The Epic Earnings Season That Isn’t
The earnings extravaganza is in full swing. It’s the peak of the season that marks the peak earnings growth of this extraordinary recovery. And the market is sort of yawning it off.
Part of the issue is summer malaise. People just tend to focus more on enjoying the waning days of summer than stocks this time of year. But it also may be that this quarter just isn’t as important one might expect.
Yeah, so far with about 55% of S&P 500 companies reporting, average earnings are up 85.1%. That’s the best quarterly growth since 2009 and one of the best ever recorded. But that growth is compared to the trough of the locked-down pandemic-stricken crashed economy.
It’s also hard to impress a market that expected huge earnings. It’s the soft bigotry of high expectations. And this phase of the recovery has likely already been priced into stocks.
What matters is where we’re going. What can we expect over the rest of the year on the other side of this pandemic recovery when things normalize? That has become more unclear as the delta variant threatens to slow things down. And company earnings reports can’t really lend insight into that.
Yet, despite the threat of renewed restrictions on the economy, and despite the fact that economic growth is likely peaking, the market indexes continue to slowly forge ever higher, at least for now.
It’s unclear how all this will shake out. It’s also possible that no narrative gains real traction until investors start paying attention again after Labor Day. For now, the market seems okay with everything, albeit not thrilled.
There are a couple stocks in this portfolio that are bucking the trend and getting a huge boost from earnings. KKR % Co. (KKR) and Eli Lilly (LLY) are soaring to new highs after reporting.
High Yield Tier
AGNC Investment Corp. (AGNC – yield 9.1%) – This mortgage REIT continues to be under pressure and trade around 16 per share after reaching a high of nearly 19 per share in early June. It’s all about the yield curve. AGNC benefits as the yield curve steepens and it earns more net interest income on the difference between short-term rates, at which it borrows, and long-term rates, at which it lends. The 10-year Treasury yield has fallen all the way to 1.17% from a post-pandemic high of 1.75% at the end of March.
Despite solid earnings that beat expectations, the stock continues to languish. Long-term rates continue to fall with no evidence of a shift in direction, despite a booming economy and persistent inflation. The market remains skeptical of growth and inflation beyond the pandemic recovery. That may change. For now, the economy is strong, and the dividend is solid. 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 market that is trending higher but not delivering fast returns. The higher monthly payout provides a great income return while the overall market bounces around. BUY
Enterprise Product Partners (EPD – yield 8.0%) – The midstream energy partnership reported solid earnings that failed to impress. Volumes continued to increase as did earnings and cash flow. But it didn’t take that big a hit in the pandemic and the economy was still largely shut down in the first half of this year’s second quarter. Volumes and earnings should get a bigger boost in the second half of the year. The stock price has been bouncing around and is at the level it was at in March after the latest dip. But patience should pay off and the stock still pays a massive yield while you wait around for better things. BUY
ONEOK Inc. (OKE – yield 7.3%) – This more-volatile midstream company reported quarterly earnings yesterday that beat expectation and also raised guidance for the year. And the market yawned despite the fact that adjusted EBITDA surged 50% over last year’s second quarter. It’s a similar problem as EPD. Earnings were resilient during the pandemic and this second quarter still doesn’t reflect the full recovery. It’s tough to impress in this earnings season. And the market hates energy right now. But things change and OKE pays a whopping 7.3% in the meantime. BUY
Realty Income (O – yield 4.0%) – Slow and steady wins the race. Returns haven’t been exciting. But Realty has a long history of boring investors all the way to the bank. The REIT just announced earnings that matched expectations and it raised guidance for the year. That’s solid. But it is unlikely to impress investors in this high-expectation earnings season. That’s okay. Its core of essential retail properties remains solid and the small percentage of those affected by the pandemic are bouncing back. I expect a slow slog higher from here. BUY
