Earnings Duke It Out with Inflation
It’s not a great year so far. In fact, it stinks.
January was the worst month for the market since March of 2020. The S&P 500 was down 5.38% and the technology-heavy Nasdaq fell 10% for the month. But stocks are recovering so far in the first week of February as earnings come to the rescue.
It looks like another strong earnings season. So far, reported earnings for the S&P 500 are up more than 25%. That’s no small thing. Earnings have saved and revived this bull market throughout the recovery. Investors can forget about the other stuff if corporate profits are booming. A rising bottom line is the bottom line, at least for now.
But there is a lot of other stuff.
Inflation and the Fed are problems that won’t go away. Inflation has been persistent and is getting worse. The Fed blew the call on inflation and will now have to make up for lost time by raising rates sooner and faster than a pace at which it wouldn’t bother the market. It’s too late to seamlessly cure inflation. Only slowing growth will make a dent now.
We will have to deal with high inflation or a slowing economy and company profits. Neither thing is good for stocks. Investors may be able to overlook these things in the middle of a booming earnings season. But inflation and a hawkish Fed will haunt this market throughout the year. Expect choppy seas ahead.
While the overall market is floundering in 2022, energy is having the time of its life. As of yesterday’s close, the energy sector of the S&P 500 is up 23% YTD. That’s in one month. Energy stocks tend to thrive in inflationary environments as prices rise amidst strong demand. Plus, the stocks are still cheap after being dogs for the last decade, despite the stellar recent performance.
I expect a more volatile market as investors come to terms with the new inflationary reality. But it should continue to be a strong environment for energy and financial stocks as inflation persists and interest rates rise.
High Yield Tier
Blackrock Enhanced Capital and Income Fund (CII – yield 5.9%) – This covered call ETF tends to move very much in line with the overall market. So far this has been a rough year. There will likely be more volatility throughout the year but I expect positive results overall. Plus, the fund provides a high income. BUY
Enterprise Product Partners (EPD – yield 7.9%) – The midstream energy partnership has leveled off over the past couple of weeks after a big surge over the prior month. But it has remained stable near the recent high despite the tough market. I like the prospects for EPD over the course of the year. It is still highly undervalued and provides a stratospheric yield that’s safe. (This security generates a K1 form at tax time). BUY
Global Ship Lease, Inc. (GSL – yield 5.5%) – The container ship company sold off sharply during the market selloff but has come roaring back with a vengeance. GSL closed yesterday over 23% higher than the low of last week. The business is booming as containership rates remain high with no end in sight. This stock should have a good year. BUY
ONEOK Inc. (OKE – yield 6.2%) – The midstream company stock is still bouncing around in the same higher range after the fall surge. That said, it isn’t that far from the high and I expect OKE to make another run beyond the recent high in the next several months and the business continues to be strong. Despite the 69% stock return in 2021 and the huge energy sector performance so far this year, OKE is still below the pre-pandemic high even after higher earnings. BUY
Realty Income (O – yield 4.3%) – The REIT sector is having a rough year so far, but O is hanging strong and not far from the recent high. The relative strength is encouraging. O is still well below the pre-pandemic high for no good reason. I like the way the stock is situated going forward as earnings are growing at a better-than-average clip because of the recent acquisition and investors should gravitate toward safer dividend stocks in a more volatile year. HOLD
STAG Industrial (STAG – yield 3.5%) – This industrial REIT did not hold up that well through the REIT selloff, probably because it had been flying so high before. STAG returned 60% in 2021 and it pulled back about 17% from the high in the peak of the market sell-down. But it has been moving sharply again since. I’m sticking with it because industrial properties are in high demand and short supply. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 4.1%) – The biopharmaceutical company reported fourth-quarter earnings this morning. It beat slightly on earnings and missed slightly on revenues. It also raised 2022 guidance, slightly. The stock is up little less than a dollar so far today. ABBV is very close to the high after a big move in December. The fact that earnings did nothing to derail this lofty level is encouraging. It still sells at a dirt cheap valuation and should have more upside. HOLD
Broadcom Inc. (AVGO – yield 2.8%) – This legendary technology company stock has been a wild ride of late. It had a big surge in December and then gave it all back and then some during the tech selloff in January. But it’s up 12% over the past week. We’ll see where it settles in the near term. But the prospects are strong for the year as Broadcom continues to benefit from the 5G rollout. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.5%) – This infrastructure partnership is still not far from the recent high. It is hanging strong in an environment that has been tough for defensive dividend payers. BIP has been on an uptrend since the market bottom in March of 2020, albeit a slow and sometimes choppy one. It still looks solid and earnings should be strong, reflecting the new acquisition. BIP was very resilient when the market was ugly. It’s a great stock to own in a more volatile market. (This security generates a K1 form at tax time). HOLD
Chevron Corp. (CVX – yield 4.2%) – The energy giant reported mixed earnings last week that beat on revenue and missed on earnings. It delivered record cash flow amidst high oil prices and strong demand but stumbled a bit with overseas production because of Omicron restrictions. The stock fell temporarily but has regained footing and appears poised for a run beyond the high. The stock returned 62% in 2021. But there should be more left in the tank as it only sells at 9 times 2022 earnings estimates, well below the rest of the energy sector. HOLD
Eli Lilly and Company (LLY – yield 1.6%) – The big pharma company reports earnings tomorrow. There is every reason to expect strong results. But you never know with earnings. Since soaring to new highs on news of the likely approval of its potential mega blockbuster Alzheimer’s drug, it has been bouncing around. It appears to have begun a new upward move after a tough January and good earnings could really propel it higher. HOLD
