Goldilocks to Catch-22
After a fabulous first seven months of 2023, stocks are pulling back so far in August. What can we expect from here?
A pullback or consolidation in the market at this point is normal and even healthy. And that’s what this will have been if the market gets back on track. There are also two potential catalysts to reignite the rally this week: Nvidia (NVDA) earnings and Jackson Hole.
It was the May Nvidia earnings report that triggered the artificial intelligence tech rally that added another leg to the bull market. Another positive earnings report could reinvigorate technology stocks after a rough August so far. The Fed will also deliver comments this week at the annual Jackson Hole thing. Dovish remarks would be positive for the market.
This week may determine the direction of stocks until after Labor Day. After that, things get confusing. The splendid first seven months were sparked by falling inflation, the Fed nearing the end of the hiking cycle, and no recession in sight. But the still strong economy was tempered by the false belief in a looming recession that kept interest rates down.
Stocks got the benefit of a perceived slowing economy in lower interest rates and falling inflation without an actual slowing economy. It was the best of both worlds. But markets seemed to have given up on the recession scenario for now. That’s why interest rates hit the highest point yet. High interest rates, possible rising inflation, and a still hawkish Fed are consequences of a strong economy that can be bad for stocks.
A good economy has negative consequences for the market. A slowing economy can relieve some of those consequences, but weaker economic activity can also hurt company profits. There is potential that the market could go from a Goldilocks scenario to a catch-22.
Anything is possible. The portfolio has positions that should benefit if the rally continues as well as positions that should deliver strong relative performance if the economy slows significantly.
It’s worth noting that the recent market has driven safe stocks in utilities to 52-week lows. And in some cases, multi-year lows. NextEra Energy (NEE), Xcel Energy (XEL), Brookfield Infrastructure Partners (BIP), and Realty income (O) are all stocks with long track records of outperforming the market that are in the throes of a bear market ahead of what may be a slowing economy.
Buying good stocks cheap is a practice that overwhelmingly works out over time, especially in a highly uncertain market like this.
Recent Activity
August 9
Purchased Tractor Supply Company (TSCO) - $224.16
Current Allocation | |
Stocks | 43% |
Fixed Income | 20% |
Cash | 37% |
High Yield Tier
Enterprise Product Partners (EPD – yield 7.5%) – The midstream energy partnership has pulled back a little after making a new 52-week high in late July. But it is still in an uptrend that began in May. Energy stocks have made a strong comeback after a dismal first five months of the year as oil prices had been rising until about two weeks ago. We’ll see were oil prices go in the fall but Enterprise should continue to have the right stuff going forward as earnings should be resilient in almost any economy. (This security generates a K-1 form at tax time). BUY
ONEOK Inc. (OKE – yield 5.8%) – Energy came back in a big way this spring and summer, although it has leveled off this month. OKE had been trending higher since May before the August interruption. The midstream energy company reported earnings that beat on EPS and raised earnings guidance for the year. The market was impressed. We’ll see if OKE can salvage the upside rally from here. Longer term the stock looks solid as the company is expected to grow revenue by an average of 10% per year over the next three years. HOLD
Realty Income (O – yield 5.4%) – It isn’t only hard times for utility stocks. Conservative REITs remain out-of-favor as well. This legendary monthly income stock is inching very close to the 52-week low, last achieved when the market hit a low last October. It may be a new bull market for the indexes, but it is the throes of a bear market for O. Yet earnings were solid with a stellar 99% occupancy rate for its properties and an additional $3.1 billion invested in the quarter in 710 properties. This is now a very cheap and high-yielding stock with an excellent historical track record in a very uncertain market and economy. BUY
The Williams Companies, Inc. (WMB – yield 5.1%) – The midstream energy company reported earnings that surpassed estimates and the stock got a further boost on the news. Volumes of throughput were solidly higher, and earnings grew 8%. That’s a far cry from the 30%-plus earnings growth of last quarter, but this lull in acquisitions coming online was expected. It’s solid growth under the circumstances. In addition, recent expansion and acquisition activity bodes well for growth in 2023 and 2024 beyond what was expected. The stock is now up over 20% since the end of May and is within 1% of the 52-week high. BUY
