July 31, 2024

Earnings Will Kill or Revive This Market

The market is going from wobbly to ominous. As of Tuesday’s close, the S&P is negative for the month of July after having been up 3.5% in the first few weeks of the month.

It’s technology. The weakness in the sector that began in the middle of July is continuing. The worry started with the report of AI chip export restrictions to China and has grown into fears of sector overvaluation and slowing growth. But it’s the heart of earnings season. And earnings will confirm or deny those fears.

So far, earnings have not been very encouraging. But this is a pivotal week as magnificent seven stocks Microsoft (MSFT), Meta (META), Apple (AAPL), and Amazon (AMZN) all report earnings. The reports and the market reaction will tell us a lot about what we can expect from this market for the rest of the summer. We should have a much better idea next week.

All those big tech stocks have been weaker leading up to earnings, but there is still the AI catalyst. There’s a chance that renewed AI excitement will turn things around. A continued market rally depends on it. True, the rest of the sectors are expected to post better growth than in many quarters, and these stocks have thus far picked up much of the slack from technology. But they can’t compensate for a sharper move lower in the tech sector.

It’s the heart of earnings season for the portfolio as well. Enterprise Product Partners (EPD), AbbVie (ABBV), American Tower (AMT), Digital Realty (DLR), Visa (V), and NextEra Energy (NEE) all reported earnings this past week, with mixed results. Brookfield Infrastructure Partners (BIP), FS KKR Capital (FSK), ONEOK (OKE), The Williams Companies (WMB), McKesson (MCK), Eli Lilly (LLY), and Qualcomm (QCOM) all report later this week or next week.

Recent Activity

July 10^th
Purchased Cheniere Energy. Inc. (LNG) - $174.92
SOLD Marathon Petroleum Corporation (MPC) - $162.18

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.2%) – This great infrastructure company stock finally got a move on. It is now at the highest price since last fall. It’s now up over 14% in July alone. BIPC had been a stellar performer for many years prior to inflation and rising interest rates. Higher interest rates increase borrowing costs and limit the company’s ability to profitably fund growth projects. But there is pent-up upside in BIPC when interest rates significantly decline. The operational performance has been sound. Brookfield reported strong earnings last quarter and reports again later this week. (This security generates a K1 form at tax time). BUY

Enterprise Product Partners (EPD – yield 7.0%) Earnings – This midstream energy partnership reported earnings on Tuesday that were completely solid, but the stock was down over 2% the morning after the earnings release. It technically missed estimates by a penny, but earnings were still up 12% over last year’s quarter. Enterprise also invested $1.3 billion in expansion for the quarter and has completed half of its $2 billion stock buyback program. The distribution is also 5% higher than a year ago and there is still an industry standout 1.6 times distribution coverage with cash flow. The story is intact and EPD should continue to slowly trend higher. But it was near the high in a wobbly market and there might be some profit taking. (This security generates a K1 form at tax time). BUY

FS KKR Capital Corp. (FSK – yield 13.8%) – The massive-yielding BDC pulled back last month after the quarterly payout went ex-dividend. When a yield is this high and this important to the stock, the ex-date has a noticeable impact. But after the BDC absorbed the ex-dividend, it has been crawling back toward the high and is now within pennies. So far, FSK is delivering as advertised. It’s continued to pay the massive dividend and the price has appreciated since it was added to the portfolio. BUY

Main Street Capital Corporation (MAIN – yield 5.6%) – The performance of this Business Development Company continues to be solid. MAIN pulled back somewhat after making a high in early May, but it moved higher again in June and made a new 52-week high earlier this month. It’s still in an uptrend that began last fall and has been steady for weeks. MAIN paid the regular monthly dividend of $0.72 per share in the second quarter and will again in the third quarter, marking a 6.7% increase year over year, as well as a $0.30 supplemental dividend. The current yield is reflected above as 5.6% because I only include the regularly scheduled dividend. Including the supplemental dividends, the yield is 8.1%. BUY

