May 22, 2024

All Eyes on Nvidia

The market has regained its footing, and here comes Nvidia (NVDA).

All eyes are on the Nvidia earnings report scheduled to come out after the closing bell on Wednesday. It was an Nvidia earnings report two years ago that featured a massive demand for artificial intelligence products and services that sparked the AI craze and ignited a powerful rally in technology stocks.

Nvidia has become a bellwether for the rapidly emerging AI industry. Wall Street is expecting a blowout quarter from that company once again this quarter. A big advantage of this market is the earnings catalyst that AI brings and Nvidia’s earnings, more than anything else, has ignited enthusiasm and rallies. In fact, it was Nvidia’s earnings in 2022 that ignited the move in our own Broadcom (AVGO), which has rallied 233% since. A bullish report could also lift Qualcomm (AVGO) this time as AI is likely coming to smartphones.

The market is already on solid footing after last week’s inflation report, which could have derailed the recent rally, came in as expected and alleviated rising interest rate fears, for now. Investors have reverted to the belief that the Fed will cut the Fed Funds rate in September. That may not happen. But for now, investors think it will and the market is swell.

As long as interest rates don’t rise to new highs and the economy stays away from recession, the market should be OK for the rest of the year. Stocks with AI exposure could be a whole lot better than OK if Nvidia’s earnings reflect powerful demand.

There are seven portfolio positions that are at or very near the 52-week high. Even previously beleaguered stocks in the utility and REIT sectors have come alive. Utilities are now the second-best performing S&P 500 sector year-to-date.

Recent Activity

May 8
Purchased FS KKR Capital Corp (FSK) - $19.40
Realty Income (O) – Rating change “BUY” to “HOLD”
SOLD Xcel Energy Inc. (XEL) - $54.93

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.3%) – It’s been a wild ride on the current interest rate narrative for this infrastructure company. It was an awful first half of April as the stock fell about 20% in the first two weeks. But Brookfield reported strong earnings and the company has rallied to make up for all of that dip since. It’s up 23% since April 16. The company also raised the next quarterly dividend by 6%. Solid earnings and a dividend raise are indicative of a company that is operationally strong. (This security generates a K-1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 7.2%) – This midstream energy partnership has pulled back a little bit from the high of early April as the energy market cooled off and beaten down dividend stocks rallied. It hasn’t really pulled back but instead stopped going higher for now. Enterprise reported solid earnings with profits per share in line with estimates and revenues a lot better as new projects came to fruition. Distributable cash flow was solid with 1.7 times distribution coverage justifying the recent 5.1% distribution increase. Overall, the earnings didn’t reflect much change in an already solid story with good stock performance. (This security generates a K-1 form at tax time.) BUY

FS KKR Capital Corporation (FSK – yield 14.4%) – The ultra-high-yielding Business Development Company reported solid earnings that were roughly in line with estimates. FS also announced a second-quarter regular dividend of 0.70 per share and supplemental dividend of 0.05, reflecting confidence in the BDC’s ability to cover the payout and support shareholders. The market seems to have liked it and the stock is up since the earnings report. FSK has been bouncing around in a slightly higher range since last October. The stock has shown good stability for such a high yielder. I’m hopeful the position will provide a great dividend income combined with covered call premiums in the weeks ahead. BUY

Main Street Capital Corporation (MAIN – yield 5.9%) – This Business Development Company reported stellar earnings that handily beat estimates. It paid a regular monthly dividend of $0.72 per share in the second quarter, marking a 6.7% increase year-over-year, as well as a $0.30 supplemental dividend in the quarter. But the stock has pulled back a couple of percentage points since the report. Perhaps there is some selling on the good news. MAIN has also shown resilience in tough markets. The safe and high yield pays dividends every single month with a strong possibility of supplemental dividends over the course of the year as well. BUY

