Earnings Save the Day, Again
Forget the virus. Forget about the Fed tightening. It’s all about earnings now.
Although it’s still very early in the reporting cycle, earnings have been great so far. The market is reacting by recouping last month’s losses and soaring back to within bad breath distance of the all-time high.
The positive early earnings are surprising yet unsurprising at the same time. It’s unsurprising in the sense that better-than-expected and spectacular earnings have buoyed the market all through this pandemic recovery. It appears to be doing it again this quarter.
The so far positive earnings are surprising because there was a much higher degree of skepticism this quarter. Supply chain issues are going from bad to worse. Inflation is still very much alive with no sign of abating. It was feared that these issues would spoil the earnings party. But so far companies are overcoming those issues and beating expectations yet again.
That’s not to say that supply constraints and inflation aren’t curtailing economic and earnings growth. They are. GDP growth and earnings would be higher without these problems. But even with the bum leg of limited supplies and inflation, companies are still beating Wall Street’s ever chic-to-be-pessimistic forecasts.
Of course, it’s still very early. The narrative could still sour. But Wall Street doesn’t seem to think so at this point, and they usually get this type of thing right. There is a good chance that the summer hangover is over and we’re off to the races again.
Meanwhile, the energy positions Valero Energy (VLO), Chevron (CVX), Enterprise Product Partners (EPD), and ONEOK (OKE) are red hot. This is the rally we’ve been waiting for. And I think these stocks will continue to move higher.
High Yield Tier
AGNC Investment Corp. (AGNC – 8.7%) – I like it. This mortgage REIT is finally getting a move on. The stock fell because of the flattening yield curve, as longer interest rates fell earlier in the year. But now those rates are sharply on the rise again and the yield curve, along with AGNC’s profit potential, is steepening. The stock had not budged until recently. But it has been moving consistently higher in October. BUY
Blackrock Enhanced Capital and Income Fund (CII – 5.9%) – This covered call ETF is a great way to generate a high yield in a market that is unlikely to reap the same gains going forward as it has over the last year and a half. It tends to move with the overall market. If the recent rally shows lasting traction, I will upgrade the rating back to BUY. HOLD
Compass Diversified (CODI – 4.8%) – This holding company for small businesses should thrive in the strong economy. Smaller companies tend to benefit more in an environment like this. Of course, there is concern about supply chain issues and inflation. But it’s a good sign that company profits are proving resilient so far. Compass reports earnings next week. BUY
Enterprise Product Partners (EPD – yield 7.3%) – Let the good times roll. After a many month-long consolidation after a surge earlier in the year, this midstream energy partnership is soaring higher again. It’s the energy sector rally we’ve been waiting for. EPD already had great value and a sky-high yield that’s safe. Now it has upward momentum too. Let’s see how far it goes. BUY
ONEOK Inc. (OKE – yield 5.7%) – Most of the things that are true about EPD are true to the third power for this midstream energy powerhouse. OKE is up over 30% since late August and has been making a series of new post pandemic highs. The momentum is accelerating, as OKE it up 13% so far in October. Those are big moves for a high dividend energy midstream company stock. OKE is also still below the pre pandemic highs despite higher earnings and better growth prospects. BUY
Realty Income (O – 4.3%) – After a pullback in REITs in the late summer, O is having a good October so far. It appears to be making a run to the post pandemic high. I’m still high on this REIT’s prospects over the rest of the year and I’m confident holding it through a still uncertain market. HOLD
STAG Industrial (STAG – 3.4%) – This industrial REIT is reversing course faster than O. In fact, STAG is at a brand new all-time high. It’s no longer cheap, but the REIT has a lot going for it. The supply/demand dynamic for industrial properties and E-commerce warehouses is excellent. It’s also a more cyclical REIT in a strong economy. HOLD
