Earnings Euphoria Might Wane
New highs are good. Nine portfolio positions are at or near the 52-week high. Let’s be happy.
Earnings have come through once again and have revived this market after a cranky September. So far, 140 S&P 500 companies have reported and 82% exceeded expectations. That’s significantly higher than an average of 66% that historically beat estimates. It looks like companies are overcoming supply and inflation issues, at least in the aggregate.
It’s a good earnings quarter so far. And I don’t believe that general narrative will change as the rest of the companies report. However, enthusiasm might be waning. These supply chain issues aren’t going away, and neither is inflation. Investors are starting to worry that these problems could catch up to companies in future quarters.
So far, future guidance has been weaker than usual. The earnings quarter euphoria may only go so far until the market runs into a new wall of worry. The environment is still generally positive, but it may not stay as positive as it’s been in recent weeks.
That said, several portfolio positions still have very positive momentum. And dividend stocks tend to be better relative performers when the rally loses steam. Check out the details in the exquisitely crafted write-ups below.
Also, if you are a Cabot Retirement Club member, be sure and tune into the monthly Cabot Retirement Club video conference call at 2pm tomorrow.
High Yield Tier
AGNC Investment Corp. (AGNC – yield 8.7%) – This mortgage REIT is finally trending higher. It had not responded to the rising 10-year Treasury rate and the steepening of the yield curve initially. But AGNC has been trending distinctly higher in the month of October, albeit slowly. I expect the trend to continue. BUY
Rating change “HOLD” to “BUY”
Blackrock Enhanced Capital and Income Fund (CII – yield 5.6%) – 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. It was downgraded to a HOLD when the market was trending down last month. The market is recovering and I’m raising CII back to a BUY. BUY
Compass Diversified (CODI – yield 4.9%) – This holding company for small businesses reports earnings tomorrow. Small businesses should be thriving in the strong economy, but they could be affected by supply and inflation issues. It’s a good sign that other companies have been overcoming the problems so far. I like the prospects over the course of the next year regardless of what happens this quarter. BUY
Enterprise Product Partners (EPD – yield 7.3%) – Despite a 15% move higher over the past month, the midstream energy partnership is still selling at a ridiculously cheap valuation. It’s also still selling below the 52-week high, the pre-pandemic high and miles below the all-time high. 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
Rating change “BUY” to “HOLD”
ONEOK Inc. (OKE – yield 5.7%) – This midstream energy company has had a huge 30% move higher over the last month. It just made a new high yesterday. Although I do like the prospects for midstream stocks, and OKE in particular, over the next several quarters, the stock is looking a little toppy in the near term. It usually consolidates somewhat after a big surge like this. As an act of caution, I’m reducing the rating to a HOLD. HOLD
Realty Income (O – yield 3.8%) – This legendary income REIT is up 14% in the month of October and just made a new post-pandemic high. Part of the reason is the recovery in the overall market this month. But the surge may also be because the acquisition of VEREIT will close on November 1st. The market likes the deal, and it should boost earnings right away. Meanwhile, O is still below the pre-pandemic price. HOLD
STAG Industrial (STAG – yield 3.3%) – This industrial REIT is proving to be one of the very best monthly income stocks on the market. It just made another new all-time high and has returned, between dividends and appreciation, over 44% YTD. It’s not cheap here, but it still has momentum in a market that is rewarding more cyclical plays and REITs as well. HOLD
Verizon Communications (VZ – yield 4.8%) – The stock rose 2.4% last Wednesday after announcing earnings that beat estimates. The positive results were driven by the adoption of 5G devices. But revenue was below estimates as tradition wireline business declined. It still has a nice yield but isn’t going anywhere. I’m just about done waiting for the 5G Great Pumpkin to show up and make this a better performing stock. I’ll continue to hold it for now because it is at the lower end of the recent range and even if fortunes don’t improve for VZ, it should gravitate back to the higher end of the range before long. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 4.8%) – ABBV has been holding steady at the support level around the current price. It’s still more than 10 per share below the high after pulling back after the FDA announced it is making the company slap an ugly warning label on one of its most promising drugs. It’s been in a holding pattern that could change after its earning report on Friday. We’ll see what happens. But I still like this stock as a long-term holding regardless. BUY
Broadcom Inc. (AVGO – yield 2.7%) – Another day, another new high for this chipmaker and software company stock. That’s the way it’s been going for AVGO recently after uninspired performance for most of this year. It’s up over 12% in October. It had a solid quarter reported in September. It’s also likely holding up better during the chip shortage as it’s a priority customer. It had been a good value. Now, it’s finally got some momentum too. BUY
Brookfield Infrastructure Partners (BIP – yield 3.6%) – This infrastructure partnership has risen to unchartered territory. It’s been making a series of new all-time highs over the past week. But even after the recent surge is has performed on par with the overall market YTD, returning 23%. It’s a defensive play and a slow mover. But earnings should grow at a faster clip after the recent Inter Pipeline acquisition. Plus, it could get a boost if an infrastructure bill is passed. HOLD
