October 19, 2022

Earnings Optimism Loses Steam

The brief earnings rally is already petering as positive surprises from some high-profile companies are being offset by others. The hope of a corporate earnings soft landing is getting some cold water thrown on it.

Better-than-expected big bank earnings along with other earnings beats from notable companies like Netflix (NFLX), United Airlines Holdings (UAL) and Johnson & Johnson (JNJ) are being smothered by overall results. So far, overall results are below average for the quarter.

Earnings have often saved or revitalized the market in recent years. There is hope that this season might do the same. But I wouldn’t count on it. Negative GDP growth for the first two quarters, and maybe this one, along with continued high inflation are bound to catch up to company profits.

I doubt we’re out of the woods yet. And the market may make new lows in the weeks and months ahead. But we should be closer to end than the beginning of this bear market. There will be opportunities ahead of the next bull market. But probably not yet.

Interest rates are also having a major effect on this market. In the first nine months of the year, conservative dividend stocks had been a haven in this bear market. But those stocks were clobbered in the recent selling as competing fixed rate investments became more attractive. Rates are now at the highest level in more than a decade.

But the recent spike seems to be ignoring the likelihood of a recession. Recessions usually put downward pressure on longer-term interest rates. The recent spike creates an opportunity to not only lock in fixed rates at this high level, but also pick up some conservative utility stocks on the cheap. Portfolio positions NextEra Energy (NEE) and Excel Energy (XEL) are near the 52-week lows while having defensive businesses ahead of a recession.

High Yield Tier

Enterprise Product Partners (EPD – yield 7.5%) – Yeah, EPD and its midstream energy peers got clobbered in September. But the stock has been trending steadily higher for the past month and the market realizes it perhaps overdid things. EPD should be ideal for the current market. It offers a high and safe distribution from a company that should well endure inflation and recession. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 6.7%) – OKE is negative for the year but has still vastly outperformed the overall market, although it is miles from the 52-week high, down 25%. The stock has also underperformed its midstream energy peers this year. This lagging performance is still hard to explain. Earnings in this natural gas arena are resilient and continued to grow through the pandemic. It pays a huge dividend and has automatic inflation adjustments built into its contracts. Markets can do anything in the short term, but rationality usually wins over eventually. BUY

Realty Income (O – yield 5.1%) – This legendary monthly income payer recently hit the 52-week low and remains a long way from the pre-pandemic high, despite having higher earnings. REITs have been under pressure from rising rates at it raises costs for growth projects. But Realty just made a large acquisition and should get strong growth because of that over the next year. A great company with a fantastic track record is on sale. BUY

The Williams Companies, Inc. (WMB – yield 5.6%) –The same things mentioned above about EPD and OKE apply to Williams. I continue to rate this and the other midstream companies a BUY because in the absence of indiscriminate selling, the stocks should resume trending higher because of the high dividend and resilient business. WMB had great momentum before the recent selloff and it should regain traction in the months ahead. BUY

Medical Properties Trust, Inc. (MPW – yield 10.5%) – This hospital property REIT sells at a fire sale value with a stratospheric dividend yield that should be safe. But the stock continues to trend lower as investors seem more keyed on momentum than fundamentals in this market. MPT does continue to have issues with its largest tenant that the market has overblown in this unforgiving environment. But because of negative momentum and continuing uncertainty half the position was sold last week and the remaining half is a HOLD for now. HOLD

Dividend Growth Tier

AbbVie (ABBV – yield 3.9%) – On the one hand, ABBV is about 20% below the 52-week high made last spring, so it hasn’t done much in a long time. On the other hand, it has still posted a double-digit positive return YTD in a hideous market and is one of the very few stocks on the market to hold up and retain its price through the tumult of the past month while just about everything else took a beating. Recession fears don’t seem to bother drug companies because it they are among the few businesses that don’t get hurt. HOLD

