An Important Juncture for the Market
It’s the heart of earnings season. More than a third of all S&P 500 companies report this week. Can the earnings barrage save this market?
The market could sure use some help. It just got hit with more bad news when it was already teetering. The market was see-sawing between generally positive earnings in a still strong economy and the specter of an aggressive Fed seriously slowing the economy over the rest of the year. Then it got hit with news of Covid spreading in China and likely slower growth in that country and globally.
The indexes took a huge hit yesterday and the S&P 500 closed dangerously close to the March low. This could be trouble. It will be a technical red flag if the indexes break below the previous low from mid-March. If that happens, stocks likely have further to fall. And we are right on the cusp.
This is an important juncture for the market. It could either stay above the lows and move higher again or break below and move lower. Much will depend on this week’s earnings. Will they be good enough to save this market, or at least give it a reprieve? We’ll see.
There are seven current portfolio positions that report quarterly earnings later this week. Qualcomm (QCOM) reports after the close today. Hopefully, it will be another stellar quarter that gets that stock moving higher again. Three positions reported over the last week, and results were good.
Both Valero Energy (VLO) and Visa (V) reported fantastic quarters. And those stocks are moving higher. NextEra (NEE) reported a very strong quarter too, but the report was accompanied by news of possible Commerce Department tariffs and penalties on its solar panel suppliers in Asia. That could delay NextEra’s planned solar projects, and the market didn’t like it.
High Yield Tier
Blackrock Enhanced Capital and Income Fund (CII – yield 6.1%) – This covered call fund enjoyed the market revival from the middle of March to early April, as it tends to move along on relative par with the overall market. When that bounce-back ran out of gas, half of this position was sold. The remaining position is held because the income provided should be in high demand in a choppy market. But if the market starts to roll over again the rest of this position may be sold. HOLD
Enterprise Product Partners (EPD – yield 7.2%) – The market has been so bad that even EPD took a hit. Of course, the stock had been moving consistently higher since the middle of March. It sold down with the energy sector as global growth concerns depressed oil prices, albeit temporarily. But EPD is only about a dollar per share below the high and has resumed moving higher after the market rout earlier this week. It’s still undervalued with a high and safe dividend in an industry that will very likely have a great year. (This security generates a K-1 form at tax time). BUY
Global Ship Lease, Inc (GSL – yield 4.3%) – This container ship company can be volatile, and this month we’ve seen the downside of that feature. It’s down over 20% since the beginning of April. GSL initially took a hit on global growth fears from the Fed’s likely aggressive rate hikes. It then started to recover strongly and then took another hit on news of Covid spreading in China. The fear is that slowing global growth will negatively affect shipping rates and company profits.
But profitability is on the rise even if rates take a hit. Shipping rates remain far higher than in recent years as demand for containers and ships that transport them remains strong amidst limited supply. And that situation should last a while. Despite the recent weakness, GSL is still only down less than 3% YTD, has returned 67% over the past year, and averaged an annual return of 60% over the last three years. GSL takes a hit every time new growth concerns develop. But then it recovers after fear wanes and investors realize that container shipping and company profits will remain strong. It’s a good entry point for the stock. BUY
ONEOK Inc. (OKE – yield 5.7%) – The story here is like that of fellow midstream energy operator EPD, except OKE tends to be more volatile. It’s down about $10 per share from the recent high after it took a hit with the rest of the sector. But conditions remain very favorable in the space and OKE will likely recover quickly from the recent pullback. It still sells at a good value with a high and safe dividend. Earnings early next month should reflect a very favorable business environment as well. BUY
Realty Income (O – yield 4.1%) – After a rough start to the year, REITs are performing better. It is one of the best-performing market sectors over the last one-month and three-month periods. O has been solid in the down market but not exciting. It has returned about 2% YTD in a market that is down 12.4% over the same period. Realty just chugs along under the radar while paying monthly dividends and shares slowly creeping higher. That’s what it is advertised to do. A boring income stock is just what the doctor ordered in this uncertain market. HOLD
Dividend Growth Tier
Rating change: U.S. Bancorp (USB) moves from “Hold” to “Sell”
