Making sense of the markets this week: February 13

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors. 

Earnings season continues, the halftime report

Last year’s Q4 financial reporting seems to be the most “normal” earnings season we’ve had in the past two years, with companies beating earnings expectations by amounts similar to long-run averages. Corporate profitability remains strong. Here is the latest report card for Q4 results-to-date, courtesy of DataTrek:

76% of reporting S&P 500 companies beat Wall Street earnings estimates. That is in line with the 5-year average but below the 83% beat rate of the last year.The average earnings beat is 8.2% above consensus. That is below the 5-year (8.6%) and 1-year (15.7%) averages.77% of reporting companies have beaten Wall Street revenue estimates. That is essentially in line with the 1-year average (78%) and well ahead of the 5-year average (68%).The average revenue beat is 2.8% above consensus. That is well above the 5-year average (1.5%) but below the 1-year average (3.5%).

Here are a few stock highlights, I’ll share. 

First, Disney (DIS) is bringing some of the magic back. Disney was up more than 8% after reporting on Wednesday February 8. Grit Capital provided me with this commentary via email: 

Disney+ adds 9.2 million subscribers, that is greater than analyst estimates.

• Goal is to release more than one new movie title every week

• Sports will be important in streaming

• Disney is testing live sports on their streaming service

• Like Netflix, Disney+ may have pricing power 

U.S. Park revenues are recovering, now just 3% below the all-time record set in 2019.

On the conference call Disney said:

• Even though the lowest-price ticket for its parks has not increased in three years,1/3 to 50% of Park goers upgraded to higher ticket packages

New higher-priced tiers include its apps and services, including Disney Genie, Disney Genie+ and Lightning Lane

• Historically 18-22% of US guests are international, which have not come back yet

I have suggested in many of my columns that Disney would be a wonderful grand economic reopening stock. It’s such a fabulous company and brand. It might have room to run. A major risk is the pandemic of course. It’s the wildcard as are any future variants. 

Canadian investors can look to the Harvest Travel and Leisure ETF (TRVL) if they want broad exposure to the “let’s go and play” stocks and sectors. It holds hotels, casinos, cruise lines and airlines. Is it set to take off? You might also consider the parks such as Disney and Six Flags (SIX). 

If your portfolio is tired of COVID-19, I’ve found some some fun options you can add. 

Toromont (TIH) delivered strong earnings. This company has a 31-year dividend growth streak. Toromont raised the dividend by 11%. The stock is not cheap, though, by any means. 

Manulife Financial (MFC) reported 4Q core earnings that beat analysts’ expectations, as new businesses and wealth and asset management profit growth helped offset declines in Canada and the United States. 

$SLF with another great performance.4th quarter net income of 1.08 Billion YOY increase of 44.89%. EPS of $1.53 YOY growth of 4%.Slightly up by 0.50% in after hours trading.

— Brian Harrigan (@labourtoleisure) February 10, 2022

Telus (T) may be considered a “boring” telco with a very nice entrepreneurial growth kicker, but it beat on earnings and revenue. It increased year-over-year revenues by 20%

Enbridge (ENB) delivered another very solid quarter. Many hold this pipeline stock for its big, juicy dividend. Plus, oil and gas companies continue to be free cash-flow gushers

While U.S. stocks are still struggling in 2022, Canadian stocks are getting close to their all-time high set in November 2021. 

Source: Google 

I am (happily) long on Telus and Enbridge. 

Inflation in the U.S: Up, up and away 

We had a very important inflation reading in the U.S. on Thursday. It will be the inflation numbers that drive the actions of the Fed, and in turn that will move the stock and bond markets. From CNBC, inflation surges to 7.5% on an annual basis, even more than expected and the highest since 1982. 

It was the biggest inflation reading since February 1982. Ironically, one of the top songs at that time was “I Can’t Go For That (No Can Do)” by Daryl Hall & John Oates. And the markets said “no can do” after the release of the February 2022 inflation reading. 

Source: Seeking Alpha. S&P 500 February 10 after inflation reading 

We saw elevated prices across many different types of products and services. Big bursts of higher prices were seen in some categories such as energy, food and housing. CNBC reports on this: 

“With another surprise jump in inflation in January, markets continue to be concerned about an aggressive Fed,” said Barry Gilbert, asset allocation strategist at LPL Financial. “While things may start getting better from here, market anxiety about potential Fed overtightening won’t go away until there are clear signs inflation is coming under control.” 

