It’s a raging bear market in technology.
But technology has been by far the best performing sector for well over a decade for good reasons. We are in fact in a technological revolution. Technological advances are accelerating. It feeds on itself and is transforming the world. Technology is where there is massive growth and excitement for the future.

Sure, the market might get cranky in the near term. Inflation and higher rates might be all the rage right now. But technology isn’t going away. It’s likely to grow even bigger in the future. The time to buy such stocks is when they are cheap and out of favor.

In this issue, I highlight three existing portfolio positions in the technology sector ready for purchase. All of these stocks sell at compelling valuations with strong growth likely ahead. They are victims of indiscriminate selling in the sector. At some point, hopefully sooner, investors will realize the value that has been created by this year’s market turmoil.

Cabot Dividend Investor Issue: June 8, 2022

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It’s Time to Buy Cheap Tech Stocks
It’s been a bloodbath in technology this year. The tech-heavy Nasdaq is 26% off the high and the S&P 500 technology sector is 20% lower YTD. The sector has spent most of the year so far in bear market territory. But many individual stocks are down far more than that.

It’s a raging bear market in this once great sector. Why is this happening?

Technology stocks had driven the market higher through the last bull market and the early pandemic recovery. Even after this selloff, the technology sector has delivered twice the returns of the overall market in the last five- and 10-year periods. This is a huge reversal of established trends.

The problem is inflation. It raises costs and interest rates for tech companies and growth projections get lowered. Plus, a faltering economy doesn’t help. It’s also true that much of the sector got overvalued and was due for a comeuppance.

But technology has been the superstar sector for good reasons. We are in fact in a technological revolution. Technological advances are accelerating. It feeds on itself and is transforming the world. Technology is where there is massive growth and excitement for the future.

Sure, the market might get cranky in the near term. Inflation and higher rates might be all the rage right now. But technology isn’t going away. It’s likely to grow even bigger in the future. The time to buy such stocks is when they are cheap and out of favor.

Sure, prices might go lower still. Nobody knows for sure how long this down-trending market will last. But for those with a little longer-term perspective, a good opportunity is unfolding.

In this issue, I highlight three existing portfolio positions in the technology sector that are ripe for purchase. All of these stocks sell at compelling valuations with strong growth likely ahead. They are victims of indiscriminate selling in the sector. At some point, hopefully sooner, investors will realize the value that has been created by this year’s market turmoil.

What to Do Now
The market has successfully rallied from the bear market precipice. But that’s about it. Stocks have shown a desire to stay away from the dark side but not enough confidence to muster any significant upside traction.

Investors have factored in the risks for now, but can’t generate much confidence ahead of likely 0.50% Fed rate hikes and continuing inflation. The market can’t seem to shake the bummer of high inflation, rising rates, and a souring economy.

It will likely take more news to move this market significantly higher or lower. It could be that inflation moderates and the Fed doesn’t have to be as aggressive as currently anticipated. That would be a huge positive. Of course, if things deteriorate from here it would be negative. But any kind of a reliable gauge of one which direction things will go likely won’t come until later in the year.

It’s likely more of the same with some frittering around the edges for the market indexes for a while. There could be some sector rotation toward the more compelling values though.

The energy sector is still booming, up 60% YTD. Chevron (CVX), Valero Energy (VLO) and Enterprise Product Partners (EPD) have all just made new highs. CVX and VLO are up so much that they no longer represent compelling buys. But are still worth holding given the seemingly unstoppable momentum. Both EPD and ONEOK (OKE) sell at cheap valuations and are still worth buying.

There are compelling opportunities for the longer term. The three tech stocks highlighted below, as well as Global Ship Lease (GSL) and Innovative Industrial Properties (IIPR), have likely been oversold. These stocks have the best chance to be up the most six months to a year down the road.

Monthly Activity
May 11th
Buy Innovative Industrial Properties (IIPR) - $122.92

June 8th
Broadcom (AVGO) – Rating change “HOLD” to “BUY”Qualcomm (QCOM) – Rating change “HOLD” to “BUY”

FEATURED ACTION

Buy Intel Corporation (INTC)
Yield 3.4%Intel is an icon of the technology revolution. The company makes chips or processors that are essentially the brains of the computer. It is one of the largest semiconductor companies in the world with $79 billion in annual revenue and holds by far the largest market share of the PC and server processor markets.

Sure, INTC has fallen along with the tech sector, although not as much. INTC is down about 14% YTD compared to a decline of over 23% for the sector. But this stock crashed all on its own before this year’s selloff, when other technology stocks were doing just fine. Intel had its own individual meltdown. Recent market turmoil has made it even cheaper. The stock is now down nearly 40% from the 2021 high.

