Can Earnings Season Bolster a Weak Market? Jarvis® Update April 19, 2024

The earnings season is underway. What should investors expect from this quarter's releases? We answer that question and much more in this week's Jarvis Update. I'm your host, Brian Dress, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Thank you, Brian. Looking forward to some more play-in games tonight.

Well, you're going to have to wait another day because it's going to be on Friday. We're happy to be back with you recording a video. It's been 3 weeks since we've spoken. First of all, we'd like to ask you to like and share the video if you find these useful. Certainly helps us grow the channel and find other investors just like you to bring it to the left brain fold. And also subscribe and hit the bell for notifications. That way you can know every time we're out with these videos and also comment below with your thoughts on the markets. We'd love to interact with you and give you more of our opinions as far as markets go. Let's jump into a quick preview. So markets have pulled back over the last few weeks. We've had interest rates and we've had what we call the earnings lull. We've got two topics as we usually do. The first is earnings. Is it the antidote for macro malaise? And secondly, we're going to speak to you about a tax-efficient income strategy. Before we get into that, let's jump into the market recap. So markets are down significantly this week and it's generally driven by interest rates and they have moved higher. The 10-year Treasury rate is up above 4.6% now. So it's up quite a bit since we last spoke with you. S&P 500 down about 3.5% for the week. We've got the Nasdaq down around 5%. And then the Russell 2000, that's the small-cap index, also down just a little under 5%. Also, what we have in terms of news flow, earnings season is just beginning. Nolan, we've seen earnings results from some major financial firms, so we're just getting started with earnings. Await some of the biggest tech earnings over the next few weeks. Putting that earnings aside, we'll talk about that later in the video. What are your initial thoughts of what we're seeing out of the markets over the last few weeks since our last video?

You know, it's generally all macro. You know, we're leading up to the NBA— to the NFL Draft. As a fan, you're always reminded, don't listen to anything clubs say about any prospects leading up to the draft. These moves in the market pre-earnings releases, I would look at them in the similar vein. There's not any news coming out from corporations because they're in their quiet period. If news is coming out now, it's not good. It's pre-announcements. And so all the market or investors have to trade on is just noise, macro noise, rumors, what's interest rates doing, what's happening over in Saudi. Volumes have been somewhat lighter because of it. But the fireworks start pretty soon here. We'll see where we are from a market and from an investor psychology standpoint.

It's a great point you say that, Nolan. We've had a lot of noise in between earnings in this earnings lull. We're getting ready to see a lot of signal in the earnings season. That brings us right to topic 1. So topic 1, earnings season. We're asking, is this the antidote for macro malaise? So Nolan alluded to this, but we've seen this over the past few weeks. General market weakness has coincided because of higher interest rates for the most part. We've had issues in housing market, we've had concerns over Fed policy. That all kind of relates to the interest rate. That's all rankled markets. But Nolan, we've had this phenomenon over the last year. It seems like during earnings season, you know, investors seem a little more positive and buoyant, especially when they see positive results coming out of companies. That's out of the micro side of things. Between earnings, markets do seem to soften as we look more toward the noise of the macro part of the economy. Can you explain a little bit more about what we think about this phenomenon, what we've been seeing over the last year?

No, I can't explain it other than to say we try to ignore it as much as we can. We really want to pay attention to how companies are doing. Like, so for example, one of the big stories this year, so far this year, has been Apple, how weak the shares have been, but also their product cycle. You know, for the most part, they are one product firm. That product, handsets, has really been kind of not a growth business for a while. Now they have problems in China, and those shares have drifted lower, and rightfully so. That's the type of thing that as investors would have our attention. I mean, it directly impacts what the future outlook for the business would be, and as investors, how much money we could possibly make and how our shares could possibly— what's happening overseas or if the 10-year ticked up a quarter basis point or something. Uh, those things are really beyond our control. And so between earnings releases, we really try to ignore it as much as we can, because history shows the biggest winners in the market kind of run through all type of calamities and worldwide events. And because the businesses continue to do well, investors can make a lot of money.