And corporate America can’t stop talking about inflation either. In fact, words like “supply chains, “logistics” and “inflation” appeared on 71% of Q4 earnings calls, up from 39.2% from the prior year. 

Inflation has certainly turned out to be transitory for longer. 

CNBC quotes senior U.S. economist Andrew Hunter at Capital Economics as saying:

“While we still expect more favorable base effects and a partial easing of supply shortages to push core inflation lower this year, this suggests it will remain well above the Fed’s target for some time,” he added.

Some market makers are betting that the Fed will raise rates by 50 basis points in March 2022 to try and quickly help stem inflation. If that is the course of action it will be the first half-point rate hike by the Fed since 2000. 

I am seeing the positive effect of our inflation hedge in our portfolios (for me and my wife). We hold the Purpose Real Assets ETF (PRA), energy stock ETFs (XEG and NNRG), materials (XMA), and financials in Canada. For U.S. accounts we have the Invesco commodities tracking ETF (PDC) and the VanEck green metals (GMET). We also have various gold assets (ETFs). 

And of course, I have that digital gold known as bitcoin in my portfolio. 

Keep in mind that if inflation (and inflation fears) weaken, these assets could underperform. I will leave it to you as to whether or not you want to hedge inflation. 

Many reports suggest that inflation will start to move down on its own, and with the help of a rising rate environment, but I’m not comfortable taking that chance. 

“It’s going to be sticky high for a while driven largely by the wage component. But it won’t be at these levels we’re seeing today,” says @RickRieder on why #inflation will cool off later this year.

— Squawk Box (@SquawkCNBC) February 9, 2022

I’ll keep that hedge. 

Building the recession-friendly stock portfolio 

While we tend to think of bonds as shock absorbers inside a portfolio, buying certain types of defensive and more “recession-proof” stocks and sectors can also help. They can help do the job of bonds. We can shape the portfolio risk level by way of stock selection. 

This chart shows the sectors that delivered positive returns during the last four major stock market corrections:

Source: Seeking Alpha 

This is from the Seeking Alpha article, “5 stocks to buy for a bear market”

“Since December 31, 1994, global equity markets experienced four bear markets when the S&P Global BMI TR declined 20% or more. The chart below shows that the most resistant sectors, consumer staples, health care, and utilities did not experience the drawdown.” 

For those of us who manage a portfolio of individual stocks and ETFs, we have the option to steer the portfolio risk level by adding more to these defensive sectors. Bear markets can be more of a concern for those of us in the retirement stage or in the retirement risk zone

I’ve been more than happy to add to my healthcare stocks with the likes of CVS Health (CVS), Johnson & Johnson (JNJ), Abbott Labs (ABT) and Medtronic (MDT). Retailer Walmart (WMT) is known as a recession-friendly or recession-proof stock. In recessions, consumers flock to low-cost retailers. Walmart is the king of low cost. I’m happy to stock up on Walmart. 

Like many Canadians I have significant exposure to defensive stocks in the pipelines and telecom sector. 

As a semi-retree I am comfortable with a more conserative portfolio. 

A look at the drawdown to date 

Thanks to Liz Sonders, Chief Investment Strategist at Charles Schwab, here’s a table that details the U.S. stock market(s) drawdowns to date: 

Drawdowns table updated thru yesterday’s close

— Liz Ann Sonders (@LizAnnSonders) February 8, 2022

The table shows the percentage of index constituents with drawdowns at 10%, 20% and 50% levels, plus those with a positive return year to date. So many stocks have been hit hard. 

Earnings season has been strong, but that’s not enough to lift U.S. stocks into the positive for the year. Here is the year-to-date chart for the S&P 500. 

Source: Seeking Alpha, to end of Thursday February 10 

Meanwhile in Canada, the big dividends are rockin’. 

Source: Google 

There might be a grand opportunity for Canadian investors to fix any Canadian home country bias, and move monies to U.S. stocks and potentially U.S. growth stocks. 

On my site I asked: “When will U.S. stocks offer reasonable value?” 

When should Canadians rebalance? Most would say when your allocation moves beyond 5% of your target, or simply rebalance it once a year. I will wait until I see reasonable long-term value in U.S. growth stocks. 

Dale Roberts is a proponent of low-fee investing, and he blogs at Find him on Twitter @67Dodge for market updates and commentary, every morning.

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