INTC had been a phenomenally performing big tech stock until about five years ago. In fact, INTC has returned far less than the overall market while the sector vastly outperformed it over the last five years. What happened?

Intel has been losing ground to the competition, mainly Advanced Micro Devices (AMD) and Nvidia (NVDA). Intel missed the boat on smartphone chips. Competitors cornered that market and Intel was never able to break in. And there’s been more bad news lately.

Last fall, Intel announced that production problems would delay the rollout of its next generation of chips due to problems in the manufacturing process, giving an opportunity to the competition. INTC plunged 10% on the news. Then, in February, Intel reduced 2022 earnings guidance to $3.50 per share from $5.47 in 2021, a decline of 36%. The market didn’t like that either.

The reason for the dip in this year’s earnings is because Intel will focus on the future by investing a record $27 billion on new products, compared to capital expenditures of $18.7 billion last year and $14.3 billion in 2021. Intel is rolling up its sleeves and taking on the competition. The company had been the best in the business on such investments and still has a lot of mojo left. There are some hugely promising growth opportunities.

Intel is already making huge strides in sizable growth opportunities where it has had little market share in the past. It has already developed superior chips in the profitable gaming and data center CPU markets and plans to aggressively compete. Intel also plans to aggressively expand its foundry business, where chips are manufactured. The chip maker recently made a $5.4 billion acquisition of foundry company Tower Semiconductor that should close around the end of this year.

Meanwhile, the stock is dirt cheap ahead of very promising growth in the years ahead. It currently sells at a price/earnings ratio of just 7 times, which is about half of its average valuation over the last five years and about a third of the current market index multiple. It also pays a solid 3.4% yield at the current price with a payout that is likely to grow.

Buy Broadcom Inc. (AVGO)Yield 2.9%Broadcom is a technology industry Goliath with $28 billion in annual revenues. It’s an icon of the technology revolution with roots that trace back over 50 years to the old AT&T/Bell Labs. The company has many category-leading products in crucial areas of semiconductors and infrastructure software solutions.

Broadcom essentially provides equipment that enables technology to function as we know it today. It provides components that enable networks to operate together and communicate with each other from the service provider all the way the end user and device. But there is a much simpler way to state this company’s importance in the industry; 90% of all internet traffic uses its systems.

The company is also in the process of a massive acquisition: It’s buying cloud software company VMware (VMW) for $61 billion. The stock fell initially after the deal leaked but has moved nicely higher since as the market has warmed to the idea. The sheer size of the deal is startling. But Broadcom can pull it off.

Broadcom has a long history of being a serial acquirer. Ordinarily, I’m not a huge fan of making a lot of acquisitions. But it’s hard to argue with success. AVGO has returned more than 2,000% over the last 10 years. The acquisition is also a big move away from the chip business, which is notoriously volatile. It bolsters Broadcom’s superior positioning for the future of more cloud-based solutions.

AVGO has also gotten cheap. It’s down 15% YTD and 17% from the high and sells at a forward price/earnings multiple well below the overall market. But unlike INTC, AVGO has been dragged lower entirely by the weakness in the tech sector. Individually, the company is killing it.

There are two simple reasons for buying the stock. One, it is benefitting from the current environment as more businesses move online and into cloud-based applications. Two, it will get a huge benefit from the 5G rollout in both the short and longer term.

Broadcom is currently getting a boost from the rollout of 5G phones, which require more filters and other networking technology. Longer term, Broadcom will see greater demand as its chips will be an enabling technology behind powerful emerging trends like the internet of things, self-driving cars, and artificial intelligence.

The company has blown away expectations in each of the last three quarters as it benefits mightily in the current environment. It has been growing earnings at nearly a 30% clip, which is stupendous for a company of this size. The dividend yield is currently around 2.9%. But the company grows the payout like crazy. The dividend has a 5-year compound annual growth rate of about 30%.

Buy Qualcomm (QCOM)Yield 2.1%Qualcomm (QCOM) is the world’s largest supplier of chips for mobile devices. It also holds the patents for the key technology systems that are the backbone of all 3G and 4G networks. In 2018, chips accounted for 76% of revenues while licensing from patents accounted for 23%, although the smaller area is more profitable and better insulated from competition.

A chip is part of the processor that is essentially the brains of a computer, smartphone or device that controls other devices in the system. These chips are the cutting edge of computer technology and determine the power, speed and function.

