August 2, 2023

Positive Earnings Boost Several Stocks

The market continues to ride the soft-landing high. The S&P 500 returned more than 3% in July and is now up 19% YTD and within just 4% of the all-time high.

The bullish mood is brought on by the fact that the miserable inflation/Fed conundrum that drove stocks into a bear market last year is ending. And it appears that we will not have to endure a recession. Even though S&P earnings are falling for the third straight quarter, investors are bullish about the future.

Sure, things could discombobulate down the road. Inflation could rise again. The economy could roll over. But even if such things happen, they appear unlikely to materialize at least before the end of the summer. For now, times are good.

AbbVie Inc. (ABBV), Digital Realty Trust (DLR), and Intel (INTC) got a big boost last week on positive earnings reports. There have also been strong upward moves in Qualcomm (QCOM), ONEOK Inc. (OKE), and Hess Inc. (HES) recently. Also, Broadcom (AVGO) and Eli Lilly (LLY) are still strong and rising after huge surges higher.

The midstream energy companies are also trending higher in the broadening rally. The only stocks still floundering are the utilities; Brookfield Infrastructure Partners (BIP), NextEra Energy (NEE), and Xcel Energy (XEL). But sector performance always rotates eventually, and these stocks are cheap while the companies are the best of the breed.

The portfolio is still well diversified and prepared for whatever lies ahead. And most of the portfolio is enjoying the bounty of this bull market.

Recent Activity

July 12^th
Purchased Digital Realty Trust, Inc. (DLR) - $117.75
Qualcomm (QCOM) – Rating change “HOLD” to “BUY”
Intel (INTC) - Rating change “HOLD” to “BUY”

High Yield Tier

Enterprise Product Partners (EPD – yield 7.6%) – The company reported second-quarter earnings that reflected a decline in earnings per share to $0.57 per unit versus $0.64 per unit in last year’s quarter. The decline was primarily due to lower natural gas liquid prices. Although the partnership has minimal exposure to commodity prices directly, the lower prices resulted in diminished volumes through its systems.

The decline was partially offset by higher volumes across the board in other areas as expansions came online. Prices have been on the rise since the end of June and the increased volumes will lead to higher earnings in the future. EPD is only slightly lower on Tuesday’s opening and still near the 52-week high. (This security generates a K1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.7%) – After getting clobbered in May when the market hated its purchase of Magellan Midstream Partners (MMP), OKE has been coming right back and has regained all those losses. It’s up over 17% since the beginning of June and is within less than 10% of the 52-week high. OKE has been trending sharply higher as the energy sector is recovering and the rally is broadening. The midstream energy company reports earnings next week that could stifle the rally or drive the stock toward the high. HOLD

Realty Income (O – yield 5.0%) – This legendary monthly income stock is showing some signs of life after a tough first half when both the real estate and consumer staples sectors floundered. It currently sells well below the pre-pandemic high, despite having higher earnings. But income and safety will come back into vogue eventually. Realty Income reports second-quarter earnings this week. Hopefully, that can get it going. BUY

The Williams Companies, Inc. (WMB – yield 5.2%) – This midstream company has been disappointing. But WMB is finally getting the lead out. It’s up close to 20% in the last couple of months. This had been a tough year for defensive stocks and energy stocks. But the broadening rally is lifting WMB. And the momentum could last. WMB is still well off the 52-week high, and earnings have been growing strongly. WMB has been trending higher since the end of May. Hopefully, the earnings report on Wednesday can thrust the stock to a higher level. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 4.0%) – This position was upgraded to a buy in June after it started to move off the bottom. AbbVie reported earnings last Wednesday that beat on both earnings and revenue and the company also raised earnings guidance for the year. The stock has spiked over 6% since the report. Humira sales were down less than expected and AbbVie’s replacement immunology drugs did better than expected. The report emboldens the notion that the revenue drop from the Humira patent expiration will be very temporary and AbbVie will turn the corner sooner than expected on route to a promising future. BUY

Broadcom Inc. (AVGO – yield 2.0%) – It looks like AVGO is just going to keep moving higher regardless of how high it gets. I thought AVGO would pull back after its amazing AI surge, but it never sobered up and maybe never will. The ascent has indeed slowed down over the past several weeks. But it isn’t showing any weakness. The AVGO return now exceeds 100% since being added to the portfolio in early 2021. It is no doubt a great company and returns should be good over the next couple of years. The road higher may not be as bumpy as expected. HOLD

Brookfield Infrastructure Partners (BIP – yield 4.3%) – The infrastructure company stock has continued to go sideways since the spring. It’s still a tough market for more defensive, dividend-paying stocks. Brookfield reports second-quarter earnings on Thursday. The stock got new life after the last report as funds from operations (FFOs) per share grew 12.5% over last year’s quarter. Hopefully, BIP can get a bump from earnings and the second half will be kinder to defensive stocks. (This security generates a K1 form at tax time). BUY

