January 25, 2023

An Optimistic Start to 2023

We are just weeks into a year that has so far been better and different than last year.

The S&P 500 is up 4.7% in January after falling 19.4% in 2022. The winners and losers are also different. The best performing sectors are last year’s worst performing, technology and consumer staples. The worst performing sectors are last year’s best performers (with the exception of energy): healthcare, utilities and consumer staples.

Is this a portent of things to come or just a temporary reallocation?

It probably is indicative of this year’s performance, but not right away. I wouldn’t be a bit surprised if technology and consumer staples end the year among the best performers in the market. But there may be more reversals before then.

The market seems to be pricing in an optimistic scenario. Investors are cautiously expecting somewhat of a soft landing, whereby inflation gets under control and the Fed pipes down without too much damage to the economy. While that scenario is possible and I hope it happens, it’s too soon to confidently embrace it.

The timing and severity of a likely recession remains to be seen. At some point it may not be possible for inflation to decline further without further decline in the economy. Inflation could be stickier and the economy could be worse in 2023 than the market currently expects. We’ll see.

It’s also possible that this market has already seen the bottom and that there won’t be much more pain before things turn around. But even if that turns out to be the case, the rally is unlikely to muster lasting upside traction until there is more clarity on the timing and severity of an economic downturn.

A big turnaround is likely in 2023 at some point. But it might be a bouncy while before that happens. Until there is further evidence of an economic bottom and a meaningful market turnaround, the Cabot Dividend Investor portfolio will remain more conservatively postured.

The position in Medical Properties Trust (MPW) is being upgraded to a BUY for reasons explained below. The current one-half position in MPW will be made a full position and the stock allocation will be increased and the cash allocation decreased accordingly.

Recent Activity

January 11
Purchased Vanguard Long-Term Corp. Bond Fund (VCLT) - $80.35

January 25
Medical Properties Trust (MPW) – Rating change “HOLD” to “BUY”
Xcel Energy (XEL) – Rating change “BUY” to “HOLD”

Current Allocation
Stocks 32.5%
Fixed Income 20%
Cash 47.5%

High Yield Tier

Enterprise Product Partners (EPD – yield 7.5%) – It’s another good year so far for the midstream energy partnership. It’s up more than 8% in January after returning a market-shellacking 18.4% in 2022. Of course, it hasn’t been lighting the world on fire but it doesn’t have to since it pays you a whopping 7.5% per year just to hold it. EPD is also well positioned for possible perils ahead in 2023 as it can continue to generate solid profits in recession and inflation. It should also perform if things go well and the market rallies. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.5%) – Let the good times roll. OKE is on a bit of a tear. It’s up over 6% in January and a whopping 38% from the October lows. The price is at the highest point since last April and now within 10% of the 52-week high. It should have more room to run as revenues should be steady even in a recession and the stock price is still below the pre-pandemic high and earnings are much higher now. BUY

Realty Income (O – yield 4.5%) – The legendary income REIT isn’t exciting, but it tends to deliver as advertised over time. O has delivered a positive return over the last year while the overall market is down double digits. It also returned more than 17% over the last three months and has finally overtaken the elusive 65 per share level. Hopefully, O can keep running. It’s a popular and defensive income stock that should hold its own in the event of a recession. BUY

The Williams Companies, Inc. (WMB – yield 5.4%) – WMB has been a big laggard in the midstream energy space of late. It held up much better than its peers when the sector took a hit in the fall. But it has foundered in the sector recovery. The market seems to like its defensive characteristics best and it tends to rally with the more defensive plays. But defensive stocks have been taking a back seat of late. They may come back again in a big way before long. Prospects for this year remain excellent. The company posted strong earnings last quarter because of resilient natural gas demand. BUY

Medical Properties Trust, Inc. (MPW – yield 8.4%) – What’s gotten into MPW? After an abysmal 2022, this undervalued and high-paying hospital REIT is up over 23% so far in January and 37% in the last three months. It has left the low in the dust and risen to the highest level since September. The stock had been grossly undervalued with a safe and high dividend and 30% profit growth in the last quarter. All the things it had going for it remain in place as MPW is still a billion miles from the 52-week high. Now it has momentum going for it too. Move from HOLD to BUY

Dividend Growth Tier

AbbVie (ABBV – yield 4.0%) – ABBV was one of the very best stocks to own as the markets struggled in the fall. But it has pulled back during the recent rally. Its near-term fortunes seem to be tied to the desirability of defensive stocks and they have been the worst performing YTD. The defensive affiliation could be a good thing if the market turns south again. And ABBV also has some powerful longer-term factors going for it. AbbVie has 11 other drugs besides Humira that are on track to top $1 billion in net revenue this year. It also continues to sell at a cheap valuation. HOLD

