December 20, 2023

A Good Market Gets Better

Let the good times roll!

A good market just got better. A petering rally has been reinvigorated. And the good times may continue to roll through January.

The peaking of interest rates started a market rally from the lows of late October. The Fed indicated it is done raising the Fed Funds rate. The notion that interest rates have peaked prevailed in the market and the benchmark 10-year Treasury rate plunged from about 5% to under 4%.

Inflation and rising interest rates hindered the market for the last two years. Under-control inflation and peak interest rates eliminate the greatest deterrent to rising stock prices. After that euphoria started to run out of gas, stocks got another shot in the arm last week after the Fed indicated that three rate cuts are likely next year.

The market has already been factoring in rate cuts, but I didn’t believe it. Sure, I thought the Fed would start cutting the Fed Funds rate if the economy tanks, but the Central Bank indicated that rate cuts were likely even with their “soft landing” projection.

The S&P 500 has rallied about 13% since the end of October and is now up 24% for 2023. Plus, the previously thin rally has broadened out to include many interest rate-sensitive stocks that had been beaten up all year.

We’ll see if the low inflation, falling interest rates, and soft landing scenario persist through 2024. Anything can happen. It’s possible that the rosy scenario discombobulates, or something else fouls things up. But for now, it looks like this rally will continue through this year and into next.

It is particularly good news for previously downtrodden safe stocks Brookfield Infrastructure Partners (BIP) and Realty Income (O), up 45% and 25% from the late October lows, respectively. For the technology stocks in the portfolio, Broadcom (AVGO), Intel (INTC), and Qualcomm (QCOM), a great year is getting even better.

In the meantime, have a great holiday! And I will be in touch again in the new year.

Recent Activity

November 22
SOLD Hess Corporation (HES) - $144.40
SOLD Tractor Supply Company (TSCO) - $198.44

December 6
NextEra Energy, Inc. (NEE) - Rating change “HOLD” to “BUY”

December 13
Purchased Alexandria Real Estate Equities (ARE)

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.6%) – Things are finally turning around for this infrastructure partnership. After more than a year of lackluster performance that seemingly would never end, BIP is up over 45% since the low in late October. It had been a safe superstar dividend performer until 2022. But the high distribution and highly reliable infrastructure earnings are catching on again as interest rates have peaked. It looks like the storm for BIP is over and 2024 should be a great year. (This security generates a K-1 form at tax time). BUY

Enterprise Product Partners (EPD – yield 7.4%) – This midstream energy partnership has been everything it should be. That massive yield is well-covered and safe. It performed extremely well in last year’s bear market with a 15% return. This year it has returned over 16%. It’s not exciting but perfectly acceptable for a high-yielding stock like this. The growth in profits and distributions is likely to continue as the partnership is expanding operations in the high-growth Permian basin. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.6%) – The performance has been solid but bouncy these two past years. But in a very tough market for dividend stocks, it has done fine, especially considering the high yield it offers. It has returned over 13% YTD. But that’s a very solid performance for a safe dividend stock in the rising interest rate environment. ONEOK reported solid earnings with adjusted EBITDA growth of 11% over last year’s quarter as natural gas volumes were up 12%. The company also raised the guidance on projected consolidated earnings going forward. BUY

Realty Income (O – yield 5.4%) – The tough times are over for this dividend stalwart as well. It’s up over 25% since the low in late October. The legendary income stock should be a great buy right now. It’s still cheap. O sells more than 25% below the all-time high set before the pandemic. There is upward momentum. And interest rates have likely peaked, removing the main downside catalyst that has been in place for the past two years. O is setting up to have a very big year in 2024. BUY

The Williams Companies, Inc. (WMB – yield 5.2%) – The natural gas pipeline company reported strong earnings growth and moved to within pennies of the 52-week high. But WMB has pulled back this month along with the rest of the energy sector as oil prices fell below $70 per barrel. But business remains solid and not dependent on commodity prices. It pays a well-supported dividend (with 2.38 times cash flow coverage). Recent acquisitions and expansions ensure more solid growth going forward all the way out to 2028. This should be a solid holding in any environment, but it could get a boost in the near term as energy stocks are rallying on the Fed news. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 4.0%) – The biopharmaceutical company has spiked higher lately. ABBV is up more than 11% since late November. AbbVie announced it is buying biotech company ImmunoGen (IMGN) for $10.1 billion in cash in a deal slated to close early next year. ImmunoGen is a cancer therapy specialist that fits nicely with AbbVie’s pipeline. Seven days later, AbbVie announced buying Cerevel Therapeutics (CERE) for $8.7 billion.

Both deals should enhance the already strong pipeline longer term. But its current pipeline should lift the stock sooner. Its two new biosimilar drugs, Rinvoq and Skyrizi, grew sales by more than 50% in the last quarter and the company expects these drugs alone to eventually surpass Humira’s peak sales. The stock sells at a low valuation and investors sense that it might turn the Humira corner sooner ahead of a very bright future. BUY

Broadcom Inc. (AVGO – yield 1.8%) – The already stellar performing fabless chip and software company stock has gotten red hot again. AVGO rocketed more than 26% higher over the last two weeks and is up 107% in 2023. The latest surge is because the company reported earnings that impressed the market. Earnings remained solid and Broadcom also cited future earnings gains from its recent VMware acquisition as well as the potential to double AI revenue from $4 billion in 2023 to over $8 billion in 2024. The company also received an analyst upgrade with a raised price target. HOLD

