Can Earnings or the Fed Show Us the Way?
A crazy earnings season meets a sideways market. Investors have been looking for a narrative that gains traction. Maybe earnings will provide it.
One day the market worries about inflation. The next day it frets about growth. Is inflation or the delta variant a bigger concern? The market can’t decide. The Fed will grapple with this very tug-o-war at this afternoon’s monthly report.
If the risk is toward high inflation, the Fed needs to get tougher and be more aggressive about raising rates and pulling back bond purchases. Investors won’t like that. If the central bank is more worried about the delta variant, the recovery could be hampered and the Fed will need to stay accommodative. Investors like that.
Given the two opposite pressures, the Fed is likely to do what it does best – nothing. Since doing nothing will involve staying accommodative, the market should be happy. We’ll see.
Then there’s earnings. Average earnings for the S&P 500 companies are expected to grow 74% from last year’s pandemic-infested quarter. That will be the highest growth since 2009 and one of the highest quarterly growth rates ever. But the market anticipates and was expecting this. That’s what the rally at the end of last year and the beginning of this year was about.
It’s also awfully hard to impress a market that’s expecting 74% earnings growth on average. Probably the most important aspect of this quarter’s earnings report will be future guidance. Investors want to see what companies expect beyond the pandemic recovery. Because they sure don’t know. But businesses don’t seem to know either.
While anything is possible, it is seeming increasingly unlikely that earnings will provide investor with the future clarity they crave. That lack of clarity or direction will hit a summer market heading into the dog days of August. Usually, the market continues to do whatever it was doing before investors go on vacation and stop paying attention.
But while the overall market tools around, several portfolio positions are quietly making new highs.
High Yield Tier
AGNC Investment Corp. (AGNC – yield 8.9%) – The mortgage REIT announced mixed earnings results yesterday afternoon. While earnings increased over 18% from last years quarter and beat estimates, net interest income declined from last year’s quarter and book value decreased from last quarter. It’s a lot better than last year but worse than last quarter as long-term rates have trended lower. The market priced in these things already and the stock is down about 0.5% on the day so far. I still expect a strong economy and rising rates going forward. BUY
Blackrock Enhanced Capital and Income Fund (CII – yield 5.3%) – This newest portfolio addition covered-call ETF tends to move roughly in sync with the overall market. Writing calls to enhance income is a great strategy in a lackluster market like this. There isn’t much appreciation, as the market is only up about 1.5% since early May, and the higher monthly payout provides return. BUY
Enterprise Product Partners (EPD – yield 7.5%) – The midstream energy partnership reported earnings this morning that have so far failed to impress. Volumes in most products continue to increase to near 2019 levels, although there is some weakness still in export volume. It showed continuing recovery in volumes overall and solid increases in earnings and cash flow. But it was nothing mind-blowing. But the business never contracted that much during the pandemic.
EPD is down about 1% so far today. That’s about normal for earnings that fail to dazzle in this high-growth quarter. The midstream partnership also easily afforded the distribution with cash flow. EPD remains an undervalued stock with a high dividend that should trend higher over the rest of the year. BUY
ONEOK Inc. (OKE – yield 7.0%) – This more volatile midstream company doesn’t report earnings until next week. Like most stocks in the sector, OKE has trended lower for most of this month, after hitting a high in early July. This most recent phase of the market has not been good for energy or other cyclical sectors. But this is a solid and resilient company that actually grew profits in 2020 but is still well below the pre-pandemic price. We’ll see what happens with earnings. BUY
Realty Income (O – yield 4.0%) – While investors have been focusing on other things this legendary income REIT touched the 52-week high yesterday. The retail sector continues to show strength and Realty should benefit. The stock has been trending strongly higher since March, but in an up and down fashion. It’s been on one of the ups this month. Earnings come out next week. The report should be solid with not all that much growth because earnings didn’t shrink much last year. I still like O in an uncertain market. BUY
