Earnings Season Kicks Off - A Look Ahead

Next week earnings season kicks off again with most of the big banks reporting.  Two banks that are favorites of some analysts are Morgan Stanley (MS) and JP Morgan Chase (JPM) for different reasons.  Morgan Stanley continues to establish itself as a wealth manager (a better business with steady, growing cash flows and less dependence on interest rates and ability of borrowers to repay loans), most recently with its acquisition of Eaton Vance.  JP Morgan is expected to have good investment banking results, good results from mortgage refinancing and possibly better than expected loan loss reserves compared to last quarter.    The outcome of next week will certainly set the tone for the next few weeks.  Although expectations are low, some improvement over the last quarter is to be expected.  While stimulus talks are on again and off again, the stock market seems to be adjusting to the reality that it's coming, it just might not be until early next year.  And assuming a Democratic sweep, which polls and betting odds seem to indicate, the fiscal stimulus when it does arrive, is likely to be substantial.  Plenty of economic data continues to point to a slow and steady economic recovery, however the there continues to be broad governmental support for additional fiscal stimulus to ensure the recovery stays on track and to help the many people who are still unemployed and the small businesses who continue to struggle.  Other items of note next week include Apple's (AAPL) reveal of the next generation of IPhones, which should generate some investor interest.  Zoom (ZM) has a two day analyst event which should provide some new insights into its business and future prospects.  Finally, stimulus talks will continue which could add some volatility into the mix.

For next week, I'm looking at selling covered calls "at the money" with a 10/16 expiration for a few stocks that have great recent and longer-term upward momentum, excellent business prospects (post-pandemic "winners") and strong top analyst support.  They are Peloton (PTON), Etsy (ETSY), Twilio (TWLO) and Fuel Cell (FCEL).  Fuel Cell in particular has recently gotten an upgrade from JP Morgan, a recent Department of Energy contract, and stands to benefit from the global push to develop alternative fuel hydrogen vehicles, particularly for heavy trucks.

Longer term, I think the focus on cyclical / industrial stocks will continue and I like chemicals, basic materials, transportation stocks (railroads in particular) and industrials like 3M (MMM).

As the recovery slowly grinds on and the stock market rally continues, there will be many investment choices, but it's important to do your research and look for the companies that stand to benefit the most from the recovering economy and are not "over-priced."  Often, you will get conflicting opinions from the Wall Street analysts, "talking heads" on TV and your own research.  It's important to digest all that information and make your own decisions.  

Diversification, managing leverage and position sizing are critical.  Borrowing too much on margin or taking too large a position in any one stock / option could wreck your portfolio.  A good rule of thumb I have learned is limiting to no more than 2% of your portfolio in any one position for pure option trades (buying or selling puts or calls).  For stocks, it's good to limit yourself to 10% - 15% of your total portfolio in any one stock, unless it's a very low volatility cash flow / dividend play, in which case a higher percentage may be okay.  

The Financial Fortress approach would ensure that you are broadly diversified across asset classes and your stock trading portfolio should not be a large component of your overall financial picture, so even if you suffered heavy losses (which shouldn't happen if you are managing risk appropriately), the impact to your net worth should be minimal.  The diversification in your stock trading portfolio need not include other asset classes like bonds or real estate, unless you don't have exposure to those areas in other parts of your Financial Fortress.  I'm not recommending any particular stock or strategy and full disclosure, I do own / manage positions in the stocks mentioned above.  Stay safe, healthy and positive.  

I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020.

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