ONEOK Inc. (OKE – yield 4.8%) – Looking good! It’s a new all-time high. Unlike most energy companies, the price exceeds the pre-pandemic high. The midstream energy company raised guidance for 2024 and analysts expect 30% revenue growth and 29% earnings growth for this year over last year. The midstream company tends to be more volatile than its peers and is outperforming them in a good market. OKE has rallied 6% since the earnings report early this month. Hopefully the upward momentum will continue. BUY

Realty Income (O – yield 5.6%) – The floundering income REIT reported solid earnings last week with 33% revenue growth due to a recent acquisition and adjusted funds from operations growth of 5%. Metrics were pretty solid across the board with high occupancy rates and an average 105% recapture on renewed leases. O didn’t get much of a bump so far from the report, but it has been trending higher since the middle of April. The performance has been disappointing compared to its peers. It might be that this one won’t really move meaningfully higher until interest rates move meaningfully lower. It will be one to watch. HOLD

The Williams Companies, Inc. (WMB – yield 4.6%) – The midstream energy company reported excellent earnings and the stock has since risen to a new 52-week high. It soundly beat estimates on both net income and earnings per share and guided to the upper half of 2024 guidance. Williams also posted stellar 2.6 times dividend coverage. WMB broke out in the middle of February and the energy sector is still strong. It’s a stable high-yield stock and the company should deliver solid and dependable earnings in just about any economy. WMB has moved 35% higher since the middle of February. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.8%) – ABBV pulled back from the high made at the very end of March but has leveled off over the past month. That is typical behavior for ABBV. It tends to have a surge and then consolidates for a while before the next one. The biopharmaceutical company reported earnings that beat expectations. But the market wasn’t too excited because the company also slightly lowered earnings per share expectations for next year. Although Humira sales fell, the other immunology drugs, Skyrizi and Rinvoq, grew at torrid paces with revenue of $3.1 billion for the quarter. The company is well on track to replace Humira revenues and return to robust growth in the years ahead. BUY

American Tower Corporation (AMT – yield 3.4%) – The cell tower REIT has been bouncing around with interest rates for the last several years. AMT is having a very good month of May in the latest upward leg of that saga. But AMT is still far from the 52-week high. American Tower rallied strongly after the REIT beat estimates on both revenue and earnings with 9.8% adjusted funds from operations per share growth over last year’s quarter. The REIT also raised guidance for 2024. Hopefully the strong operational performance along with the better interest rate news will last and AMT can muster a sustained rally. BUY

Broadcom Inc. (AVGO – yield 1.5%) – The stellar performing chip and software infrastructure company stock hit another new all-time high last week. But it has been mostly bouncing around for the last few months after having another huge surge earlier in the year. All eyes are on Nvidia (NVDA) earnings now (coming out on Wednesday). That company ignited the AI craze, and a huge move in AVGO, two years ago with an earnings report. If Wall Street likes what it hears AVGO could fly again. Broadcom doesn’t report earnings until next month, but the Nvidia report might be just as important. HOLD

Digital Realty Trust, Inc. (DLR – yield 3.4%) – The data center REIT reported mixed results from earnings as profits slightly exceeded estimates and revenues lagged somewhat due to higher costs. DLR moved down slightly after the report but is still up in May. The report was mostly uneventful except for a statement by management that the REIT is seeing accelerating demand for AI-oriented opportunities. A big reason the stock was added to the portfolio was the additional growth catalyst provided by AI. The statement indicates that is happening. BUY

Eli Lilly and Company (LLY – yield 0.7%) – This superstar pharmaceutical company stock hit a new all-time high this week. But LLY has leveled off since the middle of February. Lilly significantly raised guidance for this year in the earnings report. The main reason is that its weight loss drug revenues obliterated forecasts for the quarter. The company is also aggressively expanding production for future quarters and raised its 2024 revenue projections by $2 billion. The weight loss drug is a monster and looks like a mega-blockbuster and the Alzheimer’s drug should get the FDA nod in the next few months. HOLD

