April 26, 2023

A Big Earnings Week

This is a big earnings week that could determine the near-term direction of the market.

This earnings quarter started at the beginning of this month. But the rubber hits the road this week. Big technology companies including Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), and Meta (META) as well as energy companies Exxon Mobile (XOM), Chevron (CVX), and Valero Energy (VLO) all report this week.

Technology has been the best-performing market sector this year, up about 18% YTD, after being one of the worst-performing of the eleven sectors last year. Falling inflation and interest rates along with reduced prices have helped rally those stocks. This week’s earnings may determine if the rally continues or fizzles.

Energy stocks are at a crossroads with dueling pressures. The OPEC production cuts ahead of the summer driving season will put upward pressure on oil and gas prices. But a slowing economy and energy demand would exert downward pressure. Earnings, and more importantly guidance for the rest of the year, should provide insight into what these companies see winning the tug-o-war.

This week will certainly have an impact on the two sectors. But future earnings guidance overall will likely be a determining factor in whether the economy will move toward recession or slow significantly in the second quarter or not until later this year or beyond. A sooner recession will likely sink stocks in the near term while a later recession might delay a selloff until later months.

Until there is more clarity about the timing, severity, and duration of a possible recession, the market should remain choppy or possibly worse. Defense is still king. And the relative performance of defensive sectors has been improving since the bank failures and growing fears of a recession in the quarters ahead.

Recent Activity

April 12^th
Purchased UnitedHealth Group Incorporated (UNH) - $521.19

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

April 25^th
BUY ½ position in NextEra Energy (NEE)

Current Allocation
Stocks 34.2%
Fixed Income 20%
Cash 45.8%

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 K1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.7%) – After strongly outperforming the market and its peers for the last two calendar years, OKE has been floundering this year and is barely above even YTD. But OKE has been strong lately. It’s up 13% in the last month. It has leveled off recently but has moved to the upper levels of the recent range. The stock may bounce around with the market in the near term, but it has sound fundamentals. ONEOK continues to post strong earnings and is well-suited to endure inflation and/or recession. BUY

Realty Income (O – yield 4.9%) – 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. The returns haven’t been inspiring so far. But this stock has held its own in a bear market. As the economy slows and moves towards recession, investors will continue to demand safety and O is a highly desirable safe income stock. HOLD

The Williams Companies, Inc. (WMB – yield 6.0%) – 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 and has also moved convincingly above the low. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.7%) – So far so good. ABBV is up 3% YTD in a bear market and a transition year where revenues are falling as the U.S. Humira patent expired. The market has expected this for a long time and AbbVie has the pipeline to overcome the shortfall in the next couple of years. That may not sound great for now, but this stock should have a fantastic future as one of the best pipelines in the business comes to fruition. 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 recently hit a new 52-week high. The stock is still in an uptrend that began in October, although it has leveled off since early March. AVGO 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 15% 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 K1 form at tax time). BUY

Eli Lilly and Company (LLY – yield 1.4%) – LLY was upgraded to a BUY early last month and has since moved about 22% higher. Last week it was reduced to a HOLD rating having moved above the ideal buy range. The stock is now up 5% YTD after a spectacular 34% gain last year in a bear market. Lilly 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. HOLD

Intel Corporation (INTC – yield 1.6%) – Several important technology companies are scheduled to report earnings this week and the results may have a significant impact on the near-term direction of the sector. The recent trend has been falling inflation and interest rates and tech stocks are benefitting, as the sector is the top performing on the market YTD. Technology stocks slumped ahead of the overall market and may recover before the indexes.

INTC soared over 30% in the month of March and broke out to the highest level since last summer, although it has been pulling back somewhat this month. Intel is still a powerful industry player and its recent attempts to catch up to its competitors should succeed to a 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. But QCOM is only up 7% YTD while the overall tech sector is up a lot more. It has been weaker lately because of recession fears and the consequences to smartphone sales. But that problem is likely already baked into the price 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 ten-year returns attest. But it is also the epitome of a stock to own during an economic downturn. It pulled back since being added to the portfolio, but I expect the stock to be solidly higher in the months ahead. BUY

Visa Inc. (V – yield 0.8%) – V has an amazing track record and should be an excellent stock going forward as well. Cashless transactions are growing, and Visa has the biggest market share of that business. It can be cyclical in that a recession would reduce the number of transactions. But that possibility has likely been holding back the stock. V is up over 12% YTD after a solid performance in a bear market last year. The stock has also moved to the highest price since last summer. HOLD

Safe Income Tier

Position change – BUY 1/2

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 12% since early March. And with a recession possibly looming, XEL should remain a good place to be. BUY

USB Depository Shares (USB-PS – yield 5.4%) – 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 ten-year rate seems to top out around 4% and then pullback. BUY

Invesco Preferred ETF (PGX – yield 6.2%) – Longer-term rates are bouncing around again with a bias toward lower since the bank failures increased the risk of recession later this year. 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 down more 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