ONEOK Inc. (OKE – yield 4.8%) – This is an amazing midstream energy company. Earnings are rock solid with inflation protection and recession resilience. After a rare period of weakness when investors focused on AI, OKE surged to a new high in July, although it has pulled back and is just a little higher for the month. The high yield should be at a premium in a likely more sideways market going forward. It is a more volatile stock than the other midstream companies that have been in the portfolio. That has been a good thing in this market rally and OKE has already returned 19% YTD. There has been some weakness, along with the overall market in the last few weeks, but ONEOK will report earnings next week. BUY

The Williams Companies, Inc. (WMB – yield 4.4%) – Even this steady performer is down over the past week. WMB moved down a few dollars after making another new high last week. Midstream energy companies had been hot, and a minor consolidation in a weak market is quite normal. Williams reports earnings next week, and the earnings report was excellent last quarter. The company also guided to the upper half of 2024 estimates. WMB is still in an uptrend that began in the middle of February. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.5%) Earnings – The cutting-edge pharma stock reported earnings that indicate it is weathering biosimilar competition better than expected. ABBV got a 3% bump after the report and is up 7.5% over the past week to a new 52-week high. Revenue beat but earnings missed estimates, but the main story is the performance of its immunology business. Newer drugs Rinvoq and Skyrizi are killing it with a combined $4 billion in revenue for the quarter, and Humira also did better than expected. AbbVie is well on track to replace the Humira revenues and return to robust profitability next year. These are challenging days and AbbVie is getting through them in great shape ahead of much greener pasters in the future. BUY

American Tower Corporation (AMT – yield 3.1%) Earnings – The previously lackluster-performing cell tower REIT has taken off. American Tower reported strong earnings on Tuesday that catapulted the stock to a new 52-week high. AMT is now up about 30% since April. The REIT reported a better-than-expected 13.4% growth in adjusted funds from operations over last year’s quarter. Growth of existing cell towers is strong as new customers are being added to existing towers, and the properties continue to expand in the U.S. and overseas. It also raised guidance for 2024. It’s a solid REIT with stronger growth than most of its peers. BUY

Broadcom Inc. (AVGO – yield 1.3%) – Nothing goes straight up. AVGO had been sailing for a long time, but it has recently been knocked 20% below the high. The stock has now surrendered nearly all the gains from last quarter’s earnings and the 10-for-1 stock split. Technology stocks have been struggling over the last several weeks, especially semiconductor stocks. The big tech stocks are stumbling, and the market is waiting to see if they will be saved by earnings. This is a big week that should leave us with a better idea as several Magnificent Seven stocks report. AVGO probably got too high in the near term. But it is now much closer to a realistic valuation. If the selling gets ugly, I’ll buy more as the longer-term prognosis is still spectacular. HOLD

Cheniere Energy, Inc. (LNG – yield 1.0%) – There isn’t much to say about this newest portfolio addition in the short time since it was added to the portfolio. It’s up so far along with the rest of the market. The LNG export market has a very promising future as Europe and Asia will have a huge demand for the stuff for many years to come. LNG stumbled a bit last week amid the market selloff but has since recovered nicely and is not far from the 52-week high. BUY

Digital Realty Trust, Inc. (DLR – yield 3.3%) Earnings – The data center REIT reported earnings that were slightly below last year’s quarter but reiterated previous full-year guidance. The market didn’t much care for the report, and the stock lost a couple percent since. But more impactful than the earnings report is the selloff in the technology sector. DLR has fallen 11% from the high in the middle of July when the sector troubles began. But DLR is still up 11% YTD, and technology stocks are down but by no means out. It’s been bouncy, but make no mistake about it, DLR has vastly outperformed the REIT index over the past several years because of the data center exposure. BUY

Eli Lilly and Company (LLY – yield 0.6%) – It’s been a rare pullback for this superstar. LLY fell over 10% in a week after Roche Holding (RHHBY) reported strong clinical results for its new weight-loss drug. LLY has also pulled back 18% from the high made in the middle of July. It could be significant competition that could limit future sales. But this was inevitable, and the weight-loss market is massive. Meanwhile, Lilly’s weight-loss drug, Zepbound, was just approved in China. Everybody wants to get into this lucrative market and there will be more competition. We’ll see how good these drugs are and how long it takes to get them to market. Lilly also has its Alzheimer’s drug up for FDA approval soon. HOLD

