January 17, 2024

Earnings Take Center Stage

It’s earnings season again! And this one should be more important than most.

Earnings are, of course, a big deal for the individual company. But in addition to company-specific fundamentals, Wall Street will be carefully watching what company earnings indicate about the macro environment.

Stocks exploded 15% higher in the last two months of last year as the market anticipated subdued inflation, falling interest rates, and no recession. The main impediment to stocks over the past two years, inflation and rising interest rates, are reversing and there is still no recession. It looks like we will finally get through this rate hiking cycle without the requisite economic pain.

In addition, investors are expecting Fed rate cuts this year, starting in March. That’s certainly a rosy vision and maybe it will come true. But Wall Street needs some kind of additional confirmation to move higher. It needs corporate earnings to confirm what investors are hoping for. Earnings are always important. But this time they will likely confirm or deny falling rates and a “soft landing.”

If earnings and expectations are too strong, it could prompt fears of lingering inflation and wreck the hope of Fed rate cuts. That could be negative. If companies have negative things to say about the economy, it could create fear of recession and falling earnings. That could be bad too.

The market will be looking for the Goldilocks scenario on the macro front where earnings stay solid but there isn’t enough inflation or economic strength to discourage the Fed from lowering rates this year. We’ll see. It may sound farfetched, but the optimists have been right for a while now.

In the meantime, the portfolio will focus on broader trends that are likely to prevail regardless of near-term market gyrations. Interest rates have likely peaked in this cycle. It is unlikely that longer rates revisit and eclipse the highs of late October. That should continue to be positive for defensive dividend-paying stocks, which are still cheap and have some positive momentum. Technology stocks should continue to rally this year as artificial intelligence adds another growth catalyst in the quarters ahead.

Recent Activity

January 10^th
Purchased American Tower Corporation (AMT) - $208.97

January 17^th
AbbVie Inc. (ABBV) - Rating change “BUY” to “HOLD”

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.1%) – It was a subpar year in 2023 for BIP. A return of just 6.55% for the year badly lagged all the market indexes as interest rate sensitive stocks were under pressure most of the year. But interest rates have likely peaked and are moving lower and BIP has come alive again. It’s up over 40% since late October, although it has pulled back somewhat this month. BIP had been a safe superstar dividend performer until 2022. The high distribution and highly reliable infrastructure earnings are still highly desired. It looks like the storm for BIP is over and 2024 should be a great year. (This security generates a K1 form at tax time). BUY

Enterprise Product Partners (EPD – yield 7.4%) – This midstream energy partnership isn’t thrilling but it has been coming as advertised. It posted a solid 17.45% return in 2023 after a strong bear market return of 15% for 2022. That massive 7.4% yield is very well supported and safe. Adding capital appreciation to that makes a fantastic income investment. The growth in profits and distributions is likely to continue as the partnership is expanding operations in the high-growth Permian basin. (This security generates a K1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.4%) – This more volatile midstream energy company stock made a new 52-week high this month. It has been bouncing around on an upward trend that started last June. But OKE is still priced below the pre-pandemic high despite having higher earnings now. The stock should be on stronger footing in the improved market environment. ONEOK reported solid earnings and raised the guidance on projected consolidated earnings going forward. It should deliver solid results in just about any kind of economy. BUY

Realty Income (O – yield 5.4%) – After a terrible 2023, REITs have come alive again and O is doing even better. Since the market rallied on peak interest rates at the end of October, the sector benchmark Vanguard Real Estate Index Fund (VNQ) is up 22% and O is up more than 27% over the same period. Receding inflation and interest rates remove the main downside catalyst that has been in place for the past two years. And its retail staple properties, and new data center acquisitions, should produce reliable revenue in just about any economy. BUY

The Williams Companies, Inc. (WMB – yield 5.1%) – Midstream energy companies should have the right stuff for the current environment. Demand for energy services should remain solid even if the economy slows and they are insulated from inflation with automatic price adjustments built into the long-term contracts. Williams has highly resilient revenues, that even grew during the pandemic, and it pays a well-supported dividend (with 2.38 times cash flow coverage). Recent acquisitions and expansions ensure more solid growth going forward all the way out to 2028. BUY

