Earnings Bonanza as We Wait on the Fed: Jarvis® Update October 28, 2022

More earnings and things seem to be looking up. We cover that and talk some more bonds on this week's Jarvis Update. I'm your host, director of research here at Left Brain, Brian Dress, joined as always by our CEO and chief investment officer, Nolan Langford. Nolan, welcome to the program.

Thank you, Brian. It's great to be here.

In the broader markets, we're a lot stronger this week as we started to look through earnings. We got two topics for you, as we always do. The first is more earnings. And the second topic for us is going to be urgency in locking in some high-quality bonds. With that being said, we've got a couple of announcements before we get started. First of all, we produce this show for you, the everyday investor, whether you've got a 401(k) or an IRA, if you handle your own investments, or if you work with an advisor. If you'd like a second opinion in a volatile market and want to hear more about the opportunities that we're finding both in securities with fixed payouts and in stocks that are starting to show life, we'd love to talk. Make sure you give us a call at the number below. Also, if you're an institutional investor, we've got something for you as well. That's our research service, Left Brain Investment Research. That's 8 to 10 full-length stock reports per month from our analyst team and also the Chosen Report. That's our favorite stock and favorite bond opportunity each month. Either way, we'd like to see you sign up for our biweekly newsletter. That's the Jarvis Newsletter. Cover our thoughts on the markets every, every other week. It's an on week this week. So if you want to take a look at that, make sure you fill out the form at the link below. Finally, if you find this content useful, we really appreciate if you'd like and share the video. That helps other investors find it and also subscribe, hit the bell for notifications. That way, anytime we come out with a new video, you'll be notified. With that said, we're going to jump right into our market recap. So we cover 3 indices normally here. The first is the S&P 500 that was up 3.9% this week. The major laggard this week was the tech-heavy Nasdaq that was up only 1.9%. The small-cap-heavy Russell 2000 was up 6.0%. So a lot of outperformance there. And actually, we're going to bring in the Dow. We don't normally talk about the Dow. The Dow was up 5.6% this week after some really strong earnings from some of the components there. So we're starting to see some positive momentum in the markets. Interest rates still continue to be the major driver of things. It's really indicated in the fact that the markets were up this week. 'cause rates were falling. The 10-year Treasury, it's been flirting with 4% and going higher, actually dropped below 4% this week. And at the time we taped this, is at about 3.93%. So definitely some progress from that point of view. We also have the volatility of the market starting to calm down where we got the VIX, the VIX index, which measures volatility, is actually down, back down to 27. We'd like to see it down below 30. Normally you see the VIX at high teens, low 20s in a normal market. So we're not quite back to normal, With that all being said, Nolan, we've got the Fed coming up next week. What are your thoughts on this week's action?

Positive. As we've always said, we have 4 Christmases in the investment business and they're all around earnings releases. And my goodness, that solves a lot of wounds. And we've seen that every quarter this year where earnings are released, investors focus their attention on actually how companies are doing instead of broad economic themes that we call macroeconomic currents. Every time we see that, we see more bullishness coming into the markets. Although this time I think there may be more to it. A couple of things. One, all year we've been talking about inflation. We've been talking about interest rates, that leading to recession. Maybe we were in a recession earlier this year, classically defined as two negative quarters of GDP growth. But then we got a print this morning that showed the last quarter was actually positive. By a little over 2%. So if we were in one, we're certainly— looks like we're headed out of one now. And you mentioned the Fed next week. I have no idea what they're going to do, but the credit markets have been telling us— you and I have noted this earlier this week— credit markets have been telling us that there was no recession and that investors, particularly in the high-quality bond market, weren't pricing in recession, whatever. And I think those are all positive signs. All right.

Thanks for those thoughts, Nolan. We'll jump right into our topics. So topic 1 is earnings. The beat-down companies are starting to regain footing. So of course, the second quarter reports in the last quarter were all about setting the bar lower. We all knew that the economy was approaching recession, if it didn't go into recession. Many companies, uh, definitely signaled that, you know, third quarter and fourth quarter are going to be a lot weaker than results had been in the past. Many of the companies that we follow are down 50-plus percent. Some are down as much as 80%. So Definitely, there's been some de-risking going on in the markets as investors move away from growth stocks. We saw a couple of those wrecked tech names in press this week. That was ServiceNow, that's ticker NOW. And then we also heard from Shopify, ticker SHOP. Those were two darling stocks of 2020. Definitely both fell precipitously this year, but reacted really positively to earnings reports. Nolan, can you tell us your thoughts on those or others that did well? Dow components like Cat, Caterpillar, CAT. We had Honeywell, HON. And then also outside of the Dow, we had Enphase Energy, another stock that we really like, ticker ENPH. Leave it open-ended for you. Let's hear a little of your commentary on these positive earnings reports.

