When I started my publishing career in the early 1980s as a daily newspaperman, I was an arrogant kid with dreams of being Bob Woodward. One humbling lesson is burned in my mind.
In the newsroom one day, while I was banging out a story, the metro editor looked over my shoulder at the meandering prose and said with disgust: "Persinos, what are the three rules to writing a good story?" Before I could stammer out an answer, he thundered: "Focus, focus and focus!"
The same guidance applies to investing. You should create goals and stay focused on them. Problem is, investors currently face fuzzy conditions. Let's sharpen the lens.
I'll start by shedding light on the on-again, off-again trade war. I've consistently warned you not to get your hopes up about a Sino-American trade deal. The White House occasionally suggests a truce might be imminent, but ultimately the ruinous stalemate drags on like trench warfare.
In a policy speech Tuesday, President Trump said a trade deal with China was "close" but offered no details. Before the speech, the expectation on Wall Street was that Trump would announce a location and date for signing a trade agreement with Chinese President Xi Jinping. Didn't happen. Trump vaguely alluded to progress but dashed expectations of a deal.
Trump yesterday also attacked the Federal Reserve's interest rate stance, which he views as insufficiently dovish. With the presidential election less than 12 months away, the president's intense pressure on the Fed to further loosen the monetary spigot could escalate.
After Trump's speech, markets were little moved. The three main U.S. stock market indices closed Tuesday slightly in the green. U.S. Treasury yields held below three-month highs.
In pre-market futures trading this morning, all three indices were poised to open sharply lower. Maybe Wall Street is starting to wise up about the trade war's futility.
Earnings snapshot…
Many analysts predict that a stock market correction is around the corner. One warning sign is bad breadth. You can almost smell it. A small number of popular "story stocks" are performing quite well, but the rest of the market is a mixture of good and bad that nets out to negative territory.
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A major factor staving off a correction are better-than-feared earnings results for the third quarter of 2019.
To date, more than 90% of S&P 500 companies have reported Q3 earnings. Among these companies, 75% have reported actual earnings per share (EPS) above the mean EPS estimate, which exceeds the five-year average of 72%. In aggregate, earnings have exceeded expectations by 3.8%, which is below the five-year average of 4.9%.
So far this reporting season, when companies have beaten Q3 earnings expectations, they've been rewarded with spikes in share prices. Those that have reported positive earnings surprises for Q3 have seen an increase in price of 2.3% on average from two days before the company reported actual results through two days after the company reported actual results (see chart).
As you can see, over the past five years, companies that have reported positive earnings surprises have enjoyed a 1.0% increase in price on average during this four-day window. The chart also depicts the punishment for negative surprises.
The stock market has been rewarding positive EPS surprises more than average this earnings season. It's all part of the expectations game. Before the start of the season, expectations were low and investors were worried about a looming recession. Pessimism was running high, so when the earnings picture turned out to be less dire than originally feared, investors have responded with a burst of enthusiasm.
As stocks hover near all-time highs, where will the catalyst come for the next push forward? The economic backdrop is mixed, making the path forward unclear.
Positive factors: Unemployment remains low, consumer sentiment and spending have been resilient, and the Federal Reserve has adopted a moderately dovish stance. Negative factors: Business confidence and spending have fallen, factory activity is sputtering, and the trade war is raising costs and slicing into profits.
The Fed last month cut short-term interest rates for the third time in 2019, but Fed Chief Jerome Powell has indicated uncertainty as to what the U.S. central bank might do at its next meeting in December.
Utilities lead the pack…
Here's some clarity: Defensive sectors have outperformed, with utilities stocks leading the pack. Quality dividend payers demonstrate greater resilience during market volatility and an economic downturn.
Utilities stocks are stable cash cows because they provide essential services that people always need, regardless of the economic cycle. You should increase your exposure to dividend payers in general and utility stocks in particular.
Utilities are recession-resistant safe havens that generate reliable income. But this year, they've also conferred market-beating growth, providing a remarkable combination of income, growth and safety.
To find the best utility stocks, always look for healthy payout ratios, plenty of cash on hand, and a history of earnings growth.
When doing your homework on any dividend stock, it's crucial to examine the payout ratio. The payout ratio reflects how much of a company's net income is devoted to dividend payments. For example, if the company in a quarter generated EPS of $1.00 and paid a dividend of 60 cents per share, the payout ratio would equal 60%.
A low payout ratio can indicate the company is pursuing a long-term growth strategy by using most of its earnings to reinvest in the company. On the other hand, a high payout ratio can indicate management's desire to share profits with investors.
Always be suspicious of payout ratios over 100%, because it means the company is paying out more than its earnings. The company is going into debt simply to pay shareholders, an untenable situation.
Another red flag is low cash on hand. Dividends can't be paid without cash and a company that must quickly raise cash to cover a dividend is probably heading for trouble. Declining earnings combined with a high cash burn rate over a prolonged period are signs that the dividend may need to be cut in the future.
The good news is, our investment team already has done the homework for you. To pinpoint utility stocks with the highest and safest yields right now, consult our "dividend map" by clicking here.
Don't get spooked by headline risk and the hyperventilating newscasters on cable television. Instead, get peace of mind from "Steady-Eddy" dividend payers, especially those in the utility sector. That's where you should focus.
Questions or comments? Drop me a line: mailbag@investingdaily.com
John Persinos is the managing editor of Investing Daily. He also serves as managing editor of our premium trading service, Utility Forecaster.
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