Dividend Growth Tier

Rating change – “BUY” to “HOLD”

AbbVie (ABBV – yield 3.8%) – ABBV had a lackluster 2023 with about an even return for the year. But the stock turned sharply higher since late November and just touched the 52-week high. ABBV tends to turn lower after hitting new highs. The future for the company and the stock should be excellent as AbbVie has a strong pipeline of new drugs. But it may not be out of the Humira woods yet as more companies will launch biosimilars in 2024. The market likes that AbbVie is purchasing biotech company ImmunoGen (IMGN) for $10.1 billion Cerevel Therapeutics (CERE) for $8.7 billion. Both deals should enhance the already strong pipeline longer term. ABBV may be near the top of the near-term range and beyond an optimal buy range. HOLD

American Tower Corporation (AMT – yield 3.3%) – This newly added cell tower property REIT has had a very big move higher since late October. Rising interest rates had been holding it back, along with the rest of the REIT sector, but the peaking and falling of interest rates has reignited AMT more than its peers. That’s because it was dirt cheap with growing earnings and a lot of upside. Despite the recent spike, AMT is still a long way from the all-time high with plenty of room to run. BUY

Broadcom Inc. (AVGO – yield 1.9%) – This former solid dividend paying technology infrastructure stalwart turned into a sex symbol after artificial intelligence spending exploded last spring. AVGO exploded 75% higher since then. The stock tends to surge higher, then bounce around sideways for a while until the next surge higher. The latest surge was because the company reported earnings that impressed the market. Earnings remained solid and Broadcom also cited the potential to double AI revenue from $4 billion in 2023 to over $8 billion in 2024. Until the pattern changes, I expect AVGO to have another surge higher in the next several months. HOLD

Digital Realty Trust, Inc. (DLR – yield 3.6%) – This data center REIT had been pulling back after a huge finish to last year. But that consolidation is apparently over and DLR is getting hot again. It just made another new 52-week high. Many REITs are bouncing back strongly after a tough couple of years as interest rates are abating. Digital also has the additional catalyst of increasing AI spending and is getting a boost from the AI craze. DLR should have a solid 2024 with REITs performing better and AI still in focus. BUY

Eli Lilly and Company (LLY – yield 0.8%) – It’s another new all-time high. This superstar big pharma stock has been a lot like AVGO. It periodically surges higher and then consolidates by going sideways for a while until the next surge higher. LLY closed with a 2023 return of 60% and an average annual return of 52% over the last three years. LLY is already up double digits in 2024.

Weight loss drug Mounjaro was approved by the FDA in November. Some analysts estimate it could potentially be a $20 billion per year drug. That would match the best-selling drug ever. It still has its Alzheimer’s drug up for FDA approval in the months ahead. Earnings are expected to grow at about a 25% per year clip over the next several years, but that number could be higher with the new drugs. HOLD

Intel Corporation (INTC – yield 1.1%) – INTC soared over 50% between late October and the end of the year and finished 2023 with a spectacular 93% return. Earnings indicate that Intel’s turnaround is well on track. It has promising new chips coming out in high-growth areas and its foundry business could be huge. The stock got dirt cheap, and investors are increasingly willing to bet on the company’s future. I expect this to be another strong year for Intel as the turnaround to profitability comes to fruition. BUY

McKesson Corporation (MCK – yield 0.5%) – Quietly, this pharmaceutical distributor company stock has risen to a new all-time high after rising 24% in a crummy year for the healthcare sector. This is a company with earnings that should continue to thrive even if the economy hits the skids this year. It’s also encouraging that it performed well in a 2023 market that left most healthcare stocks behind. The company is basically an oligopoly in a market that grows all by itself with the aging population. The stock has an amazing track record, and it should continue to thrive in 2024. BUY