It's good to see some companies beat, meet expectations, decent guides. it was much better to see investors following through. So the market's acting normally again. That is, when we've seen companies that meet expectations or exceed them, we're seeing that followed up with positive stock price movement. And that's what you would expect. On the other side, we've also seen companies do a belly flop, like Meta. F5 is another company. And you've seen those share prices fairly punished. A couple of things that you mentioned, though, that stood out to me You mentioned ServiceNow and Shopify, which you're right, those were darlings of 2020. There's also that whole big cap tech space. Google is another one that came out this week along with Microsoft and their results weren't so well received. And that's one of the reasons that the, the NASDAQ has been underperforming. But what it reminds me of is when the market starts to reaccelerate, it's generally not the former group that led us up that takes over leadership. Usually the baton is passed to a new group. And I know there's a lot of investors out there that are holding on to these household tech names that they've made a lot of money from over the last 5 or 10 years, and they're very reluctant to part with them. I would just ask them to rethink. What we're seeing in the market is a whole different group emerge, small and mid-caps. We've noted many times on this show, and, uh, two earnings reports that stood out to me that fit that, one you just mentioned Enphase, which is a very profitable operator in the solar energy space. So it's a green energy company, but they also have growing sales and profits. Margins are above 40%. They generate a lot of cash, no debt, and they're growing over 30% a year. The stock isn't cheap, but the business is just that good. Another one is a small cap that we've been— we mentioned on the show last week, Inmode. In the healthcare space involved in the aesthetic market. They reported earnings this week that were also fantastic, where revenues were growing over 30% a year. And you can get this business in the healthcare space, which is sort of defensive, uh, at less than 20 times earnings. That's what stood out for me so far as we get about a third of the way through earnings season.

I hope the viewers will pardon me for feathering our own nest here a little bit, but you know, when it's when it's the market leaders like Microsoft, Google, Apple, Amazon, it's pretty easy to have a portfolio that's performing. But when it's time for the mid-caps and the small caps to start leading the market, it's a little more difficult to find those stocks. That's where we think, you know, professional management and professional managers like us can really be of value. So if you're interested in hearing where we think, you know, some of the opportunities in small and mid-caps may be coming from, definitely give us a call. But that being said, let's jump right into topic 2. So topic 2, we're calling The Train May Be Leaving the Station on High-Quality Bonds.

Bonds.

So Nolan, we've talked about this, I think, for the last 6 months or so, but, you know, interest rates have risen so dramatically in the last year. We've seen high-quality bonds in the investment-grade space— that's BBB, A, AA, and higher— we've seen those bonds on sale. But at the same time, we're starting to see some signals out of the Federal Reserve. I know we hate to read the tea leaves out of the Federal Reserve, but we're definitely seeing some acknowledgment that pausing rate hikes may make some sense you know, letting some of these rate hikes take hold. We'll know more after the next meeting, of course. But, you know, the upshot of that is the last week or two we've seen rates coming down a little bit, and that means bond prices have started to rise again a little bit. The bottom line is we've seen bonds rallying a touch. We know the window for locking in generous yields and high-quality companies is going to be limited. Can you comment on the urgency with which investors need to approach bonds, especially these investment-grade bonds that we still see on sale.