Broadcom Inc. (AVGO – yield 3.2%) – Sure, the technology stocks have performed much better lately. But this software and chip company goliath has been trending consistently higher since October. It’s made a very big move and is up about 40% from the low. Its fortunes are somewhat tied to the technology sector but it has done a lot better than its peers in the tough market. That could be because Broadcom reported 21% revenue growth and a 34% earnings increase over last year in the last quarter. AVGO is up 30% over the last three months and should really get a move on if the technology sector recovers. HOLD

Brookfield Infrastructure Partners (BIP – yield 4.1%) – The infrastructure juggernaut had been sputtering but has recently gained steam. BIP got whacked along with the other defensive stocks in September but then didn’t participate in the recovery. When other defensive stocks took off as interest rates fell back and the economy slowed, the strong dollar kept BIP back. But it always had great qualities that enable profits to remain strong in both a recession and inflation. The selling got overdone and investors are realizing the value. The stock is up over 16% so far in January. (This security generates a K-1 form at tax time). BUY

Eli Lilly and Company (LLY – yield 1.3%) – LLY is pulling back a little after a phenomenal 2022 when it returned 34% in a bear market. LLY is down 7% in the last month. The main reason is that healthcare and other defensive stocks have been down as cyclical stocks have soared in the recent rally. But Lilly also had some bad news: Its Alzheimer’s drug was denied fast-track approval. The reason was because of some data discrepancy and not bad trial results and the stock only fell around 2% on the news. It delays approval but doesn’t change the story. HOLD

Intel Corporation (INTC – yield 4.8%) – INTC has been a dog as it moved with the bad fortunes of the technology sector even after it had fallen a lot already. The company should be on a significantly improving trajectory longer term as it is investing heavily in growth areas. In the short term, things may be improving as well. The beleaguered chip company is well off the low of September and is again near 30 per share, the high point of the recent range. Hopefully, INTC can break out from here. HOLD

Qualcomm Inc. (QCOM – yield 2.5%) – It’s been better days indeed of late for QCOM. It’s up 20% so far this month and cracked the 130 per share level for the first time since September. It has been trending higher along with the sector but it also got a big upgrade as Barclays came out with a very positive report on the stock’s prospects this week. The analyst said that the worst is over for chip stocks and QCOM should be among the first in the sector to rebound. Before long, the market, which tends to anticipate six to nine months ahead, may start pricing in a real recovery in the sector. HOLD

Visa Inc. (V – yield 0.8%) – V is looking good! The stock is moving towards 230 per share and is at the highest level since last March. It’s up 8% this month and 18% over the last three months. Last year’s bear market was terrible for cyclical and financial stocks. But V held up remarkably well under the circumstances, returning -3.4% for 2022. And the market situation is likely to get a whole lot better later in 2023. V is typically one of the first stocks to recover when the market turns. We’re seeing the evidence of that already. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.1%) – Utilities were riding high in the market tumult. But now the sector is taking a back seat in the recent rally as the more downtrodden and cyclical sectors have come alive. But NEE is hanging tough and is only down 1% YTD. It’s a great stock that should remain resilient when the overall market rallies and outperform when it struggles. NEE has the right stuff for a market that can both make new lows and rally out of the bear market in 2023. BUY

Xcel Energy (XEL – yield 2.8%) – This clean energy utility stock had been a superstar when the sector was hot. It is now understandably cooling off. It has pulled back more than 6% in the past two weeks after rallying sharply late last year. That’s no big deal. But this stock tends to be bouncy and it would be very much in character for the stock to fall further on the current down move. For that reason, it is being downgraded to a HOLD. I still like NEE over the rest of the year and will likely upgrade the rating when the stock breaks the downward trend. Move from BUY to HOLD

USB Depository Shares (USB-PS – yield 5.4%) – So far, it has been a great move to lock in this high fixed rate yield when rates were near the high. The price has appreciated and the position has returned 15% in the past couple of months. Locking in the high rates may turn out to be a good longer-term move as well. BUY

Invesco Preferred ETF (PGX – yield 6.3%) – Ditto what I said about USB-PS. Longer-term rates are coming down as the economy slows. And most economists are predicting a recession this year and investors have been flocking toward fixed income. This provides diversification from stocks with a high income ahead of a period when interest rates could fall back. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.4%) – The same interest rate story for the last two positions above applies here. The timing is probably good to lock in higher rates on investment grade bonds ahead of a likely recession. BUY