KKR & Co. Inc. (KKR – yield 0.8%) – This alternative asset investment manager stock has had troubling performance of late. After a huge spike in October, KKR had been trending consistently lower until this past week. It appears to have broken the downtrend after a sharp 12% move high over the past week. Business was fantastic last quarter and this quarter should be strong as well. KKR reports next week. The prospects are good for this year and the downtrend is likely over. HOLD
Qualcomm Inc. (QCOM – yield 1.5%) – After hanging so strong near the high after a huge move and despite weakness in the sector, QCOM finally capitulated in the heat of the technology selloff in January. But it has moved sharply high since the selling abated and is right back in the 180s range. That said, Qualcomm reports earnings after the close today. You never know, but a good report could propel the stock to new highs. We’ll see. HOLD
Spectrum Brands Holdings, Inc. (SPB – yield 1.9%) – Consumer Discretionary is the worst performing S&P sector in this rough year so far. And previously high-flying SPB has taken one on the chin. It plummeted move than 15% in the second half of January. But the stock has been recovering this week. I still believe Spectrum is a standout consumer stock because of its high-growth, home-centric focus. When sector selling abates it should recover. Meanwhile, it reports earnings on Friday. Hopefully the report gets it moving back. HOLD
U.S. Bancorp (USB – yield 3.1%) – This regional bank stock caught fire in the first half of January as a steepening yield curve promised to juice profits. But USB gave it all back in the second half of the month and the market turned treacherous. USB also missed slightly on earnings, but the last quarter didn’t incorporate the higher interest rates. The stock has been strong this week and USB should be poised for a strong year as business is solid and should get stronger as interest rates rise. HOLD
Valero Energy Corp. (VLO – yield 4.5%) – The refiner stock just made a new 52-week high. It had been rallying sharply this year until it got taken down with everything else during the peak of the selling in January. But it recovered all the loss and then some. A high leverage play in the energy sector is a great place to be right now. Despite the strong recent performance, VLO is still well below the 2019 highs and miles below the all-time high. It should have room to run further. HOLD
Visa Inc. (V – yield 0.7%) – Wow! The card company stock had been languishing in the troubled market. But it reported blowout earnings last week and the stock jumped over 10% on the day of the report and is now up over 16% in a little over a week. As anticipated, international business is picking up as are the very profitable cross-border transactions as travel returns. The stock should continue to have a good year as the company benefits from a fuller recovery in 2022. BUY
Safe Income Tier
Invesco Preferred ETF (PGX – yield 4.9%) – After falling during the pandemic, this preferred stock ETF has recovered. PGX 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. It’s a great time to hold this ETF. HOLD
NextEra Energy (NEE – yield 2.0%) – This alternative energy utility stock is having a rotten year. It fell over 22% in January but it’s recovering sharply this week. The fall was amplified by the earnings report. Earnings were stellar but the company announced a management change that the market didn’t like.
The current CEO is being replaced by a 19-year veteran at the company. But the current CEO guided the company to 9% average earnings growth over the past decade compared to an average of 3% earnings growth for its 10 largest rivals over the same period. The market didn’t want to see him go. But I think it’s a big overreaction as the utility will continue a similar track. The recent selloff is a buying opportunity. BUY
Xcel Energy (XEL – yield 2.7%) – This alternative energy utility has been solid and barely budged during the market turmoil of the last week. Utilities have been a solid performing market sector since things got ugly as investors seek defense and safe havens. It’s a good market to have utilities. But XEL also has the added benefit of being on an uptrend and providing a safe way to play the growth in alternative energy. XEL is strong for now and probably stronger later in the year as investors rediscover clean energy growth. BUY
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on 2/2/22 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.6% | 21 | 1% | 5.9% | BUY | 1 |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 24 | 6% | 7.9% | BUY | 1 |
| Global Ship Lease. Inc. (GSL) | 01-12-22 | 23 | Qtr. | 1.50 | 6,41% | 23 | 17% | 5.5% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 62 | 24% | 6.2% | BUY | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 70 | 19% | 4.3% | HOLD | 1 |
| STAG Industrial (STAG) | 03-21-18 | 24 | Monthly | 1.45 | 3.3% | 43 | 114% | 3.5% | HOLD | 1/2 |
| Current High Yield Tier Totals: | 5.5% | 36.0% | 5.5% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 137 | 107% | 4.1% | HOLD | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 590 | 35% | 2.8% | HOLD | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 60 | 80% | 3.5% | HOLD | 2/3 |
| Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 4.7% | 135 | 53% | 4.2% | HOLD | 1 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 266 | 67% | 1.6% | HOLD | 2/3 |
| KKR & Co. Inc. (KKR) | 03-09-21 | 48 | Qtr. | 0.58 | 0.8% | 73 | 55% | 0.8% | HOLD | 1/2 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 184 | 120% | 1.6% | HOLD | 1/3 |
| Spectrum Brands Holdings, Inc. (SPB) | 08-11-21 | 81 | Qtr. | 1.68 | 1.6% | 87 | 11% | 1.9% | HOLD | 1 |
| U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.2% | 60 | 35% | 3.1% | HOLD | 1 |
| Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 5.7% | 86 | 31% | 4.5% | HOLD | 1/2 |
| Visa Inc. (V) | 12-08-21 | 209 | Qtr. | 1.50 | 0.7% | 232 | 11% | 0.7% | BUY | 1 |
| Current Dividend Growth Tier Totals: | 2.8% | 40.3% | 2.6% | |||||||
| Safe Income Tier | ||||||||||
| Invesco Preferred (PGX) | 04-01-14 | 14 | Monthly | 0.74 | 4.9% | 14 | 52% | 4.9% | HOLD | 1/2 |
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 78 | 87% | 2.0% | BUY | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 69 | 181% | 2.7% | BUY | 2/3 |
| Current Safe Income Tier Totals: | 3.1% | 106.7% | 3.2% | |||||||
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