Big deal, there’s lots of semiconductor companies. And competition is fierce. But Qualcomm has an enormous advantage going for it right now. It is the undisputed king of the chips that will enable 5G technology.

Qualcomm’s 5G Snapdragon 855 chipset uniquely offers modularity, the ability to mitigate existing spectrum to accommodate 5G. It offers a bridge between older 3G and 4G and the 5G upgrade that virtually every company will need. In order to effectively compete in the fierce race between countries and companies to develop the new technology, equipment makers must have Qualcomm’s chips.

Sure, other companies, including Apple (AAPL) as well as certain companies in China, are working on competing chips. That’s alarming because they account for a sizable portion of Qualcomm’s smartphone chip business. But those competing chips won’t be here in the foreseeable future and Qualcomm should have huge growth from other sources down the road.

The stock was originally purchased in the portfolio in November of 2019, primarily on anticipated 5G smartphone royalties. That business did boom, and the stock has returned 80% since then, despite being down 22% YTD and more than 27% from the high. Earnings this past quarter were up a whopping 68% over the same quarter last year and the company upgraded guidance for this year and next.

In addition to booming smartphone sales, in which the company has done a stellar job of diversifying by selling a lot more Samsung chips, future business looks very promising. The company increased automobile chip sales by 41% and Internet of Things (IOT) by 61% versus the year-ago quarter. These are areas with the most growth potential in future years.

The stock has been hammered in the tech selloff this year. But it was a beloved superstar before then. And little has changed except the market’s treatment of the sector. The stock doesn’t deserve to be down as much as it is. When things change, and they always do, the market will come back to Qualcomm and its booming earnings growth.

Portfolio at a Glance

Portfolio Updates

High Yield Tier

The investments in our High Yield Tier have been chosen for their high current payouts. These investments will often be riskier or have less capital appreciation potential than those in our other two tiers, but they’re appropriate for investors who want to generate maximum income from their portfolios right now.

Enterprise Product Partners (EPD – yield 6.6%) – It’s a new 52-week high. Ever so slowly and surely, EPD is trending higher. Why shouldn’t it? It’s in the red-hot energy sector. It pays a huge distribution that’s safe. And it has inflation adjustments built into its contracts. EPD has returned over 32% YTD, but valuations are still not stretched. EPD still sells below the pre-Covid price despite better earnings and prospects and a much friendlier energy market. EPD is in a great place and should continue to rise. (This security generates a K-1 form at tax time). BUY

Enterprise Product Partners (EPD)Next ex-div date: July 28, 2022, est.

Global Ship Lease, Inc (GSL – yield 6.5%) – The containership company stock had been on a steep uptrend since the pandemic bottom. But it has pulled back significantly since the end of March as the market got more panicky. GSL has also had several sharp pullbacks during the uptrend. It’s not unusual for the stock, especially considering this has been the biggest market pullback.

Concerns about global growth going forward have soured investors of late. But profits will continue to rise because Global already locked in much higher rates for long-term contracts that have existed for many years and greatly expanded their fleet. In addition, container shipping demand and rates should stay buoyant even as the global economy slows. BUY

Global Ship Lease, inc. (GSL)Next ex-div date: August 23, 2022 est.

ONEOK Inc. (OKE – yield 5.6%) – This midstream energy company stock is a similar story to EPD, except that OKE has underperformed the energy sector this year after outperforming last year. There wasn’t as much ground to make up and earnings aren’t skyrocketing because they never went down much during the pandemic. But the company has a reliable and growing business with inflation adjustments built into its contracts. Plus, it’s an amazing dividend and the stock should trend higher over the course of the year. BUY

ONEOK Inc. (OKE)Next ex-div date: July 28, 2022, est.

Realty Income (O – yield 4.4%) – The stock is doing OK in this market. Sure, it’s down about 4% for the year. But the market and the REIT sector are down a lot more. O is a legendarily safe income stock and investors seek it out in this market. If the market continues to face selling pressure, O should go down less. And it should slowly edge higher when the market stabilizes while paying a great income. O should rise again over the course of the year as investors reevaluate. It has solidly growing earnings from last year’s acquisition and a reduction in Covid restrictions. HOLD

Realty Income (O)Next ex-div date: June 30, 2022, est.

Dividend Growth Tier

To be chosen for the Dividend Growth tier, investments must have a strong history of dividend increases and indicate both good potential for and high prioritization of continued dividend growth.