Eli Lilly and Company (LLY – yield 1.0%) – I thought LLY would pull back, but I’m wrong again just like with AVGO. LLY continues to hover near the high, seemingly building a base for its next surge higher. The market is just so excited about the potential mega-blockbuster drugs in the late-stage pipeline. LLY has now returned over 200% since being added to the portfolio a little less than three years ago. The market has refused to cool on LLY because it has two potential mega-blockbuster drugs up for approval later this year or early next as well as better than 20% annual earnings growth for the next several years. HOLD

Hess Corporation (HES – yield 1.2%) – The exploration and production company also reported earnings last week that beat expectations. Higher production offset lower realized oil and gas prices. The company’s strong margins give it strong leverage in a rising energy price environment and the stock has benefitted from the recently rising oil prices and positive prognosis going forward. The stronger economic environment is clearly benefiting the stock in the near term and the longer-term dynamics are strong for energy prices. HES is up 16% in the last three weeks. BUY

Intel Corporation (INTC – yield 1.5%) – The chipmaker reported earnings last week that beat estimates and the company returned to profitability. The PC market appears to have bottomed out and is poised for a second-half recovery as Intel is also increasing its market share. At the same time, Intel has a promising future as it has invested heavily in chips in high-growth areas as well as a rapidly growing foundry business. The road to recovery appears smoother and insiders have been buying heavily into the stock. INTC soared nearly 7% on the news after being upgraded to a buy in mid-July. BUY

Qualcomm Inc. (QCOM – yield 2.4%) – Here comes QCOM too. The chipmaker is up 6.5% in the last couple of days and 28% since late May. It’s not an immediate AI beneficiary, but it keeps marching slowly higher ahead of the period where it might surge higher quickly. Qualcomm describes itself as the “on-device AI leader,” and the company should benefit mightily from the increasing shift towards AI and profits are now likely to soar sooner than previously expected. Qualcomm reports earnings on Wednesday and forecasts are mixed. But it might get a boost. BUY

UnitedHealth Group Inc. (UNH – yield 1.4%) – UNH has leveled off over the last week after catching a little bit of fire. UNH floundered after it reported higher costs from more people getting elective surgeries because of pent-up pandemic demand. But the company has since reported higher-than-expected earnings and raised guidance, negating the negative catalyst that had driven the stock price down. It’s still in the lagging defense arena but it could have a much better rest of the year. BUY

Visa Inc. (V – yield 0.8%) – V loves the still-strong economy and increasing soft-landing odds. Consumer spending remains strong, and the company reported another impressive quarter. The stock has pulled back after soaring to a 52-week high. But that is typical behavior for this stock. The longer-term situation is great as more people move toward cashless transactions and Visa has an unbelievable market share. The better short term is a surprise. Hopefully, the good times last. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.5%) – This combination regulated and clean energy utility stock is currently at the low end of its range as defensive stocks have floundered. But that might not last. This company is targeting earnings per share growth of 6% to 8% annually through 2026 and 10% per year dividend growth through at least 2024. NextEra is right on track. The utility grew earnings 8.6% in the second quarter and 11% in the first half versus the same periods last year. It also has predictably solid earnings going forward because of a considerable project backlog. Sure, utilities are out of style right now. But sector performance rotates eventually. And NEE is the best of the breed. BUY

Xcel Energy (XEL – yield 3.3%) – This clean-energy utility reported lower-than-expected earnings last week of $0.52 per share versus $0.60 in last year’s quarter. The company attributed unusual weather and maintenance issues to the one-off decline and reaffirmed previous earnings guidance for all of 2023. XEL has been trending lower since the beginning of April in a tough market for the utility sector. But things change, and XEL is cheap and one of the best utility stocks to own. BUY

USB Depository Shares (USB-PS – yield 5.8%) – This preferred issue has bounced around since being added to the portfolio. It took an unjustifiable hit during the banking issues. But it has mostly moved inversely to interest rates. It’s worth noting that the ten-year Treasury is near the high and USB-PS is still at a higher price since being added. We also may be near peak interest rates in this cycle. BUY

Invesco Preferred ETF (PGX – yield 6.3%) – Longer-term rates have moved near the recent high again as a recession appears less likely in a still-strong economy. The timing for buying PGX is probably good right now as rates appear likely near the peak. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.5%) – There could be some near-term turbulence with the price on the way to solid longer-term returns and diversification. The fund is holding up well in the recent rising interest rate environment and should benefit if and when rates come back down. BUY