Broadcom Inc. (AVGO – yield 3.8%) – While the chip maker and infrastructure software provider continues to deliver on an operational basis, it’s getting creamed by this market. Broadcom once again delivered on earnings with 40% earnings growth and a 25% revenue increase versus last year’s quarter. It also raised guidance for the rest of the year. But that seems to matter very little in a year when the whole technology sector continues to get crushed. The rating was reduced last week and will remain so until positive momentum can be established. HOLD

Brookfield Infrastructure Partners (BIP – yield 4.1%) – This reliable revenue generator crashed 23% in less than a month. It had been a stalwart in this rotten market for most of the year and then the bottom fell out as interest rates spiked much higher and dividend stocks got a drubbing. That’s surprising because its crucial infrastructure assets are virtually recession proof and inflation adjustments are built into the contracts. After the knee-jerk reaction to interest rates the good attributes should again apply to BIP. And a recession should bring interest rates back down. (This security generates a K-1 form at tax time). HOLD

Eli Lilly and Company (LLY – yield 1.2%) – This big pharma stock is one of very few stocks on the market that moved higher over the last month. There was good news. Biogen’s Alzheimer’s drug reported very positive phase III tests and the news is seen to increase the likelihood of approval for other similar drugs, including Eli Lilly’s drug on the fast track for approval. The stock was also upgraded by UBS for another diabetes drug that has proved effective for weight loss, saying it could be one of the most successful drugs ever if approved. HOLD

Intel Corporation (INTC – yield 5.5%) – The stock continues to be under pressure along with the rest of the tech sector in a market where value and fundamentals don’t matter right now. The stock is also facing headwinds as the chip sector continues to face pressure in the slowing economy while the company is undergoing a massive expansion program. The short term is ugly, but the dividend should continue to be safe with a very low payout ratio. HOLD

Qualcomm Inc. (QCOM – yield 2.7%) – The saga continues. Inflation and rising interest rates are bad for growth stocks since as costs rise, profit projections and market multiples decrease. It’s been going on all year and the tech sector is one of the worst performing sectors on the market. Although Qualcomm is in a strong growth phase, the market doesn’t care. But it will as things stabilize and eventually turn around. QCOM is already moving well off the lows as the market has rebounded a bit. BUY

Visa Inc. (V – yield 0.8%) – Companies are reporting that the travel rebound is continuing despite the slowing global economy. Visa exceeded expectations last earnings quarter as it very profitable cross-border transactions continue to rebound from the pandemic. The company is likely still benefitting more from the ending of Covid restrictions than it is being hurt by the slower economy. It usually moves up fast when the market rebounds. HOLD

Safe Income Tier

Rating change “HOLD” to “BUY”

NextEra Energy (NEE – yield 2.3%) – NEE continues to wallow near the 52-week lows after getting absolutely clobbered, along with the rest of the utility sector, since the middle of September. Higher interest rates have made conventional fixed rate investments more attractive and have diminished NEE’s appeal. But it is still a defensive business on the heals of recession that also offers growth from the clean energy business. BUY

Rating change “HOLD” to “BUY”

Xcel Energy (XEL – yield 3.2%) – Ditto everything mentioned above about NEE for this smaller alternative energy utility. XEL was soaring to new highs before it got rudely interrupted by rising interest rates. It also took a hit over the past month after soaring to a new high in early September. It’s still a defensive business and XEL should also benefit from the passage of the CHIPs bill as it should get some generous subsidies and favorable treatment. BUY

USB Depository Shares (USB-PS – yield 6.1%) – Interest rates have spiked to the highest level in more than a decade. This investment grade fixed rate investment is something that income investors have missed for many years: a sizable yield on a safe income investment that is diversified from the stock market. Interest rates may go higher. But they are less likely to average higher over the next several years as a recession will put negative pressure on rates. BUY

1) Please tell me about a time you made money on one of my trades – how much? How fast? What did you do with your profits?

2) How would you describe Cabot Dividend Investor to a friend?
You can simply send your response by email to CDI@cabotwealth.com. We’ll share interesting responses, anonymously, with you on the website.