McKesson Corporation (MCK – yield 0.4%) – After a rare pullback, the supply chain pharmaceutical company stock is right back in business and just made a new high this week. MCK is still very much in an uptrend that began after the pandemic and it’s up over 29% YTD. McKesson reports earnings next week and has already indicated earnings growth of 14% to 17% for this year. The pharmaceutical supply chain Goliath dominates a market that grows all by itself because of the aging population. Next week’s report should be another positive for MCK. BUY

Qualcomm Inc. (QCOM – yield 1.7%) – This ain’t pretty. The technology sector, and chip stocks in particular, continue to get hit. QCOM fell about 15% so far in July after having already declined nearly 15% from the high. The main issue was that the Biden administration put additional restrictions on AI chip exports to China. Chip makers that sell to China took a huge hit because of not only the export curbs but fears of retaliation. The fear has expanded to overvaluation in the sector as earnings are likely to slow. But Qualcomm is still well positioned ahead of AI coming to mobile devices, which should trump any of these issues over time. Earnings will be reported later this week. Hopefully, it will be a strong report that revitalizes the stock in the near term. BUY

UnitedHealth Group Inc. (UNH – yield 1.5%) – The previously beleaguered healthcare insurance giant got a new lease on life. After wallowing in oblivion since seemingly forever, UNH soared about 20% since early July and made a new 52-week high. Earnings drove the stock. UnitedHealth beat earnings forecasts as it added more patients and pharmaceutical customers despite a continuing negative effect on profits from the February cyber-attack. UnitedHealth also reaffirmed previous guidance for 2024. The market is apparently happy and reassured. BUY

Visa Inc. (V – yield 0.8%) Earnings – The stock sold down several dollars after a strong earnings report was in line with expectations. Net revenue was up 10% and earnings soared 17% over last year’s quarter. But it was something behind the numbers that spooked Wall Street. Some key business drivers decelerated. Total payments volume growth slowed from 9% to 7%, marking the weakest quarter for that metric since 2020. The company said it is seeing reduced buying activity from lower-end consumers. But Visa also reiterated guidance for the full year. We’ll see if the consumer continues to roll over, and we’ll hold the stock for now as it has leveled off. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.4%) – The niche REIT that owns and operates innovation campuses reported earnings last week that were basically solid. The REIT beat on earnings and missed on revenue and reiterated guidance. Yet, earnings were only up 5.4% while revenues jumped 7.4%. The lease rates were solid, and Alexandria reported a healthy number of new acquisitions. So far, the market hasn’t had a great reaction to the results, and ARE is down over 6% since last Monday’s report. It may be giving back some of its recent advance in the absence of an exciting earnings report. BUY

NextEra Energy (NEE – yield 2.8%) Earnings – The regulated and alternative energy utility reported earnings last week that missed expectations. But the stock is up slightly since the report because the growth trajectory is still excellent. NextEra forecasts revenue growth of 8.3% per year over the next three years, compared to average growth of 4.7% for the electrical utility group. There is also anticipation of a steep acceleration in electricity demand in the years ahead prompted by onshoring of manufacturing, electric vehicle growth, and increasing data center electricity demand because of AI. Renewable demand is expected to grow the most. I expect solid performance going forward over the longer term. HOLD

USB Depository Shares (USB-PS – yield 5.6%) – This preferred stock has just weathered a strong interest rate storm and has still returned over 18% since being added to the portfolio. I believe it is unlikely that rates eclipse the high of this cycle. Rates have fallen over the last month and may be a harbinger of things to come. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.0%) – Ditto for VCLT. It doesn’t like rising rates. But that’s okay unless rates rise to new levels beyond what has been seen in this cycle. I believe that VCLT is still well positioned after the worst two years for fixed income ever. BUY

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