Q3 Earnings Fuel ‘Epiphany’ Phase of Rally

Posted: Oct 30, 2017 7:06 PM

Heading into Thursday, the Nasdaq had been down four of the prior five days as traders took a more cautious tone as to whether the market’s big-cap tech darlings would deliver third-quarter results that would satisfy investor sentiment. There was a feeling that organic growth estimates might have gotten too optimistic. There was a growing feeling that a general rotation out of the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) and into industrials and financials was a development that might suck the oxygen out of the momentum that had served the FAANG rally so well.

Boy, were the skeptics wrong. The market already had the luxury of Netflix reporting Q3 results back on Oct. 16 that took its shares to a new all-time high, and this should have been a telltale sign there was more good news to come because what Netflix provides involves discretionary spending. Thus, it should have been no surprise that Amazon blew past its estimates, chalking it up to the massive sign-up of Amazon Prime accounts at the end of the second quarter from none other than “Amazon Prime Day.” America loves immediate delivery of deeply discounted goods.

But it didn’t stop there. Following an earnings bump in the road during the second quarter, Alphabet (GOOGL) had several analysts wondering whether the browser king had seen its best days of organic growth. Then, the company posted numbers that hit estimates out of the park, to the point that even Mr. October, Reggie Jackson, would have been impressed. As a result, come the morning of Oct. 27, the Nasdaq had two darlings trading north of $1,000 per share. This kind of upside surprise from two behemoth tech companies is, in my view, an “epiphany” moment for traders and investors.

This sends a strong message that the U.S. economy is getting serious growth traction that can fuel a higher stock market ahead, with or without tax reform. And the market has yet to hear from Facebook or Apple as of this writing. In addition to the FAANG rally, there is also a resurgence of momentum in big-cap legacy stocks that includes Microsoft, Intel, Texas Instruments, Applied Materials, Lam Research and others. The rise of many transformational technologies, from the Internet of Things to Artificial Intelligence, is driving rapid change and massive business investment that is a boon to the U.S. technology community. The really good news is that the glide path for this period of prosperity is long. We’re talking a decade or longer of scaling all these technologies.

The other good news is that income investors can get in the way of this transformational “epiphany” rally and get paid a fantastic yield at the same time. There are covered-call closed-end funds that own these bullish big-cap tech stocks that pay out yields in excess of 6% without the use of leverage by simply selling out-of-the-money call options against a portfolio of the best-of-breed tech darlings. Trying to own all these positions is financially daunting because most of the favorite names trade well in excess of $100 per share. Casting a net over the crème-de-la-crème names in a fund that actively sells option premium back to the market is the smart way to get paid while your money grows within the hottest sector that is serving investment capital best.

My favorite closed-end fund that delivers on these objectives is the Eaton Vance Enhanced Equity Income II (EOS), which sports a current yield of 7.05% that supports a monthly dividend payout policy. The fund holds 64 total positions with these top holdings:

As of 8/31/2017 reported by Fund Sponsor

Google Inc Class C Capital Stock $58.55M   8.07%
Facebook Inc Class A   $46.73M   6.44%
Amazon.com Inc $44.32M   6.11%
Visa, Inc. $30.50M   4.21%
Celgene Corporation $26.46M   3.65%
Apple, Inc. $22.73M   3.13%
Salesforce.com, Inc. $20.31M   2.80%
Avago Technologies Ltd $16.78M   2.31%
Actavis Inc $16.68M   2.30%
Microsoft Corporation $16.51M   2.28%
FedEx Corporation $15.92M   2.20%

Shares of EOS have returned 23.97% year to date as of Oct. 27, outpacing the Nasdaq’s 21.80% YTD performance and well ahead of the other major averages. Not many folks realize that an income-generating asset is outgunning index investors while experiencing lower beta (volatility) because the dividend payout smooths out the ride. This hot fund and other income-based assets that are riding the back of the bull can be found at my high-yield advisory service, Cash Machine. Take a tour of how we use a little creativity and a lot of intelligence to deliver these kinds of returns. Money goes where it’s best served and that hasn’t changed since the beginning of time.

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