That was a mouthful, but I think that was very valuable. This has been a huge year of uncertainty. A lot of people sitting on cash. Cash hasn't done much over the last couple of decades. Now interest rates are on the move. So anybody currently holding bonds in their portfolio are nursing year-to-date losses, but it also creates opportunity on the other side for those looking to purchase bonds. A lot of good high-quality bonds that are down this year since January. In a lot of cases, the businesses aren't worse. Their credit quality, as far as their ability to service the debts, are still just as good as they were. It's just the fact that interest rates are up and all corporate bonds, all bonds, period, price off of the Treasury bond. And so you're getting an opportunity here to buy a lot of these bonds and locking in yields at a lot higher rates than what we've been able to get really for the last couple of decades. Triple-B bonds, which is where investment grades start, defaults are extraordinarily low, generally anything from BBB up, and we actually prefer BB. Generally, they're— the default rates are exceptionally low. It's the high— the highest quality of high yield. Anyway, let's just stick with investment-grade bonds. We're finding a lot in our database that we're locking in, and you and I were talking before the show, we're getting yield to maturities of 6, in some cases 7, and in some cases some of them are approaching 8%. And these you can lock in maturities anywhere between 7 and 10 years, and we can sort of create the exposure we want. We can either go with a low coupon bond at 2 or 3%, and the bond might be priced at 70 cents on the dollar, so we get half of our return from income, the other half from capital gain. Or we can go with a higher coupon bond that may have a coupon at 6.5% that may be trading just below its maturity value, and and all of our return comes from income payments. And you're right, prices are starting to firm a little bit this week. We will be very active over the next couple of days buying some of the more attractive securities.

Excellent, Nolan. You know, the only way to really get the full scope of what our bond strategy looks like is to park your money with us. But we do want to open our notebook with you and show one or two bonds that, you know, we find attractive in the current market. Nolan, you want to talk about one of the bonds that you like that's kind of in the retail space?

So one of my favorite retailers is Coach, the store that makes accessories for both men and women. They also own Kate Spade. They have a bond, and that's a 3.5% coupon bond. This bond is a 10-year maturity, so in 2032 you get your money back. You can buy this bond for somewhere between $750 and $780. You can lock in a yield to maturity of very close to 7%. We think that is very attractive for an investment-grade bond.

Yeah, Nolan, I especially like it because I think you, you might be purchasing some of those Coach accessories for the dog one of these times. But so, Nolan, that tapestry bond, definitely very interesting. What's another bond on our list?

So I want to talk technology. You know, often when people think technology, they think the stock, and a lot of people are looking for technology stocks to play catch-up, but they also issue bonds from time to time. But technology bonds are starting to fall just like the rest of the bonds, as well as the technology stocks. Credit quality tends to be very high. Technology companies historically don't have a lot of debt. But a bond that we like is the company called Twilio. If you order Uber or Uber Eats, you pull up the app, you can show your location, you get a text message to and from. That's generally Twilio as the software provider. So they have a bond that I think is very attractive. It's a 3.5% coupon. It matures in 2029. As of our last look, the bond was priced at about $800. So it matures at $1,000. You can buy it at $800. You end up with about a 7% yield to maturity at a bond for a company that we like a lot. So there's a few other technology bonds as well, almost in that 7% range. So we would encourage investors that are trying to play catch up to not only look at the stocks, but also look at some of these bonds.

Thank you, Nolan. I know Nolan could sit here and talk about bonds for the next 3 hours, but if you want to learn more, definitely get in touch with us and we can talk about whether a portfolio of these type of bonds makes sense for you. Well, with that being said, thank you to the viewers for being with us. Nolan, do you have any final thoughts as we bid the viewers adieu this week?

Yes. Tonight's game, I really like the Baltimore Ravens. And on Sunday, I like the Miami Dolphins to beat up my former team, the Detroit Lions. So look forward to that.

You know what, Nolan, if you got a team with bad ownership like the Lions, you've got every right to move on. So we're happy for you as far as that goes. And I guess we're going to call that the Langford Bowl. All right.

But for the investors, I'll just remind them, historically, the stock market has been the, the greatest wealth creator over time, especially the way that you can do it passively and have your money work for you. From time to time, we're going to have really difficult markets where our portfolios show losses. And that's the short-term pain we pay for the long-term gain. And we also say that in times where it seems like there's great uncertainty, there's also great opportunities. And we're starting to see that again now that we're in earnings season, where some of these superior opportunities are starting to present themselves. So I would just ask investors to just be patient and to be optimistic. We think it's a great opportunity for some names that if you can hold them for the next 2 to 5 years, you're going to look back and be glad that you bought them at these prices.

Very wise words, Nolan. We'll see you again next week.