I'm glad you mentioned all that, Nolan. It comes to mind that when we're in these periods between earnings, it's, it's more dictated by short-term traders and short-term investors. And then when we get to earnings season and learning more about what's happening in individual businesses, then more long-term oriented investors seem to take hold. Right here at Left Brain, we're long-term oriented. We want to know what's going on inside of businesses, long-term trends, and that's what we learn in those earnings cycles. Speaking of which, we're getting ready to learn a lot more about a lot of different companies that we follow as earnings season is getting into the meat of the time over the next few weeks. Some of the biggest names in tech are getting ready to report. Netflix reporting this afternoon, right after we tape. We've got Tesla coming up, TSLA. We've got Microsoft and Google. Those are all next week. Nolan, are you expecting the coming earnings to help snap the market out of its malaise? What are some of the earnings you're looking most forward to reading?

The big ones that you mentioned will all be covered. Of course, I'll have special interest in Netflix. They really are the canary for everything that's going on in streaming, and so many dollars are going online to digital now. So that's a big market, $700 billion to a trillion. Besides that, the big ones you mentioned will all be well covered. There won't be any surprises in Microsoft or Google. However, what I am paying attention to is smaller and mid-cap earnings. You know, big caps, uh, big companies so far this year have held up fairly well. Small companies and some of these ones that have our attention between market caps of $2 billion and even $20 billion. A lot of them so far year to date aren't doing well, and a lot of them that we think are really good businesses are down double digits. So I'm going to be watching those earnings releases this quarter to see if these companies do continue to do well and post earnings and revenue numbers that beat expectations, whether the investors will still ignore them, or whether at some point you'll get to a bottom of valuation and you'll start to see a snapback. Okay.

And before we get to the second topic, I know we wanted to discuss a little theme here. Nolan, as you said, it's, it's, we're deep in the meat of sports season. Can you talk a little bit about how that relates to the streaming business and what we're thinking from the investment point of view as far as the whole migration to streaming goes?

I'll try to summarize this as best I can, but there's a lot happening now. The way that we consume television and media and content has changed dramatically over the last 10 years. No longer do we have to be tethered to our home and to one provider. And it was that one provider. And then all the other media companies, you know, sold their services through, through Comcast or that one. That is gone now with streaming. A lot of these channels go direct to consumers. And so everything's gone from, you know, being wired to your home to being over the internet via some sort of streaming. Everything's open. So we're rushing for new winners. The advertising business is really what's, what's driving everything. $700 billion a year in advertising spend is up for grabs. Advertising spending goes up mid-single digits every year. We think that's going to be $1 trillion soon. And all of those ads are going to go from traditional TV media cable buying to streaming. And that's a really big deal. And the reason that we mention it now during sports season is the most interesting properties or the most expensive properties for traditional media now are are live sports. So NBA, NFL, because the rest of those businesses are scripted and you can just move them to streaming. But with live sports, the audiences continue to grow. So they're very valuable properties. So it'll be interesting now that a lot of these streamers are entering the bidding rights wars. There's a lot of money to be, to be split up depending on the outcome. Let's put it that way.

Okay. So that's, that's a theme we're definitely going to be watching over the next few quarters as this continues to play out. With that, let's move on to topic 2. So topic 2 is what we're calling a tax-efficient income strategy. So, Nolan, we've had many investors taking advantage of high rates, shrewdly so, over the last couple of years, putting money in CDs, elevated levels of return. But we've seen those CDs are starting to mature. People are looking for other ways to get involved in the market and invest that money. We maintain an income model portfolio here at Left Brain that's got more than a dozen high-yielding stocks. We refer to those as bond-like equities because they are stocks, but they generally provide us a bond-like sort of yield to those stocks. Nolan, can you compare and contrast CDs and dividend stocks as income vehicles? I know people are trying to make decisions of what to do with money coming up from CDs, especially as you look through the lens of tax efficiency.

