Earnings Don’t Impress, but Here Comes the Fed
It’s the middle of the summer swoon. But there’s a lot going on in the market, namely earnings. It’s second quarter earnings season. Earnings news is affecting several portfolio positions and I will discuss it in the body of this update.
Overall, this earnings season is shaping up to be positive but uninspired. S&P 500 profits are likely to grow, but not by much. It seems like a logical breather after the torrid earnings growth of last year from the effects of the tax cuts. But can low single digit earnings growth support a market already near new all time highs? It probably can with the help of the Fed.
The Fed meets next Wednesday and is largely expected to cut the Fed Funds rate by 0.25%. But the market is already pricing that in. Fed watchers will be carefully listening for hints as to whether the Central Bank will cut rates more by the end of the year. But that will probably depend on how the economy performs going forward.
Most economists believe the economy is sputtering a little bit. Most are calling for second quarter GDP growth of less than 2%. Of course, that’s what they said last quarter. And they were dead wrong. GDP grew 3.2% in the first quarter. What do they know?
But either way, the market should have it covered. If the economy is strong, stocks will benefit from the strong fundamental backdrop. If it’s weak, the Fed will come to the rescue and lower rates more. Either the economy or the Fed will stimulate the market.
At least that’s how things are shaping up right now. It should remain a strong environment for dividend stocks. Earnings so far have been positive for the portfolio. There is one rating change this week. NYC utility Consolidated Edison is being sold from the portfolio.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 44 – yield 4.6%) – BIP is part of Brookfield, one of the best asset managers in the world. The partnership has a solid track record of investing in profitable, stable, long life assets with near monopolies in their areas. Looking ahead, the company has been selling mature assets and reinvesting in higher return properties. The defensive nature of the cash flow, high dividend and superior track record make this a great dividend stock. The stock is still reasonably valued and looks poised to break through the old high of $45.
HOLD – Community Health Trust (CHCT 40 – yield 4.2%) – Nothing seems to stop this small healthcare REIT. It seems to forge higher every single week. It’s up over 40% already this year, more than double the return of the overall market. The market loves REITs right now. Although the stock is getting very expensive, it may well move still higher in the weeks ahead.
BUY – Enterprise Product Partners (EPD 30 – yield 6.0%) – This oil and gas infrastructure company looks very good right now. New projects should continue to boost earnings when it announces on July 31st, and the company has beat expectations for the last six straight quarters. The high yield is rock solid and the stock is still cheap, still selling significantly below its 5-year average valuation. The stock also recently broke above a key resistance level at 30 and has been forming a base there. EPD is still a great buy here.
HOLD – STAG Industrial (STAG 30 – 4.6%) – Stag is a high dividend payer with a great niche in a strong REIT sector. Industrial REITs enjoy a high demand that outstrips current supply. The sector seems to be benefitting from the proliferation of E-commerce as much retail space is moving into warehouses. The market loves this monthly dividend payer right now and it still has good momentum. The stock recently broke above a key resistance level and could continue to run higher.
Dividend Growth Tier
HOLD – AbbVie (ABBV 68 – 6.1%) – The good news is that the stock is very cheap. The bad news is that it could stay that way for a while. Abbvie announces second quarter earnings on Friday and analysts expect earnings to grow 10.5% year over year and revenues to shrink 2.1%. I don’t see a lot of downside even if earnings disappoint because the stock is so beaten down already. However, a positive surprise could lift the stock higher. It needs some kind of catalyst to get out of this funk. Maybe the earnings will deliver.
HOLD – Altria (MO 50 – 6.5%) – The stock got a little bit of a boost this week as Philip Morris (PM) beat earnings expectations and rose 8% on the day. It probably doesn’t portend anything for Altria’s earnings next week, but good tobacco news is good tobacco news. Analysts expect Altria to report an 8.9% jump in earnings and 3.5% revenue growth. We’ll see what happens. Investors will be interested in other numbers as well, like cigarette volumes and E-cigarette sales.
HOLD – American Express (AXP 128 – yield 1.2%) – The credit card company reported earnings last week and they were good. Earnings were up 12.5% and revenues grew 8.4% over last year’s second quarter. It was also the eighth straight quarter of 8% or better revenue growth. Both earnings and revenues beat expectations but the stock stumbled because the company maintained the same guidance for 2019. The market was hoping for a guidance bump and was a little disappointed. When a stock is at an all time high, investors are more demanding. The stock has bounced back to where it was and we’ll see what happens from here.