Marathon Petroleum Corporation (MPC – yield 2.1%) – This newly added oil refiner stock sort of bounces around with the energy sector, except better. When energy stocks get hot, MPC gets hotter. When the energy sector is sucking wind, MPC still does good. Even though the energy sector posted a negative return for 2023, MPC returned a solid 30% for the year. While the environment can vary from quarter to quarter, it should remain an overall profitable environment for refiners over the next several years. MPC also has the advantage of spiking higher if there is more trouble in the Middle East. BUY

Qualcomm Inc. (QCOM – yield 2.3%) – The mobile device chip maker had a bad time of it from the beginning of 2022 until the end of last year. But it has come alive again lately. Although returns lagged that of the overall technology sector in 2023, it still returned over 38% for the year, and 33% of that return came in November and December. This is a company that will benefit from the AI revolution later than the 2023 movers and shakers. But the revolution will come to mobile devices. Qualcomm is introducing new AI chips for PCs and smartphones that could be big sellers next year. When QCOM moves it can make up for lost time. BUY

UnitedHealth Group Inc. (UNH – yield 1.4%) – This healthcare insurer has been sucking wind lately. It’s down about 6% in the last month and fell 3.4% Friday after Wall Street didn’t like its fourth-quarter earning reports. The company reported double-digit earnings and revenue growth, but costs were higher than expected. The reasons were more elective surgeries after covid, extra vaccine activity and inflation. But the company doesn’t expect costs to have a negative impact on 2024 projections. I believe the higher costs are temporary and can be easily overcome. It’s a great entry point if you don’t own UNH already. BUY

Visa Inc. (V – yield 0.8%) – This payment processing company stock enjoyed the late-year rally. V soared 13.5% between late October and the end of the year, making a series of new all-time highs. Visa is loving the soft landing euphoria. It has been one of the very best financial companies to own but was held back by the pandemic and last year’s bear market. But earnings have been stellar. International business and travel are thriving and driving earnings higher. It has a strong business that should remain solid in all but a recessionary environment. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.0%) – The Fed’s indication of three rate cuts next year added another up leg for some of the best interest rate sensitive stocks. ARE has soared over 40% since the low of late October. But we didn’t miss the boat. The stock is still more than 40% below the all-time high. The company also has a highly reliable and growing business that should thrive in any economy. It’s cheap with strong momentum ahead of a period of likely strong performance and interest rates abate. BUY

NextEra Energy (NEE – yield 3.1%) – After a rotten couple of years, NEE has been trending sharply higher since early October. It’s up over 30% from the 52-week low and it looks like we have seen the bottom of this cycle. The clean energy utility delivered solid earnings, and management reiterated previous growth projections and said the company expects to deliver earnings near the top of the expected range through 2026. This stock is still very oversold. It had been a market superstar that investors loved because it offered both defense and growth. It will rise again. BUY

USB Depository Shares (USB-PS – yield 5.6%) – Recent developments have been great news for this and other fixed-rate investments. Interest rates appear to have peaked which means the selling is over in fixed income and prices are likely to rise as rates fall. The price has soared 24% since late October. And USB-PS has now returned 14% since being added to the portfolio a little over a year ago despite the rising interest rate environment. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.7%) – Falling interest rates are also a huge positive for VCLT, as evidenced by the recent 20% price surge. This long-term bond fund is very sensitive to interest rates. It held up relatively well in the rising rate environment and now rates are trending lower. After two of the worst years ever for the bond market, the rebound should continue next year. BUY

Xcel Energy (XEL – yield 3.4%) – Utilities are still remarkably reliable revenue generators in any economy. Alternative energy is still the wave of the future. A combination of safety and growth is still highly desirable. The last two crummy years are not what this stock is about. XEL has been trending higher since the beginning of last month and it’s had a convincing 18% move off the low. This is one of the best utility stocks to own and the recent debauchery may prove to be very temporary. XEL still sells near the lowest levels of the past several years and now has positive momentum. BUY