Yeah, thank you, Brian. This is an important topic. We know as interest rates have gone up a lot over the last year and a half or so, A lot of investors have taken advantage and locked in CDs, and it's worked out fairly well for a lot of investors. So remember, when you do a CD, the interest rate they pay you, it is taxable as ordinary income. So as a quick example, if you have a $100,000 CD, it gave you 5%. That's $5,000 in interest income. If your salary was $100,000 for the year, then you're going to pay taxes on $105,000. So it's just ordinary income. Taxed at your marginal rate. If, however, though, you receive $5,000 for the year in qualified dividends, those are not taxed at ordinary income tax rates. They're taxed at a more favorable qualified dividend rate, which are closer to capital gain rates, which in most cases for most investors will be much lower.

So that's interesting, Nolan. You've got not only the consideration of what the yield is from CDs to dividend stocks, But you also got to consider what the tax implications are there, too. So those are a couple of things to keep in mind when you've got money coming due from a CD. Now, one of our favorite income stocks, we're going to call it our Income Security of the Month. That's AMLP. That's Alerian's ETF basket of master limited partnerships. Those are mostly natural gas and oil pipeline companies. This company's got a dividend in excess of 7% annually today. And I'll put the chart up on the screen. It's gained more than 10% in value so far this year as well. You tell us a little bit more about why we like AMLP, Nolan, and speak a little bit to the tax benefits of AMLP specifically.

I will. Thank you for that. Before I get going, full disclosure, this is a security that we do own. A lot of retail clients at Wealth Management and Left Brain Wealth Management also runs a private limited partnership, uh, that at times in the past has owned shares of, of AMLP as well. So I wanted to put that out there. But this is an ETF. What that means is it has a ticker, it trades like a But what it is, is it incorporates ownership shares of many, many, like Brian mentioned, oil and gas pipelines. Like these companies, we think about them like toll takers. You know, if you're in Chicago and you're driving on the freeway and you have your I-Pass, every time you pass, you pay. And it's the same thing when these natural gas producers ship product through the pipeline of oil and gas companies. So the price of the commodity doesn't matter as much as volume. Very steady businesses. And the way that they pay out most of their net income is in terms of dividend payments. We aren't building a lot of new pipelines or energy infrastructure in the country, but it's sorely needed. So we know it's going to be with us forever, like utilities, or for a very long time. And it's capital intensive and you need a lot of regulatory permitting. So protected markets. So we just like the end markets. The fundamentals are really good. We think the valuations are cheap. Shares have gone up a lot over the last couple of years, but we still think the businesses can do okay. What we really love for our investors is the income. These things kick off income. The underlying businesses do. They tend to grow it. I think half of the companies in the portfolio grow the dividend every year and the other ones are maintaining. But the dividend is 7% and it's a preferred rate. So if you get it, it's not 7% as ordinary income. In the past, as much as 80% of that dividend has been a return of capital and 20% of it has been at the preferred qualified dividend rate. It's no guarantee that that'll be the split in the future, but it's a favorable dividend rate.

I'm glad you mentioned that part of it, Nolan. We just came through tax season. A lot of folks wrote checks to the IRS. I know it hurts on April 15th to do that. You just passed bonus season. Maybe some clients and investors have money coming back from the IRS in terms of a refund. So there might be some money out there Do you think, Nolan, this might make sense for as an idea for people to consider? They've got cash in the bank.

So what I think is we've just put out our quarterly updated models. One of our model portfolios is our Model Income Portfolio. It has a basket of almost 20 holdings. The average yield is over 7%, and a lot of them are favorable yield from a tax perspective. So I think if you do have bonus money or CDs coming due or cash at the bank, that may be a good alternative to consider.

We also want to stress, if you are looking for something to do with that IRS refund check or that bonus money that might just be sitting in the checking account earning nothing right now, take a look at the link at the bottom of the screen. We'll put it up there for you if you want to get in touch with us for a free consultation. We're happy to get in touch and discuss with you whether these ideas might be suitable for your portfolio. With that, Nolan, we'll thank you for being with us. Any final words?

My Miami Heat didn't look so good yesterday. Let's hope Jimmy Butler is well. Jimmy Butler is good. And we will have an NFL Draft between now and next recording. So I don't know who to root for, but I'll be interested to see how many quarterbacks go in the first round.

Yes, Nolan, this is the moment of hope for all football fans. So enjoy it while you can. With that, we'll see you next time.