Dividend Growth Tier
AbbVie (ABBV – yield 3.9%) – The cutting-edge biopharmaceutical company stock had been having a bad year as its number one drug Humira’s U.S. patent expired this year. But since the middle of July, ABBV is up 13% and holding near the recent high despite the down market so far in August. The company reported earnings that beat on both earnings and revenue and raised guidance for the year. The report emboldens the notion that the revenue drop from the Humira patent expiration will be very temporary and AbbVie will turn the corner sooner than expected. BUY
Broadcom Inc. (AVGO – yield 2.2%) – The AI juggernaut finally started showing some weakness in the month of August, falling to the lowest level since June. But AVGO spiked 4.6% higher on Monday as another AI company reported blowout earnings. It could get a further boost on Wednesday when Nvidia (NVDA) reports. It was that company’s report in May that triggered the huge surge in AI stocks. Broadcom also reports earnings next week. The two events should determine the near-term direction of the stock. HOLD
Brookfield Infrastructure Partners (BIP – yield 4.8%) – The tough times for safe stocks continue. Despite strong operational performance in a period of shrinking earnings for most companies, BIP continues to wallow and even flirt with the 52-week low. But these periods of bizarre underperformance never last. Sure, the stock could languish for a while longer, but it is highly likely to be a lot higher a year from now. Brookfield is targeting 10% average earnings growth and 5% to 9% distribution growth over the next several years. (This security generates a K-1 form at tax time). BUY
Digital Realty Trust, Inc. (DLR – yield 4.0%) – DLR was one of the very few stocks on the market and in the portfolio that gained a little ground over the past couple of negative weeks for the market. Digital reported better-than-expected earnings because of strong data center demand and raised over $2 billion by selling joint venture assets. The move strengthens the balance sheet and secures the dividend. Now the REIT is poised to benefit from accelerating data center demand growth prompted by the AI craze. The strong down-market performance is encouraging and the stock could have nice upside if the market rally reignites in the fall. BUY
Eli Lilly and Company (LLY – yield 0.8%) – I thought this big pharma juggernaut would pull back after the huge 59% spike from early March until the end of June. But it hung tough near the high through July and has soared another 21% so far in August. LLY is up over 50% YTD and has returned 72% over the past year. It has also returned a stellar 278% since being added to the portfolio three years ago. It has two potential mega-blockbuster drugs up for FDA approval this year as well as stellar earnings growth for the next several years. HOLD
Hess Corporation (HES – yield 1.1%) – Oil prices hit the highest level since last year on strong demand and limited supply. Exploration and production company stock HES has moved higher along with oil. Energy prices have leveled off so far in August, but prices may start moving up again in the fall, as many predict. Hess’ high margins give it powerful leverage in a rising energy price environment. We’ll see how much further this uptrend can take the stock. BUY
Intel Corporation (INTC – yield 1.5%) – August has been a reckoning for technology stocks. The sector has plunged as interest rates are more likely to remain elevated amid the better-than-expected performance of the economy. However, the pullback provides a necessary consolidation after a big run-up and technology stocks could be reignited with Nvidia’s earnings this week, as this event prompted the big rally last quarter. Also, Intel performance is turning the corner as earnings beat estimates and the company returned to profitability. The company has a promising future as it has invested heavily in chips in high-growth areas and insiders have been buying heavily into the stock. BUY
Qualcomm Inc. (QCOM – yield 2.9%) – Not only has it been an ugly market for technology stocks this month, but Qualcomm reported earnings results that the market hated. Earnings were down 37% year over year and revenues fell 23%. It’s because of lower smartphone sales as the 5G upgrade cycle ended and economic conditions tightened. However, smartphones sales may be close to bottom as they are expected to increase in 2024 and Qualcomm is expected to resume earnings and revenue growth. This slump was expected and that’s why QCOM has underperformed. But it is cheap now. BUY
