January 31, 2024

It’s All About Earnings for Now

It’s been a good start to the year, with the S&P 500 up more than 3% so far this month. Of course, that’s a big slowdown from the breakneck pace of advancement in November and December. But that’s to be expected.

As always, the market is a battle between good and bad. So far, good is edging out bad. The bad part is mostly that stocks are due for some sort of consolidation after the 15% surge at the end of last year. But investors are also dealing with a letdown as it becomes unlikely that Fed rate cuts will come as soon as previously expected, in March.

But the good news is very good. Inflation continues to plunge. Interest rates have peaked and retreated. The economy is still strong. And it’s a new bull market with new highs being made. This inflation and rising rate cycle is over and it doesn’t appear at this point that a significant economic slowdown or recession is coming.

That’s the backdrop for this earnings quarter. With the market sort of languishing upwards, primarily driven by the technology sector, company earnings should play a big role in the near-term direction of individual stocks. And it is the peak of earnings season for this portfolio with a huge number of reports coming this week and next.

Quarterly and annual earnings will be reported this week from AbbVie Inc. (ABBV), Alexandria Real Estate Equities (ARE), Marathon Petroleum Corporation (MPC), Brookfield Infrastructure Partners (BIP), Enterprise Product Partners (EPD), and Qualcomm Inc. (QCOM). The reports could be a hugely important factor in determining the near-term direction of these stocks.

Recent Activity

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

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

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 4.8%) – Like many other safe dividend stocks, BIP had a strong resurgence at the end of last year as interest rates peaked. But unlike most of these stocks, BIP has held very steady during what has been an ugly January for defensive dividend stocks. It is still a great stock at a cheap price. The high distribution and highly reliable infrastructure earnings are still much desired. It looks like 2024 should be a great year that makes up for some lost time. The partnership reports earnings on Thursday that can hopefully spur a breakout from here. (This security generates a K-1 form at tax time). BUY

Enterprise Product Partners (EPD – yield 7.3%) – This midstream energy partnership has delivered remarkably steady performance. However, Enterprise reports earnings on Thursday and the last few earnings reports led to a drop in price shortly after. Hopefully it can break the pattern this time. But price dips tend to be short-lived when they occur. EPD posted a solid 17.45% return in 2023 after a strong bear market return of 15% for 2022. EPD also hasn’t lost a thing in the rocky start to this year. That massive 7.3% yield is very well supported and safe. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.7%) – This more volatile midstream energy company stock will bounce around more than its peers. It was up more in the last two months of 2023, and it’s down more so far this year. It is still in an uptrend that began last June. 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 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 5.6%) – This is a legendary monthly income stock that has historically been a fantastic holding for income investors. It had a lousy two years as interest rates rose. But it soared at the end of last year after interest rates peaked. And O has had a crummy start to this year as the interest rate trade has reversed, in my view temporarily. It is still a great stock at a cheap price. 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%) – This more conservative midstream energy company stock tends to march to its own tune. It hasn’t been as volatile as its peers over the last three months. It tends to just chug along very slowly. Demand for energy services should remain solid even if the economy slows and Williams is 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 solid growth all the way out to 2028. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.8%) – ABBV is trading near the 22-month high. It is at the high point of the range in which it has traded since early 2022. The company reports earnings on Friday that could determine whether the stock breaks out into higher territory or pulls back again. 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. HOLD

American Tower Corporation (AMT – yield 3.4%) – This newly added cell tower property REIT had a very big move at the end of last year. Rising interest rates had been holding it back, along with the rest of the REIT sector, but the peaking and falling of interest rates reignited AMT more than its peers. That’s because it was dirt cheap with growing earnings and a lot of upside. But the souring of the interest rate trade so far this year has been pressuring the stock lower. Recent weakness provides a good entry point to buy the stock. BUY

Broadcom Inc. (AVGO – yield 1.7%) – This former solid dividend paying technology infrastructure stalwart turned into a sex symbol after artificial intelligence spending exploded last spring. The stock price has about doubled since then. AVGO tends to surge higher then bounce around sideways for a while until the next surge higher. Even after fantastic returns for most of 2023, AVGO is up 35% since early December. It looks like this earnings season will be another great one for AI stocks. Anticipation is lifting the stock still higher. Hopefully the party will continue. HOLD

Digital Realty Trust, Inc. (DLR – yield 3.3%) – This data center REIT had leveled off since the beginning of December but has reignited recently. It’s up 8% this month while the REIT sector is struggling. That’s because it trades more like a technology stock than a REIT. In a rotten 2023 for REITs, DLR posted a stellar 36% return. I believe REITs are poised for a better 2024 and DLR also has the additional catalyst of increasing AI spending. DLR should have a solid 2024 with REITs performing better and AI still in focus. BUY

