3.4% for 2022. And the market situation is likely to get a whole lot better later in 2023. V is typically one of the first stocks to recover when the market eventually turns. We’re seeing the evidence of that already. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.0%) – NEE has leveled off over the past six weeks or so after roaring back from the low in October. It is up over 27% since the low and is forming a solid base at this higher level. NEE is also well positioned for a weaker economy and possibly recession in the months ahead. The earnings are defensive but also growing because of the company’s huge presence in alternative energy, where costs continue to fall. It’s a great stock to own anytime. But heading towards a likely recession it’s one of the very best. BUY

Xcel Energy (XEL – yield 2.8%) – This clean energy utility stock keeps going, albeit slowly. XEL is still in an uptrend that began in October. It is up over 22% since the October low and posted a positive 6.44% return for 2022. That may not sound like much, but XEL outperformed the market by better than 25% last year. XEL is also not far from the high ahead of a likely period of historical outperformance. BUY

USB Depository Shares (USB-PS – yield 5.5%) – This preferred stock has bounced around a little bit in price since being added to the portfolio. But the price has risen back near the high as interest rates have fallen back near the recent low as economic forecasts deteriorate. A likely recession this year could pressure rates still lower and this high fixed yield with a stable price should be a great holding. BUY

Invesco Preferred ETF (PGX – yield 6.3%) – Ditto what I said about USB-PS. Longer-term rates are still near the highest level in 15 years. And most economists are predicting a recession next year. This provides diversification from stocks with a high income ahead of a period when interest rates could fall back. BUY

Vanguard Long-Term Corp. Bd. Index Fd. (VCLT – yield 4.4) – The same interest rate story for the last two positions above applies here. The timing is probably good to lock in higher rates on investment-grade bonds ahead of a likely recession. BUY

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