Tractor Supply Company (TSCO – yield 1.9) – The farm and ranch company is a serious retail player. The company has a proven ability to consistently grow earnings and deliver on stock performance. Few retailers have grown earnings every year for 31 straight years. Last quarter, the company delivered 8.5% EPS while average S&P 500 earnings were down more than 5%, and down for the third straight quarter. TSCO should be solid in just about any environment with a low beta and many products that are considered staples. BUY
UnitedHealth Group Inc. (UNH – yield 1.4%) – The malaise in defensive stocks is catching up to UNH. It has been falling over the past few weeks after catching a little bit of fire. Solid earnings growth and increased guidance assuaged the market’s negative attitude after UnitedHealth had earlier reported higher costs from more people getting elective surgeries because of pent-up pandemic demand. It’s still in the lagging defense arena but it could have a much better rest of the year. BUY
Visa Inc. (V – yield 0.7%) – V loves the strong consumer and the increasing expectation of a soft landing. The stock has been bouncing around at a higher level than earlier this year after hitting a 52-week high in July. Good economic news could propel the stock to another level. It is also capable of holding its own if the market flounders, as it did last year. HOLD
Safe Income Tier
Invesco Preferred ETF (PGX – yield 6.3%) – Longer-term rates have moved near the recent high again as a recession appears less likely in a still strong economy. The timing for buying PGX is probably good right now as rates appear likely near the peak. BUY
NextEra Energy (NEE – yield 2.8%) – The weakness continues. This combination regulated and clean energy utility stock just hit a new 52-week low. The utility sector remains under pressure even in the broadening market rally as interest rates have risen and growth plays continue to be favored. But the operational performance is solid. The utility grew earnings 8.6% in the second quarter and 11% in the first half versus the same periods last year. It also has predictably solid earnings going forward because of a considerable project backlog. BUY
USB Depository Shares (USB-PS – yield 6.0%) – This preferred issue has bounced around since being added to the portfolio. It took an unjustifiable hit during the banking issues. But it has mostly moved conversely to interest rates. It’s worth noting that the 10-year Treasury is at a new high and USB-PS is still at a higher price since being added. We also may be near peak interest rates in this cycle. BUY
Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.6%) – There could be some near-term turbulence with the price on the way to solid longer-term returns and diversification. The fund is holding up well in the recent rising interest rate environment and should benefit if and when rates come back down. BUY
Xcel Energy (XEL – yield 3.6%) – This clean energy utility hasn’t fared any better than NEE in a very tough market for utilities. XEL has been trending lower since the beginning of April and is wallowing near the 52-week low. But things change and XEL is cheap and one of the best utility stocks to own. These are dark days for utilities. But things always change and XEL and NEE are selling at 52-week lows in an expensive market and ahead of a likely slowing economy. BUY
High Yield Tier | ||||||||||
Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on Close 8/21/23 | Total Return | Current Yield | CDI Opinion | Pos. Size |
Enterprise Product Partners (EPD) | 8.30% | 27 | 33% | 7.50% | BUY | |||||
ONEOK Inc. (OKE) | 7.20% | 65 | 42% | 5.80% | HOLD | |||||
Realty Income (O) | 56 | 3% | 5.39% | BUY | ||||||
The Williams Companies, Inc. (WMB) | 8/10/22 | 33 | Qtr. | 1.7 | 5.30% | 35 | 12% | 5.14% | BUY | 1 |
Current High Yield Tier Totals: | 6.30% | 22.50% | 6.00% | |||||||
Dividend Growth Tier | ||||||||||
AbbVie (ABBV) | 150 | 140% | 3.94% | BUY | ||||||
Broadcom Inc. (AVGO) | 865 | 106% | 2.20% | HOLD | ||||||
Brookfield Infrastucture Ptrs (BIP) | 32 | 53% | 4.80% | BUY | ||||||
Digital Realty Trust, Inc. (DLR) | 121 | 3% | 4.00% | BUY | ||||||
Eli Lily and Company (LLY) | 550 | 278% | 0.80% | HOLD | ||||||
Hess Corporation (HES) | 154 | 14% | 1.10% | BUY | ||||||
Intel Corporation (INTC) | 33 | -27% | 1.50% | BUY | ||||||
Qualcomm (QCOM) | 111 | 42% | 2.90% | BUY | ||||||
Tractor Supply Company (TSCO) | 216 | -4% | 1.90% | BUY | ||||||
UnitedHealth Group Inc. (UNH) | 498 | -4% | 1.40% | BUY | ||||||
Visa Inc. (V) | 12/8/21 | 209 | Qtr. | 1.5 | 0.70% | 239 | 16% | 0.76% | HOLD | 1 |
Current Dividend Growth Tier Totals: | 2.20% | 64.10% | 2.30% | |||||||
Safe Income Tier | ||||||||||
11 | 3% | BUY | ||||||||
67 | 68% | 2.80% | BUY | |||||||
U.S. Bancorp Depository Shares (USB-PS) | 10/12/22 | 19 | Qtr. | 1.13 | 6.10% | 19 | 5% | 6.00% | BUY | 1 |
4.50% | 73 | -7% | 4.60% | BUY | ||||||
Xcel Energy (XEL) | 10/1/14 | 31 | Qtr. | 1.95 | 2.80% | 58 | 149% | 3.60% | BUY | 1 |
4.30% | 43.60% | 4.70% |