April 19, 2023

The Market Awaits Earnings - Guidance

January was up. February was down. March was up. April has not yet tipped its hand.

The S&P 500 is up 8.12% YTD, as of Monday’s close. It’s been a bouncy market that has bounced up more than down so far. April has been directionless because investors are waiting for earnings.

Average S&P earnings contracted in the fourth quarter and are expected to do so again in the first quarter. That’s an earnings recession. But investors already know that. The main event should be how companies anticipate next quarter and the rest of the year. That guidance will either validate or delay recession concerns.

As inflation has fallen and the Fed is likely very near the end of this rate hiking cycle, the new worry is a recession. It will be difficult for stocks to muster a sufficient rally to lead us into the next bull market without more clarity on the timing, severity, and duration of a possible recession. A sustainable rally is unlikely to commence until investors can sniff out an economic bottom.

In the meantime, defense is still king. Defensive sectors have rallied since the banking issues helped swap concerns from inflation and the Fed to recession. The uncertainty should last a while and defensive sectors such as healthcare, utilities, and midstream energy should continue to prosper as a result.

Of course, the top performing market sector YTD is technology. The sector is getting a boost as interest rates and inflation come down. That sector may continue to outperform as we move closer to recession. It’s also possible that technology stocks are on a more expedited schedule than the overall market and the recovery may have already begun.

Recent Activity

March 22
SOLD Medical Properties Trust, Inc. (MPW) - $7.40

April 12
Purchased UnitedHealth Group Incorporated (UNH)

April 19
Eli Lilly and Company (LLY) – Rating change BUY to HOLD
Visa Inc. (V) – Rating change BUY to HOLD

Current Allocation
Stocks 32.7%
Fixed Income 20%
Cash 47.2%

High Yield Tier

Enterprise Product Partners (EPD – yield 7.3%) – I like midstream energy companies right now. They aren’t leveraged to commodity prices but rather make profits from the fees of piping and storing oil and gas. The volumes Enterprise processes are unlikely to be negatively affected even in a recession because of global supply issues. After a strong year in a bear market last year, EPD is up over 13% YTD. A high yield and earnings that are resilient in inflation and/or recession should continue to be a winning formula for the rest of this uncertain year. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.7%) – After pulling back in March, OKE is up 15% in less than a month. The market turbulence following the bank failures has prompted a flight to safety. Midstream energy companies have benefited from that flight as well as some investor optimism about a sooner end to Fed rate hikes. OKE continues to post strong earnings and is well suited to endure inflation and/or recession. The stock has already popped back above 65 per share and appears poised to move still higher. BUY

Realty Income (O – yield 5.0%) – In a highly uncertain environment like this, where the narrative can change on a dime, income is king. And this legendary income REIT is the king of income stocks. It has paid 632 consecutive monthly dividends and increased the dividend payment 119 times since its IPO in the 1990s. And the REIT has been growing stronger through acquisitions of late. Earnings grew at 9.2% for 2022, which is above the historical average, and they did so in a challenging year. Despite being a retail REIT, the portfolio is largely staple properties like drug stores and supermarkets that are resilient in a slower economy. HOLD

The Williams Companies, Inc. (WMB – yield 5.9%) – WMB has been a struggling stock this year because of natural gas prices, which have crashed. Although the company is not highly levered to energy prices, it is affected by turbulence in its industry. Prices have fallen largely because of the unusually warm winter temperatures throughout the country and the world. Demand for the fuel has been far less than anticipated and stockpiles have built up. But it is a temporary problem for a fuel source that should own the next decade. And WMB has gotten cheap. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.7%) – This is a transition year for AbbVie as its mega-blockbuster immunology drug Humira faces a U.S. patent expiration. But the market has been anticipating this for a long time. That’s why ABBV is still more cheaply valued than its peers. And so far, ABBV has a slightly positive return YTD and is defensive postured ahead of a possible recession. This company has one of the best pipelines in the business and new drugs will make up for Humira in a short time. At some point, the market will look ahead and start pricing in a bright future. HOLD

Broadcom Inc. (AVGO – yield 2.9%) – AVGO was added to the portfolio because it is a highly resilient technology company that is mostly involved in technology infrastructure and earnings are not highly dependent on product sales. That’s why in a tough technology market AVGO has returned over 13% YTD and recently hit a new 52-week high. The stock is still in a steep uptrend that began in October and could move a lot higher if the technology sector continues to recover. HOLD