McKesson Corporation (MCK – yield 0.5%) – It moves slowly. But it trends unmistakably higher. The wholesale pharmaceutical giant reported mixed earnings but also indicated earnings growth of 14% to 17% for this year and the stock has trended higher since the report and hit a new all-time high earlier this week. MCK just continues to forge quietly higher while no one seems to notice. The pharmaceutical supply chain goliath dominates a market that grows all by itself because of the aging population. BUY

Marathon Petroleum Corporation (MPC – yield 1.9%) – The country’s largest refiner fell significantly after reporting lower earnings amid record maintenance shutdowns. But things aren’t nearly as bad as they seem. The company actually beat earnings and revenue forecasts. Earnings are down because of reduced crack spreads versus last year’s near-record first quarter but profits are still historically high. The maintenance shutdowns are necessary and set the company up well for increased volumes ahead of the driving season. The stock was red hot, then turned ice cold, but has been leveling off this month. HOLD

Qualcomm Inc. (QCOM – yield 1.7%) – The mobile device chip maker has gotten sizzling hot. QCOM is up over 28% since late April. Qualcomm reported earnings that beat estimates and the company raised earnings guidance for 2024. But the real excitement is the growing talk about artificial intelligence coming to smartphones and Qualcomm as a major beneficiary of the upgrade cycle. It has been a while since phones had a significant upgrade and sales growth has been dwindling. But more analysts are contending that an AI-driven super cycle is coming soon. Qualcomm is at the leading edge of chips that enable AI for smartphones and PCs and should benefit mightily if such a cycle comes to fruition. BUY

UnitedHealth Group Inc. (UNH – yield 1.7%) – Things have been good since earnings put fears about the hacking to rest. UnitedHealth reported earnings last month that soundly beat expectations with an 8.6% revenue rise and a better than 10% increase in adjusted earnings from last year’s quarter. The company also issued strong guidance. UnitedHealth appears to have absorbed the costs while maintaining strong growth in the quarter and future quarters. The health insurer is up about 20% over the last month. BUY

Visa Inc. (V – yield 0.8%) – This payment processing global goliath reported stellar earnings again. It reported a 10% jump in revenue and a 20% increase in adjusted earnings per share over last year’s quarter. It is still thriving from cross-border transactions and benefits from the recent economic news. Visa also reported upbeat guidance for the rest of this year. Although performance has leveled off over the past few months, V should be solid as long as the economy holds up. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.1%) – After bouncing around with the interest rate narrative for the past few years, this one-of-a-kind life science property REIT is having a good month in May. It’s up 7% so far and may be approaching the 52-week high if the good vibes last a little longer. The REIT also reported strong earnings earlier this month that beat expectations. Adjusted funds from operation grew at 7.3% over last year’s quarter and raised the quarterly dividend by 5%. ARE is a great income stock selling at the low end of historical valuations while the company is consistently growing revenues and profits from its niche properties. BUY

NextEra Energy (NEE – yield 2.7%) – The combination regulated and alternative energy utility reported earnings earlier this month that slightly missed on revenues but beat significantly on earnings. The stock has continued to move higher since. It was a solid report and NEE is now officially turning things around in a very significant way. NEE has been trending higher since the beginning of March and is up over 40% in that time. NEE had been a superstar performer before inflation and rising interest rates. It provides both safety in the form of its best-in-class regulated utility business and growth from its considerable clean energy business. BUY

USB Depository Shares (USB-PS – yield 5.7%) – This preferred stock has just weathered a strong interest rate storm and has still returned about 15% since being added to the portfolio. I believe it is unlikely that rates eclipse the high of this cycle. Even if they do this security can handle it well. It’s also quite possible that rates fall from here and the stock behaves very well. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.1%) – Ditto for VCLT. It doesn’t like rising rates. But that’s OK unless rates rise to new levels beyond what has been seen in this cycle. I believe that VCLT is still well positioned after the worst two years for fixed income ever. BUY

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