Verizon Communications (VZ – 4.9%) – Let’s just come out and say it. This stock is a dog. It just seems to bounce around in the same underperforming range regardless of what the overall market is doing. A big part of the reason for still holding it was its down-market strength. But VZ managed to underperform the overall market through the latest downturn. It should slowly gravitate back up to the higher point of the range. When it does, I’ll sell it. HOLD
Dividend Growth Tier
AbbVie (ABBV – 4.8%) – I don’t really know what this stock is up to recently. It sold off from the high in the late summer after the FDA announced it is making them slap an ugly warning label on one of their most promising drugs. ABBV has since been holding up like a rock at the support level around the current price. Maybe next week’s earnings will get it moving again. But I still like this stock as a long-term holding regardless. BUY
Broadcom Inc. (AVGO – yield 2.8%) – Finally! This thing has been an underperforming stock with great promise since it was added to the portfolio at the beginning of the year. Although AVGO went nowhere, it was held because when it does get going it can make up for lost time. That long-awaited move may be underway. It’s up 7.5% in the last two weeks and has just made a new all-time high. Hopefully, this run will continue. BUY
Brookfield Infrastructure Partners (BIP – yield 3.6%) – Everything still looks good for this infrastructure partnership. It’s doing what it always does, very slowly bouncing ever higher. That’s what you sign up for when you buy a defensive infrastructure stock with a good dividend. BIP won’t light the world on fire. But it should make you slowly richer. HOLD
Chevron Corp. (CVX – yield 4.9%) – It’s a great time to be in energy. And CVX is the poster child. Oil price continue moving higher with no end in sight. Chevron is more levered to the price of oil than the other energy majors. Those higher price should get right to the bottom line and juice profits in this quarter and next. Despite a nearly 20% move higher in the last month, CVX still sells below the pre pandemic price. HOLD
Rating change “HOLD” to “BUY 1/3”
Eli Lilly and Company (LLY - yield 1.4%) – This is a great company and a fantastic stock for the longer term. It tends to move up and down on an upward trend.
Recently, we saw the downside of that behavior, as it plunged about 25% in six weeks. We did take profits before the fall. Now, LLY is moving higher again. It’s up 10% so far in October. Since this a great longer term stock and it appears to be over the downside of its common pattern, the 1/3 position that was sold is being bought back. BUY 1/3
KKR & Co. Inc. (KKR – yield 0.9%) – This alternative investment asset manager is back with a vengeance. It had pulled back on fears of contagion from the Chinese real estate issues with Evergrande. But those worries have abated for now and KKR has come raging back all the way to the all-time high. Business is booming for asset managers. And KKR is in the fastest growing alternative investment segment of the business. It should run higher. HOLD
Qualcomm Inc. (QCOM – yield 2.1%) – This chip maker has done nothing but bounce around in a lower range since February. But business is absolutely booming for the company. The last two earnings reports were spectacular as the company benefits mightily from the rollout of 5G phones. It pulled back recently because of slower growth in China and fears of lower smartphone sales because of supply disruptions. But the earnings report in a couple of weeks could turn things around. I believe in the stock and it’s in oversold territory. BUY
Spectrum Brands Holdings, Inc. (SPB – yield 1.8%) –Spectrum is in the right place at the right time. The home centric consumer isn’t going away and Spectrum will benefit. As well, the recent $4.3 billion sale of its Home Improvement unit fixes the financial issues that had been holding the stock back. It’s a good sign that earnings so far are overcoming the supply chain problems. BUY
U.S. Bancorp (USB – 3.0%) – There was a stumble. Everything was strong at the bank except net interest income margins because of lower rates. Rapidly rising long-term rates will fix that missing piece. But the stock sold off after the earnings reports, despite beating consensus estimates on both revenue and earnings. Rising costs weren’t offset by higher interest margins as the last quarter only had a short time of higher rates. But that should get fixed next quarter and the stock has already made up the lost ground. BUY