STAG Industrial (STAG – yield 3.6%) – This industrial REIT is a rare stock making new highs in this market. Shares are jumping today as STAG reported better-than-expected earnings. The stock has already been outperforming the market YTD as the outlook in the industrial space remains very positive. While cyclical stocks have been floundering, STAG is a more defensive one ahead of a cyclical trend that’s less volatile. HOLD
Verizon Communications (VZ – yield 4.5%) – The wireless giant beat earnings expectations last week on both revenue and earnings per share because of 5G phone upgrades. That’s good news and indicates that the strategy of investing heavily in 5G is starting to work and hit the bottom line. It’s what we’ve been waiting for. But the market yawned. It’s a tough market to impress. And VZ remains a great down-market stock. We’ll see how it behaves from here. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 4.4%) – This biopharmaceutical stock has been slowly making a series of new 52-week high. And it’s now within striking distance of the all-time high. But ABBV still trades at a dirt-cheap valuation of less than 9 times forward earnings with a high and safe dividend. AbbVie reports earnings on Friday. The report should be important as investors are still gaging the impact of the merger as well as tracking the performance of its new drugs and their ability to overcome lost Humira revenue going forward. BUY
Broadcom Inc. (AVGO – yield 3.0%) – Some of the big tech companies reported earnings that soundly beat expectations. The market expected that and is more focused on future guidance. It’s tough to impress in an environment with such lofty expectations. Broadcom doesn’t report until September. It’s all noise in the short term. The sector is doing great and Broadcom will surely benefit from 5G. BUY
Brookfield Infrastructure Partners (BIP – yield 3.7%) – BIP recently hit a new high and then pulled back. That has been a consistent pattern. The stock is trending very slowly higher in a bouncy fashion. BIP should trend higher over the next week or two and then pull back again if the same pattern continues. It’s still a good defensive company with a safe dividend that’s headed in the right direction, even if it’s not setting the world on fire. BUY
Chevron Corp. (CVX – yield 5.3%) – Sure, crude oil prices have pulled back a little in recent weeks as OPEC is increasing production and the new virus strain prompt global growth fears. And the energy sector has been taking it on the chin. But the price per barrel is still very near the post-pandemic high and near the highest level since 2018. The high price must boost Chevron’s bottom line, which should be reflected in the second-quarter earnings report coming out on Friday. HOLD
Digital Realty Trust (DLR – yield 3.0%) – This data center REIT reports earnings tomorrow. The stock is still off the recent highs, but it still looks pretty good, trending higher since March. Earnings are always a wild card, but I don’t know of anything to worry about. DLR is also a great stock to have amidst uncertainty. It has historically traded with a beta of just 0.11, meaning it’s only about one-tenth as volatile as the overall market. BUY
Eli Lilly and Company (LLY — yield 1.4%) – It’s a brand-new all-time high. Although the healthcare sector has underperformed the market YTD, LLY has return over 45% so far this year, and it’s trending higher. The performance is clearly company specific as its tremendous pipeline continues to excite. Much of the latest move is about the pending Alzheimer’s treatment approval, which could be before the end of the year. Lilly reports earnings Friday. HOLD
KKR & Co. Inc. (KKR – yield 1.0%) – This thing just keeps going. It’s up about 55% YTD and at another new all-time high despite the fact that the financial sector has been floundering since early June. The asset management industry is booming, and alternative investments are the hottest part of the sector. KKR announces next week. I expect more splendid things. BUY
Qualcomm Inc. (QCOM – yield 1.9%) – In the near term, the chip maker bounces around with the tech sector on every inflation announcement. Longer term, Qualcomm is in the right place as it benefits mightily from the 5G rollout. Last quarter’s earnings report was fabulous. It reports the latest quarter tomorrow. Let see if that gets it going. BUY
