The Dividend Investor's Edge Newsletter - January 31st 2022

Volume 2

Jan 31, 2022

The Dividend Investor’s Edge is a weekly newsletter designed to give you the investor a full picture of where the stock market is, and to equip you with important information I came across during the week, and what to look for in the week ahead, all constructed in an easy to understand format.

This newsletter is designed for investors of all levels.

Each Week I will discuss:

• An update on the Stock Markets major averages

• Stock Market: On The Horizon

• Notable Upgrades/Downgrades

• Dividend News

📈 Quick Look At The Markets 📉

As a reminder or for those of you new readers, in the “Quick Look At The Markets” section I plan to give you a recap on the prior week for the S&P 500 as a whole as well as the top performing and worst performing sectors. In addition, I will touch on volatility and fear, which are important factors to consider when investing.

With that being said, the stock market had another roller coaster week, but was able to eke out a weekly positive gain. Year-to-date the S&P 500 is still down 7%, after gaining 0.8% last week.

Here is the last weeks heat map for the S&P 500:

Source

Top Sectors For The Week

Energy: 5.01%

Information Technology 2.26%

Financials 1.32%

Worst Sectors For The Week

Industrials -1.47%

Utilities -1.36%

Consumer Discretionary -0.96%

Fear Factor

Fear levels still remain high, but things did improve as the VIX dropped during the week, but still remains at an inflated level, suggesting volatility is expected to stick around at least for the near future.

Fear and uncertainty is often expressed in the stock market through volatility. One way for investors to understand where the market as a whole is in terms of volatility is by monitoring the CBOE Volatility Index (VIX). The VIX represents the market’s expectations for near-term price changes within the S&P 500 index. The index is derived from index options with near-term expiration dates, projecting a 30-day forward projection.

The 50-day average for the volatility index has been 21.94 and at the close of last week the volatility index shot up to 27.66, down 3.7% from last year, but still indicating that investors are fearful about stocks in the near-term.

Here is a look at the VIX chart with the 50-day moving average:

Source

Another resource you can look at is the Greed and Fear Index that measures market sentiment based on the following seven factors: put/call ratios, junk bond demand, stock price breadth, market volatility, stock price strength, safe-haven demand, and market momentum.

Currently, the index has a reading of 36, which is down from the prior weeks reading of 43, also indicating higher levels of fear. So we are getting some mixed signals with the VIX decreasing, but the fear levels getting more extreme.

Source

📰 Stock Market: On The Horizon 📰

In this section labeled “Stock Market: On The Horizon” I will discuss a variety of different topics that have gone on in the market and are on the horizon.

This past week we continued to see more volatility in the market as we try to find our footing at the start of 2022. We got to hear to some earnings updates from the likes of Apple, Microsoft, and Visa to name a few, all of which had great earnings. We will take a look at some of those here in a second.

Before we get to those earning results, everything circles back to the Federal Reserve. Investors were laser focused on the Federal Reserve this week who made the decision to keep the fed funds rate unchanged for the time being.

Based on the Fed Chair Jerome Powell’s comments, the Fed seems focused on increasing rates a number of times in 2022. Here are some key takeaways from the Fed’s update and conference call:

No rate change to the Fed Funds rate, but indications are that in March is when the rate hikes will begin
“Reducing the balance sheet will take some time” The Fed is expected to start reducing its balance sheet once they begin raising rates
The Fed expects supply chain and inflation issues to subside moving forward in the year

The Fed certainly has a tightrope to walk because raising rates too fast could hurt both the economy and the markets, but increased rates are overdue especially with inflation levels piping hot right now. Increased rates will go a long way at slowing that down.

Rising rates have resulted in the re-rating of many growth stocks, which is where we have seen heavy selling of late. These ultra-growth companies that have little to no profit will see debt related expenses rise and it also lowers the future value of growth stock earnings.

Next, let’s take a look at a few key earnings reports we saw last week.

