August 30, 2023

Stocks Wobble into September

After a strong first seven months of the year, stocks retreated in August. Is this a normal consolidation or the start of a bigger correction after Labor Day?

Anything is possible. On the one hand, such pullbacks are normal and healthy after a strong run higher in the market. The economy still appears nowhere near a recession. There is still an enormous amount of cash on the sidelines. It’s near the end of the rate hike cycle. And artificial intelligence is triggering a new tech boom.

On the other hand, the highest interest rates in 16 years are starting to bite. Many businesses that were barely making it in a low-interest rate environment may have trouble surviving. The economy is showing signs of slowing. High interest rates in an already slowing economy make for a tough environment for stocks to build on an already 30% rally from the low.

Without a crystal ball, it is more important than usual to own stocks of companies that can continue to grow earnings and pay dividends even if the uglier scenario proves to be true. Recent portfolio additions Hess Corporation (HES) and Digital Realty Trust (DLR) have performed well even during the August downturn.

It’s also time to consider the beleaguered defensive stocks in utilities NextEra Energy (NEE), Xcel Energy (XEL), and Brookfield Infrastructure Partners (BIP) as well as Realty Income (O) and UnitedHealth Group (UNH). All the stocks, except for UNH, are selling near the 52-week low ahead of a likely slowing economy, which historically has been a period of market outperformance.

We’ll see what happens when the rubber hits the road after Labor Day. Regardless of what happens, this portfolio will adapt and put you in the best position to succeed. Have a great rest of the summer!

Recent Activity

August 9
Purchased Tractor Supply Company (TSCO) - $224.16

August 29^th
Invesco Preferred ETF (PGX) – Rating change “BUY” to “HOLD”

High Yield Tier

Enterprise Product Partners (EPD – yield 7.6%) – EPD has slightly retreated from the new 52-week high hit in July, but it is still about even in August while most stocks are down for the month. After a stellar 2022 in a bear market, EPD has returned over 16% YTD. Energy stocks have made a strong comeback after a dismal first five months of the year as oil prices had been rising until a few weeks ago. We’ll see where 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 K1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.9%) – 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 flirting 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 still 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. Also, 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 bad-breath distance of the 52-week high. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 4.0%) – The cutting-edge biopharmaceutical company stock has leveled off in the ugly August market after a sharp rise from the bottom in July. I like the way the healthcare sector is set up ahead of a slowing economy and perhaps a further correction in the market after Labor Day. Meanwhile, AbbVie 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 temporary and AbbVie will turn the corner sooner than expected. BUY

Broadcom Inc. (AVGO – yield 2.2%) – The AI juggernaut didn’t get much of a bump after the Nvidia earnings this time. That suggests that perhaps this wave of AI excitement might be already priced into the stock. But AVGO is still hanging tough near the high after a huge spike after the May Nvidia report. Broadcom reports its own earnings this Thursday and there is every reason to believe they will be stellar again. AVGO may get another strong bump from that. It’s also solid longer term. 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 K1 form at tax time). BUY

Digital Realty Trust, Inc. (DLR – yield 4.0%) – It’s been a tough several weeks for the market. But nobody told DLR. It’s up 7% since early August. It got a bump from Nvidia as the company reported strong data center demand for its chips. 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 AI. The strong down-market performance is encouraging. BUY

Eli Lilly and Company (LLY – yield 0.8%) – LLY is on its own schedule. It thrives regardless of what the rest of the market does. 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 then soared another 21% so far in August. LLY is up over 50% YTD and has returned 77% over the past year. It has also returned a stellar 280% 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 1.2%) – The exploration and production company stock had a strong price spike along with oil prices since June. But it has pulled back a little over the past couple of weeks along with energy prices. Oil prices may start moving up again in the fall, as many predict. Hess’s 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 had 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 turn up, and the sector is now getting somewhat of a bump after NVDA earnings once again blew away expectations. Also, Intel’s performance might be turning the corner as earnings beat estimates and the company returned to profitability. 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, smartphone 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 growth while average S&P 500 earnings were down over 7%, 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. UNH has the tailwind of an aging population and a track record of superstar performance. BUY

Visa Inc. (V – yield 0.7%) – V has leveled off since the beginning of July. The company loves the strong consumer and the increasing expectation of a soft landing. Although V stopped moving higher, 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

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 both in the broadening rally and the August selloff. 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. NEE has historically not only blown away utility sector performance but the overall market as well. It’s selling near a multi-year low and is poised for a strong rebound. 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. But this security has outperformed other investment-grade fixed-rate investments. Interest rates are near the highest level since 2007. This is a good time to buy. 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

Rating change “BUY” to “HOLD”

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. Rates could be near the peak and it’s probably a good time to buy in terms of that dynamic. However, PGX has a lot of exposure to the banking sector and could be under pressure if the high interest rates trigger more bank troubles in the fall. HOLD

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