Valero Energy Corp. (VLO yield 5.0%) – And we’re off! I knew the energy rally had more in the tank. Energy was hot earlier in the year and then cooled off. Now it’s back. This refiner and high leverage play on the energy sector is up almost 30% in the past month. Business should be booming with increasing margins. Yet VLO is still below the 52-week high, the pre pandemic high, and light years below the all-time high. It should have room to run. HOLD
Safe Income Tier
Invesco Preferred ETF (PGX – yield 4.9%) – After falling during the pandemic, this preferred stock ETF has recovered and is back near the pre pandemic high. This preferred stock ETF is much less volatile than the stock market while providing a big yield. It also adds diversification as preferred stock performance is historically not correlated to the stock and bond markets. HOLD
NextEra Energy (NEE – yield 1.9%) – It’s tough to figure out this regulated/alternative utility stock recently. It just sort of bounces around like a high quality utility stock, going in and out of favor. But it used to be more and will be again. It should mainly be a fantastic way for conservative investors to play the growth in clean energy. But investors seem to have forgotten all about clean energy for the time being as conventional energy has gotten red hot in the recovery. But NEE should be back to its old ways when the market normalizes. BUY
Xcel Energy (XEL – yield 2.9%) – XEL is the same story as NEE, except is has gotten more beaten-up and should have more upside potential in the near term. Longer term, XEL should again be a popular conservative play on alternative energy. Near term, it should at least bounce back up to the higher point of the recent range. BUY
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on 10/19/21 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| AGNC Investment Corp. (AGNC) | 04-14-21 | 17 | Monthly | 1.44 | 9.00% | 17 | -1% | 8.7% | BUY | 1 |
| Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.2% | 21 | 2% | 5.7% | HOLD | 1 |
| Compass Diversified (CODI) | 10-13-21 | 31 | Qtr. | 1.44 | 4.6% | 30 | -3% | 4.8% | BUY | 1 |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.10% | 25 | 5% | 7.3% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 7.00% | 65 | 26% | 5.7% | BUY | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.1% | 71 | 15% | 4.0% | HOLD | 1 |
| STAG Industrial (STAG) | 03-21-18 | 24 | Monthly | 1.45 | 3.5% | 44 | 116% | 3.4% | HOLD | 1/2 |
| Verizon Communications (VZ) | 02-12-20 | 58 | Qtr. | 2.51 | 4.7% | 54 | -3% | 4.9% | HOLD | 1 |
| Current High Yield Tier Totals: | 5.5% | 31.8% | 5.1% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 109 | 61% | 4.8% | BUY | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.9% | 511 | 15% | 2.9% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 58 | 73% | 3.6% | HOLD | 2/3 |
| Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 5.5% | 112 | 26% | 4.9% | BUY | 1 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 243 | 62% | 1.4% | BUY 1/3 | 2/3 |
| KKR & Co. Inc. (KKR) | 03-09-21 | 48 | Qtr. | 0.58 | 0.9% | 70 | 46% | 0.9% | HOLD | 1 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.9% | 132 | 64% | 2.1% | BUY | 1/3 |
| Spectrum Brands Holdings, Inc. (SPB) | 08-11-21 | 81 | Qtr. | 1.68 | 2.1% | 95 | 16% | 1.8% | BUY | 1 |
| U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.3% | 62 | 38% | 3.0% | BUY | 1 |
| Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 6.0% | 80 | 7% | 5.0% | BUY | 1/2 |
| Current Dividend Growth Tier Totals: | 3.2% | 40.8% | 3.0% | |||||||
| Safe Income Tier | ||||||||||
| Invesco Preferred (PGX) | 04-01-14 | 14 | Monthly | 0.74 | 4.9% | 15 | 56% | 4.9% | HOLD | 1/2 |
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.8% | 84 | 98% | 1.9% | BUY | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 66 | 165% | 2.9% | BUY | 2/3 |
| Current Safe Income Tier Totals: | 3.2% | 106.3% | 3.2% | |||||||
Would you please do us a favor?
1) Please tell me about a time you made money on one of my trades – how much? How fast? What did you do with your profits?
Since readers take different trades from the different tiers of Cabot Dividend Investor, we’d love to hear from you about your experience.
2) How would you describe Cabot Dividend Investor to a friend?
You can simply send your response by email to CDI@cabotwealth.com. We’ll share interesting responses, anonymously, with you on the website.