STAG Industrial (STAG – yield 3.5%) – Industrial properties are hot stuff, and so is STAG. The REIT continues to forge to new highs even in this market. STAG exceeded expectations on earnings, and forward estimates continue to rise as industrial properties are in high demand and low supply. It’s a good business that should thrive in this economy and STAG is still small enough to get a lot of leverage out of the situation. HOLD
Verizon Communications (VZ – yield 4.5%) – The wireless giant beat earnings expectations 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. Of course, you wouldn’t know it by the stock movement. The stock continues to float on the water like whale excrement. Perhaps the post-Labor Day market will infuse the market with newfound enthusiasm for the 5G phenomenon. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 4.5%) – AbbVie posted earnings last week that slightly beat estimates and it raised EPS and revenue guidance for the year. The biopharmaceutical company is benefiting from a rebound in cosmetic treatment Botox as people come back to non-essential procedures after the pandemic, as well as strong growth in its immunology drugs that it needs to replace Humira revenue in 2023. The stock did nothing. But it remains near the 52-week high and near the all-time high. It’s still dirt-cheap at 9.5 times forward earnings and might be near a breakout. BUY
Broadcom Inc. (AVGO – yield 3.0%) – This recently underperforming tech industry giant is near the 52-week high. The semiconductor industry has been outperforming the market and most analysts expect a very strong period over the next year. I’m hoping this stock can surge after investors start paying attention again after Labor Day. BUY
Brookfield Infrastructure Partners (BIP – yield 3.8%) – The infrastructure partnership has been going sideways since April. It reports earnings tomorrow. Maybe that can get it going. It’s a solid and defensive business that should be getting strong earnings growth and new projects come online and the transportation assets rebound. BUY
Chevron Corp. (CVX – yield 5.3%) – The energy giant soundly beat earnings expectations this week with a $1.71 per share profit and revenue growth of 179% over last year’s quarter. Of course, the stock did nothing. But despite this being peak earnings growth for the overall market, the strongest growth for Chevron should be in the second half of the year as it benefits from higher oil prices and a strong recovery. The delta variant and peak earnings may give some the impression that the party is over for CVX. But it should have another surge as business booms over the rest of the year. HOLD
Digital Realty Trust (DLR – yield 3.0%) – The world’s largest provider of datacenter properties reported solid earnings this week. Core funds from operations was even with last year’s quarter and revenue increased 10%. The FFO included an increase in the UK tax rate. It otherwise would have climbed 8%. Of course, it’s important to realize that business boomed during the pandemic, and these are solid “normal economy” growth rates. BUY
Eli Lilly and Company (LLY – yield 1.4%) – Lilly is on fire at another new all-time high. It’s up another 3.5% so far today, 55% YTD, and 9% is the last few days. The pharmaceutical giant report mixed earnings results earlier this week as earnings slightly missed but revenues beat. But the main event was the company’s announcement that it will submit its Alzheimer’s drug for FDA approval this year. Enthusiasm for the drug outweighs everything else. The drug has blockbuster potential and a likely approval. We’ll see how far the stock runs. HOLD
Rating change “BUY” to “HOLD”
KKR & Co. Inc. (KKR – yield 0.9%) – This is one stock that is actually getting a boost from great earnings. Distributable earnings more than doubled and revenues tripled over last year’s quarter. The company took in a record $59 billion in new assets. It was an impressive quarter even among huge expectations. KKR is up over 60% YTD and nearly 15% in less that three weeks at another new all-time high. It’s worth holding as it might continue to run. But it has moved beyond the buy price. HOLD