AbbVie (ABBV – yield 3.6%) – This biopharmaceutical stock had been moving relentlessly higher despite the down market. It has soared more than 30% since late January. But it has pulled back substantially from the recent high in the past few weeks. This stock does that. It surges and then pulls back until the next surge. We could have taken profits on the some of the position when it was riding high. But what’s the point? One-third of the position was already sold after an earlier surge. But the return since on those sold shares would have been solid. This is a stock that should have a strong longer-term trajectory and it pays a good dividend. This is one you can just hold. HOLD
Broadcom Inc. (AVGO – yield 2.8%) – It continues to be a tough market for technology and AVGO is now down over 17% from the 52-week high. This exceptional technology stalwart is a good company that is hanging out with the wrong crowd right now. The crummy tech sector market is obscuring the fact that Broadcom is growing earnings very strongly and will likely continue to do so for some time. It will have its day in the sun again and patience should be rewarded. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.5%) – You know the market is getting ugly when BIP sells off. Recent selling has taken everything down. Even a defensive company with bankable and growing earnings with a strong dividend hasn’t been safe. But when fear eventually wanes investors should gravitate back to stocks like this. And earnings should grow above trend because of a recent acquisition in the energy space. (This security generates a K-1 form at tax time). HOLD
Discover Financial Services (DFS – yield 1.8%) – I’m not as sure about this one. I like it because consumers are likely to increase credit purchases going forward as their high Covid-era savings inevitably deplete. But the market isn’t embracing this stock at all. Earnings should be solid but the market is grouping it with other consumer-oriented and finance stocks, which doesn’t bode well in a slowing economy. But the stock reports earnings today. Hopefully it can get a boost. We’ll hold it for now. HOLD
Chevron Corp. (CVX – yield 3.6%) – Oil prices have been falling recently amidst global growth fears from China’s Covid woes. Energy stocks took a hit on concerns that demand will weaken as the economy slows. CVX has pulled back about 10% from the highs. We did sell half of this position earlier. But the remaining one-half position is still worth holding because there is still a good chance prices move higher in the months ahead. Plus, Chevron reports quarterly earnings at the end of the week that should be spectacular. HOLD
Eli Lilly and Company (LLY – yield 1.4%) – This best-in-class big pharma stock has pulled back a lot after a big recent surge. It soared over 30% from late February to early April but has since fallen nearly 10% from the high. It does this. The stock is notorious for surging and then pulling back for a while before the next surge. It doesn’t seem worth it trying to time the high and take profits because the stock remains on a longer-term uptrend. The population is aging at warp speed and Lilly is perhaps the best in the world at providing drugs and treatments. That’s a good formula. HOLD
Intel Corporation (INTC – yield 3.1%) – It’s been a lousy market for technology stocks. But Intel has a key downside buffer. It has been beaten to a pulp already. It has marvelous prospects for growth over the next few years. In the meantime, it pays a great dividend and has limited downside. Plus, technology stocks are getting oversold and could rally in the months ahead. I like INTC in this market. BUY
Qualcomm Inc. (QCOM – yield 2.2%) – This former superstar performer hit the skids and continues to wallow. This is the company that reported blowout earnings the last several quarters and raised guidance for this year and beyond while receiving a slew of analyst upgrades. But it’s hard to fight a falling technology sector.
It’s been decimated already, down over 30% from the high. The concern is slowing smartphone sales in 2023. But the company anticipated revenue growth of 27% and earnings growth of 39% in 2022 and it still sells at just 12 times earnings. The company reports quarterly earnings today. Earnings have been stellar and maybe a good report can get the stock moving higher again. HOLD
Rating change “HOLD” to “SELL”
U.S. Bancorp (USB – yield 3.7%) – The market doesn’t like banks right now. Even with higher rates and improving net interest income, fear of future slowing growth is weighing heavily on the industry. The stock has been trending lower all year. It has rallied somewhat after a recent positive earnings announcement. We did take a profit on one half of the position already. But USB rolled over again and the downtrend remains intact with an acceleration likely if the market continues to flounder. You can’t fight the tape. Let’s take the remaining profit off the table. SELL
Valero Energy Corp. (VLO – yield 3.7%) – Despite being a high leverage play on the energy sector, this refiner stock has held up very well through the recent energy sector pullback. It’s only down about 6% from the recent high despite having soared 65% since the end of November. It’s also been bouncing back in recent days.