Chevron Corp. (CVX – yield 4.7%) – It’s a great time to be in energy. And CVX is the poster child. Oil prices continue moving higher with no end in sight. Chevron is more levered to the price of oil than the other energy majors. Those higher prices should get right to the bottom line and juice profits in this quarter and next. The energy giant reports earnings on Friday. Hopefully it gets another boost. HOLD
Eli Lilly and Company (LLY – yield 1.4%) – The biopharmaceutical giant reported earnings on Tuesday that slightly missed earnings estimates and beat revenue forecasts. The stock is up about 1.5% today. The miss was very slight and offset by the company raising guidance for the year. Also, its superstar diabetes drug Trulicity grew sales a whopping 45% over last year’s quarter (more than expected) and Lilly has begun submitting its new Alzheimer’s drug to the FDA. The recovery from the recent bottom is accelerating. HOLD
KKR & Co. Inc. (KKR – yield 0.8%) – This alternative investment asset manager stock is absolutely on fire. It’s up over 25% in just the last three weeks. It’s been making new highs for weeks. Although business is booming, the stock had pulled back after the Chinese real estate problems and fears of contagion. But those fears have subsided for now, and KKR has made up for lost time. We’ll see how much more this surge has. KKR does report earnings next week. The stock could get another boost. BUY
Qualcomm Inc. (QCOM – yield 2.1%) – This 5G chipmaker stock continues to stink up the place. While the technology sector is rallying again, QCOM is just floating around the low point of its range. It’s likely because of the slowdown in China and the chip supply issues. But those things haven’t held back profits in recent quarters. Even if profits are impacted, it should only be temporary, and the boom times will last longer. Hopefully, next week’s earnings report can get the stock moving again. BUY
Rating change “BUY” TO “HOLD”
Spectrum Brands Holdings, Inc. (SPB – yield 1.8%) –There is some caution here. The company reports earnings in a couple of weeks. Although earnings in general have been able to successfully navigate the supply and inflation issues so far, Spectrum’s last earnings report was negatively impacted by inflation. There could be a disappointment in the works. Although home-centric is a great place to be and the recent sales of its division improves the stock overall, I’m reducing the rating to HOLD until after the earnings report to be more cautious. HOLD
U.S. Bancorp (USB – yield 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 report, 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. HOLD
Valero Energy Corp. (VLO – yield 4.7%) – The refining giant reported earnings that soundly beat estimates and turned last year’s quarter’s $1.16 loss into a positive $1.22. It was helped by higher volumes and higher margins as the massive recovery in gasoline demand helped the company. But VLO is down over 3% today following the announcement. The stock had risen over 30% since late September. This looks to be an example of selling on the good news. There’s no apparent reason why the good times won’t continue for longer and the stock is still well below the pre-pandemic price. 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 1.8%) – 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 2.8%) – XEL is the same story as NEE, except it 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. The company reports earnings tomorrow. Maybe that will get it moving. BUY
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on 10/26/21 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| AGNC Investment Corp. (AGNC) | 04-14-21 | 17 | Monthly | 1.44 | 9.00% | 16 | -1% | 8.7% | BUY | 1 |
| Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.2% | 21 | 4% | 5.6% | BUY | 1 |
| Compass Diversified (CODI) | 10-13-21 | 31 | Qtr. | 1.44 | 4.6% | 30 | -4% | 4.9% | BUY | 1 |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.10% | 24 | 4% | 7.3% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 7.00% | 65 | 28% | 5.7% | HOLD | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.1% | 74 | 22% | 3.8% | HOLD | 1 |
| STAG Industrial (STAG) | 03-21-18 | 24 | Monthly | 1.45 | 3.5% | 44 | 121% | 3.3% | HOLD | 1/2 |
| Verizon Communications (VZ) | 02-12-20 | 58 | Qtr. | 2.51 | 4.7% | 53 | -2% | 4.8% | HOLD | 1 |
| Current High Yield Tier Totals: | 5.5% | 34.6% | 5.0% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 108 | 64% | 4.8% | BUY | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.9% | 530 | 21% | 2.7% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 60 | 78% | 3.6% | HOLD | 2/3 |
| Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 5.5% | 112 | 28% | 4.7% | HOLD | 1 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 250 | 66% | 1.4% | HOLD | 2/3 |
| KKR & Co. Inc. (KKR) | 03-09-21 | 48 | Qtr. | 0.58 | 0.9% | 76 | 63% | 0.8% | BUY | 1 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.9% | 132 | 63% | 2.1% | BUY | 1/3 |
| Spectrum Brands Holdings, Inc. (SPB) | 08-11-21 | 81 | Qtr. | 1.68 | 2.1% | 95 | 16% | 1.8% | HOLD | 1 |
| U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.3% | 61 | 41% | 3.0% | HOLD | 1 |
| Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 6.0% | 79 | 9% | 4.7% | HOLD | 1/2 |
| Current Dividend Growth Tier Totals: | 3.2% | 44.9% | 3.0% | |||||||
| Safe Income Tier | ||||||||||
| Invesco Preferred (PGX) | 04-01-14 | 14 | Monthly | 0.74 | 4.9% | 15 | 58% | 4.9% | HOLD | 1/2 |
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.8% | 85 | 106% | 1.8% | BUY | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 63 | 163% | 2.8% | BUY | 2/3 |
| Current Safe Income Tier Totals: | 3.2% | 109.0% | 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.