Corporate Profits Soared In 2021. So Why Are Stocks Down?

This market’s insistence on falling—even though earnings are soaring—has opened up a strong buying opportunity for us dividend investors.

And we’re going to tap it to grab a rare “double discount” on an 8%-yielding closed-end fund (CEF) that no one’s noticed. This income-and-growth machine has soared 260% since inception and has the potential to crush stocks this year, thanks to its undeserved markdown.

More on that below. First, let’s talk about this stock-market disconnect, because recent declines have yanked the S&P 500’s price-to-earnings ratio down to 23.8. That may not sound cheap, but it’s far below last year at this time, when valuations hit a nosebleed 43.7.

That’s a complete disconnect from the earnings trend, which is spectacular:

This chart tracks the earnings for S&P 500 companies in the fourth quarter of 2021, and what we’re seeing is one of the best quarters on record. A whopping 77% of firms have seen earnings per share above expectations, with profits 8.6% above where S&P 500 companies projected for the end of 2021.

That’s just continuing a trend we saw all throughout 2021.

Overall, earnings rose nearly 90% in 2021. While a lot of that is because 2020 was a terrible year, the fact is that earnings growth is expected to continue, with firms projecting a 5.5% increase for the first half of 2022. Economists expect GDP growth of over 3% for the entire year.

The Fear Factory

With so many strong economic indicators and a lot of earnings growth behind us, stocks should be going up. So why aren’t they?

While geopolitical chaos is definitely a drag in the short term, stocks began falling before the Ukraine crisis, as investors weighed the risks of inflation to the broader economy. That risk was augmented in article after article in the press saying that skyrocketing prices for food and gas were driving more people into economic stress.

The only problem? This isn’t exactly true.

One surefire way to look at whether Americans are struggling is to see if they’re taking out a lot of debt to survive. And while credit card debt has risen in the last year, it’s nowhere near where it was pre-COVID and isn’t even where it was in 2008, when fewer Americans had credit cards and consumer prices were much lower.

When we look at Americans’ earnings, things look brighter than ever.

While income did dip briefly because of COVID-19, it remains at its highest level in history, save for the spike in late 2020 from stimulus checks.

And while the data doesn’t show Americans are as rich as that one-off made them, it does show that they are richer than they were before COVID-19—and by a wide margin. Throw in a historically low unemployment rate of 4% and I think you’ll agree that we have an economic picture that’s much rosier than the media lead us to believe.

How to Buy in at a Big “Double Discount”

With such strong economic fundamentals in the US, it’s pretty obvious that the recent market selloff is way overdone.

We can look to history for a hint of how a selloff like this one could turn out: there was a similar decline back in early 2016, in a similar economic climate (just like then, markets are bracing for the Fed to start raising rates as the economy recovers following many generous bouts of quantitative easing). And stocks have soared since.

Bargain-Priced CEF Gives Us a Second Discount Deal

Now, you could just buy the S&P 500 through an index fund like the SPDR S&P 500 ETF (SPY) and be done with it. But why do that when you can get many of the same stocks even cheaper—and with a dividend six times what SPY pays?

With a CEF like the Nuveen Core Equity Alpha Fund (JCE), you get both of those things, thanks to its 8% dividend yield and its discount to net asset value, or NAV.

This is a discount that only exists with CEFs (ETFs, for their part, always trade at par). And in JCE’s case, it amounts to a “bonus” 5% off deal: while JCE’s portfolio could be liquidated for about $250 million today, shares in JCE are actually valued at around $238 million. So with JCE, you’re getting great stocks like Apple
AAPL
(AAPL), Microsoft
MSFT
(MSFT), Amazon.com (AMZN) and other well-established S&P 500 names, but you’re paying less than if you’d bought these companies outright!

What’s more, JCE recently hiked its dividend by 30%, thanks to its outsized gains in recent years. Go back further and you see it has an amazing track record behind it: even after the recent selloff, JCE is up over 260% in the last 15 years.

I think you’ll agree that JCE, with its double discount and 8% dividend that grows, is a much better way to go than buying an ETF, particularly in today’s uncertain market.

Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Safe 7.5% Dividends.”

Disclosure: none