Eli Lilly and Company (LLY – yield 0.8%) – LLY is trading within bad breath distance of the 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 and is already up double digits in 2024. The good times may continue. Potential mega-blockbuster weight loss drug Mounjaro was approved by the FDA in November. It still has its Alzheimer’s drug up for FDA approval in the months ahead. HOLD

Intel Corporation (INTC – yield 1.0%) – Intel reported earnings last Friday that laid a big fat egg. Wall Street hated it, and the stock price has declined about 13% since the report. The chip maker actually exceeded expectations for both earnings and revenue in the fourth quarter but it was the next quarter’s guidance that repulsed investors. The company guided for earnings and revenues substantially less than what had been expected. Apparently, the bounty from the new chips and the foundry business won’t come as soon as optimistic investors had hoped. The future is still bright. There are great days ahead. But the recent spate of good news had investors hungry for more of the same. They didn’t get it. 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 2023 for the healthcare sector. This is a company with earnings that should continue to thrive even if the economy hits the skids this year. And McKesson will report fourth-quarter earnings in the next couple of weeks. It could get a bump. The company is basically an oligopoly in a market that grows all by itself with the aging population. BUY

Marathon Petroleum Corporation (MPC – yield 2.1%) – This oil refiner stock may be breaking out of the sideways funk it had been in since September. It is trading near the all-time high and above the recent range ahead of the earnings report that comes out later this week. The company has a strong record of positive earnings reports that please the market. It is also poised to rise on continuing tension in the Middle East, which tends to lift all energy stocks. While the environment can vary from quarter to quarter, it should remain an overall profitable environment for refiners over the next several years. But there are currently a couple of things that could lift the stock in the short term. BUY

Qualcomm Inc. (QCOM – yield 2.1%) – QCOM is starting off the year strong. It went up about 10% in just a few days to a new 52-week high last week and approached the highest level since early 2022. The recent catalyst is that semiconductor companies that have reported earnings are confirming that the semiconductor industry has double-digit growth this year after contracting last year. Leaders like Qualcomm should experience a much higher level of growth than the overall industry. Qualcomm reports earnings later this week. Hopefully, it will be good news that helps the stock break out from here. Qualcomm is introducing new AI chips for PCs and smartphones that could be big sellers this year. BUY

UnitedHealth Group Inc. (UNH – yield 1.5%) – This healthcare insurer has been sucking wind lately. It’s down over 7% since the end of November and Wall Street didn’t like its fourth-quarter earnings 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. The higher costs are likely temporary and can be easily overcome. It’s a good entry point if you don’t own UNH already. BUY

Visa Inc. (V – yield 0.8%) – You know who loves the current environment? Visa does. The economy is still strong and consumers that showed signs of weakening late last year are bounding with optimism again. That’s why V has spent this year making a series of new all-time highs. Earnings last week beat estimates with upbeat guidance through 2024. As long as the environment remains positive, V could continue to run higher from here. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.0%) – ARE levelled off after a big move in November and December when it soared over 40%. REITs and other income stocks have had a hard time in the market so far this year and it’s a good sign that ARE still hasn’t given up much, especially after the big move at the end of the year. Meanwhile, 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 ahead of a period of likely strong performance as interest rates level off or abate. Earnings come out this week. They should be solid. BUY

NextEra Energy (NEE – yield 3.1%) – The beleaguered combination regulated and clean energy utility reported strong earnings that exceeded expectations again last week. It grew earnings by 9.3% over the previous year in 2023 and reiterated its growth projections for this year, near the top of the estimated range. NEE only got a very slight boost from the positive report even though the stock has lost nearly a third of its value over the past year. But NEE is still way up from the low and trending in the right direction. 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 5.5%) – The party isn’t over for fixed income. Rates have still peaked and may well trend lower for the year. The price has soared 25% from the low of late October and has provided a 17% total return since being added to the portfolio in October of 2022. After the worst two years ever for fixed income, this preferred issue is well positioned for a further rebound. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.7%) – Ditto 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 may continue to trend lower. If the economic strength lasts, VCLT should remain stable and deliver a strong income. If the economy weakens, and/or rates move lower, there should be more upside for the price. BUY

Xcel Energy (XEL – yield 3.5%) – 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. But XEL has been a dog. It had a rotten two years until November and December when it turned sharply higher. But January has seen a return of ugliness as investors walked away from interest rate-sensitive stocks. But Xcel reported solid earnings on lower operating expenses. 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. BUY

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