Qualcomm Inc. (QCOM – yield 1.8%) – The 5G chip maker delivered another blowout quarter last week, thrashing estimates and raising guidance. Qualcomm is making a fortune on royalties as 5G phones are selling like hotcakes. The stock soared 5% on the day of the announcement but has pulled back since. It figures. Technology companies are having trouble getting lasting traction. But semiconductor stocks are outperforming the sector with a bright outlook. There should be another surge ahead in the near future. BUY
Rating change “BUY” to “HOLD”
U.S. Bancorp (USB – yield 3.3%) – Business is booming is the strong economy, but the flattening yield curve is putting pressure on net-interest income profits. The 10-year Treasury has fallen from 1.75% in March to about 1.2% today. USB has been in a funk as investors worry about the yield curve. I still believe it’s overblown, and rates should trend higher over the rest of the year. But the rate is still trending lower with no signs of stopping. Until it reverses, I’m reducing the stock to a HOLD. HOLD
Valero Energy Corp. (VLO yield 5.8%) – Reported earnings last week beat expectations with a return to profitability of $0.43 per share. It showed solid growth in refinery throughput. VLO bounced around since but is lower today as it goes ex-dividend. Like Chevron, Valero’s real recovery will show in the second half of the year as it records full quarters of an open economy. 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 1.9%) – The alternative energy utility delivered strong earnings results this quarter with 9% earnings growth over last year’s quarter. It’s right on track for its goals and firing on all cylinders. It looks like this alternative energy utility is benefitting as investors sour on the cyclical stocks. NEE has been trending nicely higher since the moment cyclical stocks started to weaken in June. It’s a great stock for the longer term as alternative energy continues to grow at warp speed and it gets cheaper to produce. BUY
Xcel Energy (XEL – yield 2.7%) – This smaller alternative energy utility delivered uneventful earnings. EPS grew at a solid 7.4% clip, which surpassed estimates, and the company reiterated the same yearly guidance. The stock has been trending higher since late June after a recent low. It should benefit when alternative energy stocks come back into vogue. BUY
| High Yield Tier | ||||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on 8/03/21 | 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 | -6% | 9.1% | 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% | 22 | -3% | 8.0% | 8.3 | 7 | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 7.10% | 52 | 0% | 7.3% | 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 | 105% | 3.5% | 5.2 | 5.9 | HOLD | 1/2 |
| Verizon Communications (VZ) | 02-12-20 | 58 | Qtr. | 2.51 | 4.3% | 55 | 2% | 4.5% | 8.6 | 9.2 | HOLD | 1 |
| Current High Yield Tier Totals: | 5.7% | 23.8% | 5.5% | |||||||||
| Dividend Growth Tier | ||||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 6.7% | 116 | 72% | 4.4% | 10 | 8.6 | BUY | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 3.2% | 486 | 9% | 3.0% | BUY | 1 | ||
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 5.0% | 54 | 62% | 3.8% | 6.5 | 8.6 | BUY | 2/3 |
| Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 5.7% | 100 | 14% | 5.3% | HOLD | 1 | ||
| Digital Realty Trust (DLR) | 09-09-20 | 147 | Qtr. | 4.64 | 3.2% | 155 | 9% | 3.0% | 6.8 | 10.0 | BUY | 1 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 2.2% | 267 | 71% | 1.4% | 10.4 | 8.3 | HOLD | 2/3 |
| KKR & Co. Inc. (KKR) | 03-09-21 | 48 | Qtr. | 0.58 | 1.2% | 66 | 38% | 1.0% | HOLD | 1 | ||
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 3.1% | 148 | 82% | 1.8% | 8.0 | 9.0 | BUY | 1/3 |
| U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.7% | 55 | 25% | 3.3% | HOLD | 1 | ||
| Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 4.7% | 65 | -9% | 5.8% | 6.4 | 8.6 | HOLD | 1/2 |
| Current Dividend Growth Tier Totals: | 3.9% | 37.3% | 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 | 58% | 4.9% | 6.3 | 1.1 | HOLD | 1/2 |
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 3.5% | 79 | 91% | 2.0% | 9.4 | 8.0 | BUY | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 5.9% | 68 | 178% | 2.9% | 9.5 | 7.0 | BUY | 2/3 |
| Current Safe Income Tier Totals: | 4.2% | 83.8% | 2.8% | |||||||||