AbbVie (ABBV – yield 3.8%) – After soaring in the earlier part of this year, ABBV has pulled back about 17% from the April high. Despite the recent weakness, it has still provided a double-digit positive return in this down year for the market. Part of the reason for the drop is that earnings were somewhat disappointing. Another part is that the stock almost always pulls back after a surge. The stock could languish for longer but the longer-term prognosis remains excellent as AbbVie has a superior pipeline and still sells at a very cheap valuation. HOLD

AbbVie Inc. (ABBV)Next ex-div date: July 13, 2022, est.

Broadcom Inc. (AVGO – yield 2.9%) – Broadcom is acquiring cloud software company VMware (VMW) for $61 billion. The stock fell initially after the deal leaked but has moved nicely higher since as the market has warmed to the idea. The sheer size of the deal is startling. But Broadcom can pull it off. The tech giant has a long history of being a serial acquirer and it has served shareholders well. The stock returned over 2,000% over the last 10 years. It’s a big move away from the chip business which is notoriously volatile. It bolsters Broadcom’s superior positioning for the future of more cloud-based solutions. The company is also a buy on fundamentals outside of this acquisition. It’s solid for both the long and short terms. BUY

Broadcom Inc. (AVGO)Next ex-div date: June 21, 2022, est.

Brookfield Infrastructure Partners (BIP – yield 3.4%) – This infrastructure asset owner seems to trend higher at a snail’s pace no matter what the market does. It had spiked higher in April but then realized it’s BIP and pulled back to resume its torturously slow ascent. Business is solid. The transportation assets are rebounding as Covid restrictions have abated and the recent midstream energy acquisition is accretive and serving it well. BIP is ideally suited for this market. It’s a safe dividend payer with built-in inflation protections. Just hold on and collect the dividend. It should serve you well over time. (This security generates a K-1 form at tax time). HOLD

Brookfield Infrastructure Partners (BIP)Next ex-div date: August 27, 2022 est.

Discover Financial Services (DFS – yield 2.2%) – The credit card company stock has been under pressure lately and is down since being added to the portfolio in February. But it’s only slightly lower YTD and has significantly outperformed both the overall market and the financial sector. It’s not a normal financial stock and certain aspects of the current environment serve it well.

Operationally, the company is killing it. Profits are soaring and they just raised the dividend 20%. Plus, there’s a big bonus coming. As consumers run out of stored up cash they will inevitably start charging more. Discover will benefit from the higher balances at exorbitant interest rates. It could get knocked around more in the near term but it should be well positioned for the longer term. HOLD

Discover Financial Services (DFS)Next ex-div date: August 25, 2022, est.

Chevron Corp. (CVX – yield 3.3%) – It’s been a tough year for the market but not for CVX. Energy is on fire and CVX is up over 50% YTD. Chevron is the most levered to oil prices of all the oil majors and that’s a good thing when prices continue to soar. The high prices and strong demand are directly related to profits. Chevron expects to grow earnings by 100% this year and is well on track so far.

The stock is near the high and it begs the question: Is it time to take profits? We already took profits on half of the position, but it seems worth holding the other half. The great risk to energy prices remains to the upside. Plus, CVX still sells at a price/earnings ratio well below the overall market as well as its five-year average. HOLD

Chevron Corp. (CVX)Next ex-div date: August 18, 2022, est.

Eli Lilly and Company (LLY – yield 1.2%) – There is more great news from Lily’s phenomenal pipeline. One of its existing Diabetes drugs (Mounjaro) posted impressive late-stage trial results for weight loss. That’s a huge market and another potential game-changer for the drug company. The stock soared to new high after the news but has since pulled back, because that’s what the stock almost always does after a surge.

But there will likely be more good news on the way. Lilly is the best in business at developing drugs and treatment for illnesses at a time when the population is aging at warp speed. That’s a winning formula. There is also the likely approval of its potential mega-blockbuster Alzheimer’s drug before the end of the year. HOLD

Eli Lilly and Company (LLY)Next ex-div date: August 13, 2022 est.

Innovative Industrial Properties, Inc. (IIPR – yield 5.2%) – This marijuana farm REIT has been acting better since being added to the portfolio in last month’s issue. IIPR is up about 8% while the market is in negative territory over the past month. But the stock is down nearly 50% YTD. It got absolutely clobbered as the market has been particularly unforgiving to last year’s superstars. But I believe the selling is way overdone.

The company is projected to grow earnings 37% this year and it sells at a price/earnings ratio close to that of the overall market. It also pays a large and rapidly growing dividend. It could fall further if the market gets dicey again. But it should be a lot higher six months to a year from now. BUY

Innovative Industrial Properties, Inc. (IIPR)Next ex-div date: June 30, 2022, est.