BUY – Crown Castle International (CCI 128 – yield 3.4%) – This cellular infrastructure REIT announced earnings last Wednesday. They crushed it, beating Wall Street expectations on earnings and revenue and raising full-year profit estimates. But the stock sold off. The price fell almost 6% in the two days following the announcement. I’m not entirely sure why. I couldn’t find any hidden bad news behind the numbers. It appears to be just a little profit taking on good news. The stock has started to rebound this week. Operationally, everything looks great. This represents an opportunity to buy the stock on a pullback as earnings should remain strong and growing for the foreseeable future.
BUY – Valero Energy Corp. (VLO 85 – yield 4.3%) – This is in my view the best refiner in the country. The longer trend is still strong for American refiners with the advantage of cheaper crude oil feedstock. And Valero has moved down and is cheap because of temporary factors. Things are turning around and it should also get a boost from the new fuel standards required by the IMO starting in 2020. I see this as a stock that recently had a down leg in an uptrend. The big rebound in earnings will likely occur in 2020, but the market looks ahead. Meanwhile, analysts are expecting stronger second quarter earnings than last quarter but lower than the year ago quarter, to be reported this Friday. I don’t know what to expect. Various prices are not aligned right yet, but the expectations bar isn’t that high either.
Safe Income Tier
BUY- Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.3%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.8%)
There is nothing to say about these safe short term bond ETFs. Isn’t that beautiful? They just keep rolling on at a steady price paying interest. When the market booms these ETFs seem like a waste and dead money but things get ugly you’re happy you have these. Holdings like these add intangible effects like giving you more confidence to stay invested in the rest of the portfolio.
Rating change “HOLD” to “SELL”
SELL – Consolidated Edison (ED 86 – yield 3.3%) – The NYC utility was in the crosshairs this week. During last week’s heat wave in the area, parts of the city experienced their second major power outage this month. The Governor and the NYC Mayor weren’t happy. The Mayor actually suggested a City government takeover of the NYC grid! While that is highly unlikely, it isn’t the friendliest regulatory environment as it is and, having provoked the ire of the politicians, it could get worse. I’m not overly worried about the current troubles; the stock price has barely moved lower. But here’s the thing. I don’t know how much was left in the tank anyway. The stock had a great year and is perched near recent all time highs, selling at a five year high valuation. The stock was probably near a good exit point anyway and the recent issues make the decision to take a profit easier. There is likely more downside risk than upside potential at this point. The position delivered a 67% return since being added to the portfolio in 2014.
BUY – Invesco Preferred ETF (PGX 15 – yield 5.6%) – The high yield and lack of correlation to the stock and bond markets make this a nice portfolio holding and income generator. The stock price has barely budged for this entire year so far and that’s exactly what investors sign up for with this ETF. With rates likely to fall and the demand for income strong this ETF should continue to churn out high monthly income with a stable price in the foreseeable future.
HOLD – McCormick & Co (MKC 158 – yield 1.4%) – The spice maker is a rock solid, defensive food company with better earnings growth than its peers. But everybody knows it and the stock is selling at very lofty valuations. It still has good momentum for now, so it is still a HOLD. But I will have a low level of tolerance for any stock price weakness going forward.
HOLD – NextEra Energy (NEE 208 – yield 2.4%) – The country’s largest utility announced earnings this morning that beat estimates for both revenue and earnings. The company grew earnings in the quarter at a 13% clip over last year’s quarter and reiterated a target earnings growth rate of 6% to 8% through 2021, very high for a utility, especially one this size. The operational performance continues to be sound, the valuations aren’t out of whack, and the stock still has good momentum.
HOLD – Xcel Energy (XEL 60 – yield 2.7%) – This utility is similar to NextEra in that it has a strong alternative energy business. But it’s a lot smaller which gives it potentially more upside. The company is doing well as earnings estimates have been raised for this year and next year. Over the past five years the price has move 92% higher compared to just a 14.6% move for its peers over the same time span. The stock continues to outperform the market and its peers and momentum could drive it still higher in the weeks and months ahead.