JNJ: The company expects its Covid vaccine to generate $3 billion to $3.5 billion in sales this year
- Adjusted EPS: $2.13, vs. $2.12 expected.
- Revenue: $24.8 billion, vs. $25.29 billion expected
LMT: The company issued 2022 guidance that was in-line with analyst expectations. The FTC is suing to block Lockheed Martin $4.4 billion acquisition of Aerojet
- EPS: $7.47, vs. $7.27 expected.
- Revenue: $17.7 billion, vs. $17.03 billion expected
MMM: Net-income fell year over year as the company was impacted by supply chain issues during the quarter. The company reported free cash flow of $1.5 billion. News came out Friday that the company lost a $110 million case for which they were sued by two army veterans over combat earplugs that lead to their loss of hearing. JP Morgan analyst Stephen Tusa sees this potentially being a “significant issue” based on the liability exposure falling from the case.
- EPS: $2.31, vs. $2.02 expected.
- Revenue: $8.61 billion, vs. $8.31 billion expected
MSFT: Beat on top and bottom line and really after this earnings result is when the market start moving back positive. Revenue and net income increased 20% and 21%, respectively. The company’s Azure cloud service grew 46% yoy, which was the lowest growth rate to date. The company’s $68.7 billion acquisition of Activision Blizzard (ATVI) was in the spotlight as the company looks for a jolt in its gaming segment.
- EPS: $2.48, vs. $2.31 expected.
- Revenue: $51.73 billion, vs. $50.88 billion expected
BA: Boeing reported its third consecutive annual loss as they were met with 787 delays. Boeing took a $3.5 billion charge due to the delays with $2 billion more expected moving forward. On a more positive note, the company saw an increase in 737 MAX deliveries which helped the company generate cash in Q4 for the first time in three years. Much of the company’s future performance is tied directly to the 737 MAX and 787 Dreamliner.
- Adjusted EPS: -$7.69, vs. -$0.19 expected.
- Revenue: $14.79 billion, vs. $16.66 billion expected
TSLA: Tesla shares saw some wild swings after beating on the top and bottom line. CEO Elon Musk focused investors on the company scaling up production and both its new Texas and Berlin factories. Investors were expecting some new product ideas, but they did not get that. Instead, the company’s focus in 2022 will be on the new factories and the company’s self-driving technology. Musk alluded to the company being impacted by the global chip shortage as well, but the worst may be behind us.
- EPS: $2.52, vs. $2.36 expected.
- Revenue: $17.72 billion, vs. $16.57 billion expected
MO: The company has laid out guidance calling for revenue growth between 4%-7% in the coming year. Altria returned $8.1 billion to shareholders by way of dividends and share buybacks.
- Adjusted EPS: $1.09, vs. $1.08 expected.
- Revenue: $5.09 billion, vs. $4.19 billion expected
AAPL: Apple was the single biggest earnings call of the week and yet again they saved a fluttering market, at least for the week. Revenues overall were up 11%. Services revenue grew by 24%, Mac revenue was up 25% off the MacBook Pro upgrade, and iPhone sales saw a 9% boost. Gross margins grew from 41.7% to 43.8%. It was yet another blowout quarter for the company, and it was an indication that the chip shortages may be easing.
- EPS: $2.10, vs. $1.89 expected.
- Revenue: $123.9 billion, vs. $118.66 billion expected
V: Payment volumes increased 20% during the quarter and a big area of growth was the usage of the company’s crypto-linked cards, which saw customers make $2.5 billion in payments with its crypto linked cards. As travel returns, Visa is primed to benefit.
- Adjusted EPS: $1.81, vs. $1.70 expected.
- Revenue: $7.06 billion, vs. $6.79 billion expected

This week is also jam packed with another round of important earnings results. Here is a look at companies that are reporting earnings this week (via @eWhispers).

Notable Earnings Calls I am watching closely:

XOM
PYPL
AMD
GOOGL
SBUX
ABBV
FB
QCOM
AMZN
HON
BMY

Here are some key data reporting due this week:

2/3: ADP Employment Survey
2/4: Initial Unemployment Claims
2/5: Non-Farm Payrolls

It will yet again be another jam packed week of reports and data to go through, but that is part of the reason I put this newsletter together, so you can have a one stop shop for important market news and data.

The plan in the week ahead is to continue looking for opportunities in high-quality companies that have established businesses and are turning positive cash flows.

⏫ Stock Upgrades/Downgrades ⏬

In this section moving forward, I will add any notable analyst Upgrades or Downgrades I came across during the previous week.

Tractor Supply Company (TSCO) upgraded to Buy from neutral at Citi
Visa (V) PT increased to $283 from $275 at Piper, a week after Barclays cut the PT to $250 from $270 (I have a position)
Caterpillar (CAT) PT cut to $227
Abbott Labs (ABT) PT cut to $143 at Raymond James
PepsiCo (PEP) PT raised by Credit Suisse to $166
Nike (NKE) PT raised by Wells Fargo to $175, calling it a “rare buying opportunity”