Intel Corporation (INTC – yield 3.4%) – It’s been an awful year for technology, but INTC is down less than the sector. That’s because the stock crashed before the sector selloff and didn’t have any excess to burn off. INTC is oversold and undervalued ahead of what is likely to a strong several years for earnings growth. Things could get a little worse in the near term, but I like the stock very much as a longer-term play. BUY

Intel Corporation (INTC)Next ex-div date: August 5, 2022, est.

Qualcomm Inc. (QCOM – yield 2.1%) – Technology has been crushed and QCOM has not been immune. It’s down 22% YTD and 28% from the high. This company is growing earnings by 50% and recently upgraded guidance for this year and next and received a slew of analyst upgrades. Meanwhile, QCOM sells at a price/earnings ratio of just 14. The only thing that has changed since its booming days is the market’s treatment of the technology sector. Some technology companies may deserve the selloff. But not QCOM. BUY

Qualcomm Inc. (QCOM)Next ex-div date: September 2, 2022, est.

Valero Energy Corp. (VLO – yield 2.9%) – It’s another new high. Say what you will about the current economic and market environment, but VLO is loving it. The stock is up a staggering 87% YTD. Gas prices are through the roof and projected to go much higher over the summer. Crack spreads, which determine profits margins, are the highest in many years and demand remains very strong. VLO also sells at a reasonable valuation. The stock should have more to go. HOLD

Valero Energy Corp. (VLO)Next ex-div date: August 11, 2022, est.

Visa Inc. (V – yield 0.7%) – V has been knocked around because of economic growth concerns. It has spent much of this year under the 200 per share level, although it has recovered well above that range recently. But the company itself is killing it. The tremendous earnings boost it gets globally from the removal of Covid restrictions easily outweighs slower global growth or geopolitical uncertainty. Visa’s earnings blew away expectations with YOY revenue growth of 25% and 30% earnings growth. This stock is poised to move higher if the market continues to stabilize. HOLD

Visa Inc. (V)Next ex-div date: August 12, 2022, est.

Safe Income Tier

The Safe Income tier of our portfolio holds long-term positions in high-quality stocks and other investments that generate steady income with minimal volatility and low risk. These positions are appropriate for all investors, but are meant to be held for the long term, primarily for income—don’t buy these thinking you’ll double your money in a year.

NextEra Energy (NEE – yield 2.1%) – This alternative energy utility stock was a superstar last year and is also a great stock to own in a recession or slow economy. It had a sharp pullback earlier this spring as there was trouble with supplies of solar panels in Asia. But tariffs are being reduced and the stock has recovered sharply over the last several weeks. It’s up 14% in less than a month in a down market. This is a great utility and a phenomenal way for conservative investors to play the growth in clean energy. HOLD

NextEra Inc. (NEE)Next ex-div date: August 28, 2022, est.

Xcel Energy (XEL – yield 2.6%) – This stock has been terrific. It has outperformed both the overall market and the utility index this year and is up over 12% for the past month. It’s one of the best-performing non-energy stock this year. The stock price has leveled off since making a high in early April. But it recently made a new all-time high and isn’t pulling back. XEL is a great stock for the future as clean energy should remain popular and it is also good in case of continuing market selling. HOLD

Xcel Energy Inc. (XEL)Next ex-div date: June 14, 2022

Dividend Calendar
Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates are estimated.

The next Cabot Dividend Investor issue will be published on July 13, 2022.

About the Analyst

Tom Hutchinson

Tom Hutchinson is the Chief Analyst of Cabot Dividend Investor, Cabot Income Advisor and Cabot Retirement Club. He is a Wall Street veteran with extensive experience in multiple areas of investing and finance.

His range of experience includes specialized work in mortgage banking, commodity trading and in a financial advisory capacity for several of the nation’s largest investment banks.

For more than a decade Tom created and actively managed investment portfolios for private investors, corporate clients, pension plans and 401(K)s. He has a long track record of successfully building wealth and providing a high income while maintaining and growing principal.

As a financial writer, Tom’s byline has appeared in the Motley Fool, StreetAuthority, NewsMax, and more. He has written newsletters and articles for several of the nation’s largest online publications, conducted seminars and appeared on several national financial TV programs.

For the past seven years, Tom has authored a highly successful dividend and income portfolio with a stellar track record of success. At Cabot, Tom provides monthly Cabot Dividend Investor issues, regular weekly updates on every portfolio position and a weekly podcast discussing goings-on in the market.