Digital Realty Trust, Inc. (DLR – yield 3.7%) – This data center REIT has pulled back from the recent high. That’s not unexpected. DLR has had a stellar year and tends to consolidate after a surge. Even though REITs have been terrible this year, DLR has now returned about 37% YTD. It looks like REITs have bottomed out and are on their way higher as interest rates have likely peaked and may be headed lower. Digital also has the additional catalyst of increasing AI spending and is getting a boost from the AI craze. BUY

Eli Lilly and Company (LLY – yield 0.8%) – This stock is a star with a YTD return of 60% and an average annual return of 51% over the last three years. But LLY has been in a sort of holding pattern for a couple of months. It’s not making new highs, but it doesn’t have a pullback of any significance either. It’s hanging tough at the high range after a big surge earlier in the year. Weight loss drug Mounjaro was approved by the FDA last month. Some analysts estimate it could potentially be a $20 billion per year drug. That would match the best-selling drug ever. It still has its Alzheimer’s drug up for FDA approval in the months ahead. HOLD

Intel Corporation (INTC – yield 1.1%) – The chipmaker company stock had been taking a breather after a huge surge this fall. But last week there was more good news that lifted INTC to another new 52-week high. It launched an AI chip for personal computers (PCs) that is cutting edge and very promising. It represents a big push to bring AI to the fledgling PC market and some analysts say it could trigger a new upgrade cycle in 2024 and beyond. The news fed into the positive mentality increasing among investors that Intel is turning things around and is still a very cheap stock with a bright future. BUY

McKesson Corporation (MCK – yield 0.6%) – The red-hot market has left healthcare stocks behind a little. Investors are all hopped up on lower rates and a soft landing and defensive health companies have taken a back seat. But things change. There is still a strong risk of a slowing economy and possible recession in 2024. McKesson has a business that will continue to thrive even if the economy slows. It’s a defensive and growing business and the stock should be a great holding in any environment. BUY

Marathon Petroleum Corporation (MPC – yield 2.2%) – After a big move higher in the summer, this refiner has been bouncing around sideways as demand remains strong, but energy stocks came under pressure. But the recent dovish tone by the Fed about rates and the continued strength in the economy may prompt another MPC rally in the new year. The stock has blown away the performance of its peers and the overall market for several years. Even in a bad year for energy stocks, MPC has delivered a 33% YTD return. Think what it could do with a tailwind. BUY

Qualcomm Inc. (QCOM – yield 2.3%) – It has been a decent year for QCOM, with a 32% YTD return. But the overall technology sector is up 56% YTD. QCOM may be at a 52-week high, but it’s still a long way below the early 2022 high. Revenues are down 19% in 2023 as smartphone chipset sales have tanked and consumers weakened at the end of an upgrade cycle. But smartphone sales have likely bottomed out. Qualcomm is introducing new AI chip for PCs and smartphones that could be big sellers next year. It’s looking like 2024 could be a much better year and QCOM has already started to ascend. BUY

UnitedHealth Group Inc. (UNH – yield 1.4%) – This healthcare insurer has a spectacular long-term track record but has struggled somewhat with just a 1% return this year. Most healthcare stocks have struggled in the 2023 market for a host of reasons. But those reasons are unlikely to persist going forward. This stock has a stellar track record and is capable of performing well in a slowing economy. UNH could make up for lost time as new stocks come back into favor. BUY

Visa Inc. (V – yield 0.8%) – This payment processing company is hitting new all-time highs. Visa is loving the soft-landing euphoria. It has been one of the very best financial companies to own but was held back by the pandemic and last year’s bear market. But earnings have been stellar. While the weakening consumer is a negative, international business and travel is thriving and more than offsetting the negatives for now. It has a strong business that should remain solid in all but a recessionary environment. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 3.9%) – Missed it by a day. The stock was added to the portfolio at the closing market price of the issue release date last Wednesday. We got in after a 7.3% price surge on that day. If it wasn’t for bad luck, I’d have no luck at all. It was purchased because it was dirt cheap after getting bludgeoned by rising interest rates. But last week’s Fed indication of three rate cuts next year set off a buying frenzy in some of the best interest rate-sensitive stocks. ARE has soared over 40% since the low of late October. But we didn’t miss the boat. The stock is still more than 40% below the all-time high. BUY

NextEra Energy (NEE – yield 3.2%) – NEE has been bouncing around. But the stock is still in a strong uptrend that began in early October and it’s up over 30% from the 52-week low. The clean energy utility delivered solid earnings and management reiterated previous growth projections and said the company expects to deliver earnings near the top of the expected range through 2026. This stock is still very oversold, especially considering interest rates have likely peaked. NEE has likely bottomed out and is now in a positive trend. BUY

USB Depository Shares (USB-PS – yield 5.8%) – Recent developments have been great news for this and other fixed rate investments. Interest rates appear to have peaked which means the selling is over in fixed income and prices are likely to rise as rates fall. The price has soared 18% since late October. And USB-PS has now returned 10% since being added to the portfolio a little over a year ago despite the rising interest rate environment. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.9%) – Peaking interest rates are also a huge positive for VCLT, as evidenced by the recent 17.5% price surge. This long-term bond fund is verry sensitive to interest rates. It held up relatively well in the rising rate environment and now it looks like rates are trending lower. After two of the worst years ever for the bond market, the rebound should continue next year. BUY

Xcel Energy (XEL – yield 3.4%) – This clean energy utility stock has been trending higher since the beginning of last month. The low may be in. XEL had a convincing 17% move off the low. But, like NEE, XEL came under pressure last week as analysts expressed concern about the solar energy business amid the current high interest rates. But this is one of the best utility stocks to own and the recent debauchery may prove to be very temporary. XEL still sells near the lowest levels of the past several years and now has positive momentum. BUY