Valero reported earnings earlier this week that showed profit growth of better than 40% over last year’s quarter on rising through-put volumes and the highest refining margins since 2015. The company is also benefitting from cheap U.S. natural gas inputs which give it a huge advantage over foreign competitors. Despite the high margins, the stock is still well below the 2018 high. HOLD
Visa Inc. (V – yield 0.7%) – This global payments company stock has been bouncing around in a similar fashion to GSL, although not as volatile. V too took a hit on global growth fear from Fed tightening. Then it started to recover before getting knocked back again this past week due to concerns about China growth. But the international business is picking up strongly as Covid restrictions have largely been removed.
Visa reported earnings yesterday that confirmed that fact. The company soundly beat estimates and grew earnings by more than 30% from last year’s quarter. It reported high transaction volumes and a huge boost in international business as travel returns and the profitable cross-border transactions soar. V is up over 7% in early trading so far today. HOLD
Safe Income Tier
NextEra Energy (NEE – yield 2.2%) – This alternative energy utility stock took a big hit after the earnings announcement last week, falling more than 10%. The first quarter was terrific, as the company reported 10.4% year-over-year growth, which was higher than the historical average and soundly beat expectations. The problem was that the Commerce Department is imposing tariffs and restrictions on solar panels coming from Southeast Asian countries, where NextEra gets theirs. The move could delay the company’s planned expansions in the solar area over the next year.
The market didn’t like that. NextEra maintained previous guidance for the year but investors were disappointed that guidance wasn’t raised after such a strong quarter. The likely reason is possible project delays. But the company says it won’t affect planned expansions through 2024. And NextEra is also well on track to raise the dividend 10% per year through 2024. This doesn’t change the basic story with the stock. And it might not be affected as it is still unclear if NextEra’s non-China distributors are affected. HOLD
Xcel Energy (XEL – yield 2.7%) – The market has been so crummy it even stopped XEL from making new highs. The stock has leveled off since early this month and even pulled back a little in the volatility of recent days. I do like the stock longer term as safety is unlikely to go out of style in this tumultuous year. It’s also a great way for conservative investors to play the growth of alternative energy. HOLD
| High Yield Tier | |||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on close 4/26/22 | Total Return | Current Yield | CDI Opinion | Pos. Size | |
| CII | Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.6% | 20 | -3% | 6.0% | HOLD | 1/2 |
| EPD | Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 26 | 17% | 7.2% | BUY | 1 |
| GSL | Global Ship Lease. Inc. (GSL) | 01-12-22 | 23 | Qtr. | 1.50 | 6,41% | 22 | -7% | 7.0% | BUY | 1 |
| OKE | ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 65 | 30% | 5.7% | BUY | 1 |
| O | Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 72 | 24% | 4.1% | HOLD | 1 |
| Current High Yield Tier Totals: | 6.2% | 16.0% | 6.0% | ||||||||
| Dividend Growth Tier | |||||||||||
| ABBV | AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 156 | 138% | 3.6% | HOLD | 2/3 |
| AVGO | Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 560 | 28% | 2.8% | HOLD | 1 |
| BIP | Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 62 | 90% | 3.5% | HOLD | 2/3 |
| CVX | Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 4.7% | 157 | 80% | 3.6% | HOLD | 1/2 |
| DFS | Discover Financial Services (DFS) | 02-09-22 | 125 | Qtr. | 2.00 | 1.6% | 110 | -12% | 1.8% | HOLD | 1 |
| LLY | Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 283 | 91% | 1.4% | HOLD | 2/3 |
| INTC | Intel Corporation (INTC) | 03-09-22 | 48 | Qtr. | 1.46 | 3.1% | 46 | -4% | 3.1% | BUY | 1 |
| QCOM | Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 134 | 67% | 2.2% | HOLD | 1/3 |
| USB | U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.2% | 50 | 14% | 3.7% | SELL | 1/2 |
| VLO | Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 5.7% | 105 | 44% | 3.7% | HOLD | 1/2 |
| V | Visa Inc. (V) | 12-08-21 | 209 | Qtr. | 1.50 | 0.7% | 201 | -4% | 0.70% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 3.0% | 40.3% | 2.7% | ||||||||
| Safe Income Tier | |||||||||||
| NEE | NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 74 | 79% | 2.1% | HOLD | 1/2 |
| XEL | Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 73 | 203% | 2.7% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 2.3% | 141.0% | 2.4% | ||||||||
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