U.S. Bancorp (USB – yield 3.3%) – The sideways funk continues. USB peaked in May and then pulled back and has moved sideways for the last month. Earnings were stellar. The bank reported earnings of $1.28 versus an expected $1.12 on the strength of both a release of loan-loss reserves and a booming fee business. But the market is still worried about the flattening yield curve and the effect on banks. The strong economy should keep it from losing any ground, and I still believe rates will trend higher in the months ahead amidst a booming economy and persistent inflation. BUY
Valero Energy Corp. (VLO — yield 6.1%) – This refiner is bouncing around with the energy sector in an exaggerated fashion. The stock has returned 20% YTD but is down 44% over the last three years. Business should be booming as demand and prices for refined product have skyrocketed. The earnings announcement is tomorrow. It will be very important. Hopefully, things go well and the stock moves higher again. HOLD
Safe Income Tier
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 1.5%) – This short-term bond fund is a safe port. While the market is promising for the rest of the year, there are still a lot of uncertainties out there. It’s nice to have something in the portfolio that you don’t have to worry about. That said, the bonds in this ETF mature at the end of this year. HOLD
Invesco Preferred ETF (PGX – yield 4.9%) – After falling during the pandemic, this preferred stock ETF has recovered and is back near the pre-pandemic high. This preferred stock ETF is much less volatile than the stock market while providing a big yield. It also adds diversification as preferred stock performance is historically not correlated to the stock and bond markets. HOLD
NextEra Energy (NEE – yield 2.0%) – The alternative energy utility delivered strong earnings results last week with 9% earnings growth over last year’s quarter. It right on track for its goals and firing on all cylinders. The regulated part shined as new investment in solar and customer growth helped. NEE has moved slightly higher since the announcement to near the highest level since April. It should also get a boost when alternative energy investments inevitably come back into vogue. BUY
Xcel Energy (XEL – yield 2.6%) – After dipping for a couple of months after the recent high, the alternative energy utility is having a good month in July, up about 6%. Xcel announces earnings tomorrow. We’ll see. BUY
High Yield Tier | ||||||||||||
Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on 7/27/21 | Total Return | Current Yield | Div Safety Rating | Div Growth Rating | CDI Opinion | Pos. Size |
AGNC Investment Corp. (AGNC) | 04-14-21 | 17 | Monthly | 1.44 | 8.5% | 16 | -5% | 8.9% | BUY | 1 | ||
Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.3% | 21 | 1% | 5.3% | BUY | 1 | ||
Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 6.40% | 23 | 0% | 7.5% | 8.3 | 7 | BUY | 1 |
ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 7.10% | 53 | 1% | 7.0% | BUY | 1 | ||
Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.5% | 70 | 15% | 4.0% | 9.3 | 9.8 | BUY | 1 |
STAG Industrial (STAG) | 03-21-18 | 24 | Monthly | 1.45 | 6.0% | 41 | 99% | 3.6% | 5.2 | 5.9 | HOLD | 1/2 |
Verizon Communications (VZ) | 02-12-20 | 58 | Qtr. | 2.51 | 4.3% | 56 | 3% | 4.5% | 8.6 | 9.2 | HOLD | 1 |
Current High Yield Tier Totals: | 5.7% | 23.6% | 5.3% | |||||||||
Dividend Growth Tier | ||||||||||||
AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 6.7% | 118 | 74% | 4.4% | 10 | 8.6 | BUY | 2/3 |
Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 3.2% | 476 | 7% | 3.0% | BUY | 1 | ||
Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 5.0% | 54 | 62% | 3.7% | 6.5 | 8.6 | BUY | 2/3 |
Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 5.7% | 101 | 12% | 5.3% | HOLD | 1 | ||
Digital Realty Trust (DLR) | 09-09-20 | 147 | Qtr. | 4.64 | 3.2% | 154 | 9% | 3.0% | 6.8 | 10.0 | BUY | 1 |
Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 2.2% | 247 | 63% | 1.4% | 10.4 | 8.3 | HOLD | 2/3 |
KKR & Co. Inc. (KKR) | 03-09-21 | 48 | Qtr. | 0.58 | 1.2% | 62 | 33% | 1.0% | BUY | 1 | ||
Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 3.1% | 141 | 74% | 1.9% | 8.0 | 9.0 | BUY | 1/3 |
U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.7% | 56 | 25% | 3.3% | BUY | 1 | ||
Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 4.7% | 67 | -14% | 6.1% | 6.4 | 8.6 | HOLD | 1/2 |
Current Dividend Growth Tier Totals: | 3.9% | 34.5% | 3.3% | |||||||||
Safe Income Tier | ||||||||||||
BS 2021 Corp Bond (BSCL) | 08-30-17 | 21 | Monthly | 0.42 | 2.0% | 21 | 8% | 1.5% | 9.0 | 4.0 | HOLD | 1/2 |
Invesco Preferred (PGX) | 04-01-14 | 14 | Monthly | 0.74 | 5.3% | 15 | 57% | 4.9% | 6.3 | 1.1 | HOLD | 1/2 |
NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 3.5% | 77 | 87% | 2.0% | 9.4 | 8.0 | BUY | 1/2 |
Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 5.9% | 68 | 181% | 2.6% | 9.5 | 7.0 | BUY | 2/3 |
Current Safe Income Tier Totals: | 4.2% | 83.3% | 2.8% |