Brookfield Infrastructure Partners (BIP – yield 4.3%) – The infrastructure juggernaut has been bouncing around to nowhere since the end of 2020. The uninspired returns aren’t that bad considering it has been a bear market. The stock had been held back more recently by a strong dollar and higher lending rates, but those things have been receding and the stock might be on the move. BIP recently hit the highest price level since last fall and is up about 16% YTD. The stock is now right around the midpoint of its 52-week price range and should be a solid holding amid inflation and/or recession. (This security generates a K-1 form at tax time). BUY

Rating change – BUY to HOLD

Eli Lilly and Company (LLY – yield 1.2%) – LLY was upgraded to a BUY early last month and has since moved about 19% higher. The stock is notoriously bouncy, and it made sense to buy it on the dip because it should have a great future. Lilly grew earnings 12.7% in 2022 and is expected to grow earnings by an average of 22% per year over the next five years. It also has two drugs that could be mega-blockbusters in the pipeline that could be approved in the next year. But the stock has moved to the high end of the recent range and with the market still somewhat perilous LLY is out of the ideal buy range. HOLD

Intel Corporation (INTC – yield 1.6%) – INTC has leveled off this month but not before an impressive move off the low. The stock price soared over 30% in March and broke out to the highest level since last summer. Part of it is a rally off the bottom as the stock sunk to book value after lousy earnings and guidance and a dividend cut. Intel is still a powerful industry player and its recent attempts to catch up to its competitors should succeed to at least some degree over time. The company also appears to have solved its production issues, which bodes very well for new products on the launchpad and a sooner return to profitability. HOLD

Qualcomm Inc. (QCOM – yield 2.7%) – This is a great longer-term stock of a company with a huge share of mobile 5G chips and strong exposure to some of the fastest growing areas in technology. Meanwhile, it sells at a very cheap valuation by historical standards. Inflation is coming down and interest rates are falling and technology is the best performing sector YTD with the group up over 20%. At some point this year, the market should start sniffing out the recovery, if one hasn’t already begun. And QCOM can make up for lost time fast when it moves. HOLD

UnitedHealth Group Inc. (UNH – yield 1.3%) – This recent portfolio addition has strong predictable revenues in a very defensive business ahead of a likely recession later this year. UNH has been a terrific stock to own in any market, as its three-, five- and 10-year returns attest. But it is also the epitome of a stock to own during an economic downturn. It pulled back a little this week but I expect the stock to be solidly higher in the months ahead. BUY

Rating change – BUY to HOLD

Visa Inc. (V – yield 0.8%) – V is tied to the fortunes of the more cyclical stocks in the near term. But it tends to outperform that group. It held up nicely in a very tough 2022 with a -3.4% return for the year, it’s up 35% since the September low, and it has a 12% return YTD. Of course, it could be under pressure if the economic situation deteriorates. V has moved to the top of the recent range and has moved away from the optimal buy price in a risky market. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.4%) – This combination regulated and clean energy utility stock has bounced around over the past two years and is currently at the lower end of that range. It has been trending higher since the beginning of March as the risk of recession has grown and defensive stocks have outperformed. NEE is still well positioned as a defensive stock with growth in a highly uncertain market where a recession is becoming more likely. BUY

Xcel Energy (XEL – yield 3.0%) – This clean energy utility stock got knocked around a little bit in the tough market for defensive stocks in the early part of this year. But defensive stocks are springing back as a recession later this year becomes more likely. Utilities and healthcare have been among the top performing sectors over the past month. XEL won’t be held down for long and has already started moving higher. It’s up about 10% since early March. And with a recession possibly looming, XEL should remain a good place to be. BUY

USB Depository Shares (USB-PS – yield 5.3%) – This preferred stock has bounced around with interest rates since being added to the portfolio, moving lower when long-term interest rates rise and vice versa. But interest rates have plunged since the banking problems and increasing fear of recession and this stock has moved higher again. The 10-year rate seems to top out around 4% and then pull back. BUY

Invesco Preferred ETF (PGX – yield 5.8%) – Longer-term rates are bouncing around and have recently been moving lower again. It is still a good time to buy this preferred ETF and the stable income provides a cushion in tough markets and rates may come if the economy weakens. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.4%) – There could be some near-term turbulence with the price on the way to solid longer-term returns and diversification. The increased risk of a recession this year bodes well for the near-term total return of this fund. BUY