July 19, 2023

Trust in Diversification and Megatrends

The good year is continuing. The market rally is broadening. And pundits increasingly have positive things to say about the second half of the year.

Artificial intelligence isn’t the only mania capturing the imagination of investors. The soft-landing belief is also widespread. Investors see inflation falling fast, the Fed nearly done hiking rates, and no recession. It looks like we can get through this rate hiking cycle, the steepest in decades, without much economic pain.

That’s the way things look now. And I certainly hope that is the case. But the market could also surprise investors in the second half. There’s no sign of recession yet, but there might be in the quarters ahead. The Fed is still making hawkish noises and still higher rates could reignite bank failures.

That’s the market. It could move 10% either way at any time. This portfolio has certain defenses against our human inability to predict the short-term gyrations of the market, diversification and trend investing.

There are more cyclical positions in the three technology stocks, Intel (INTC), Qualcomm (QCOM), and Broadcom (AVGO) as well as Visa (V) and Hess (HES), that will benefit if current trends continue. It also has defensive positions in healthcare, utilities, and midstream energy, which are benefiting from the broadening rally.

It also pays to invest in front of a megatrend like the aging population or the technological revolution. There’s a reason why AbbVie (ABBV) is up over 100% since being added to the portfolio despite the Humira patent expiration, and Eli Lilly (LLY) is up over 200%. These companies have the powerful tailwind of the aging population.

The technology stocks should also be propelled in the quarters and years ahead by the additional growth catalyst of artificial intelligence. Companies can’t afford to be left behind and there is a mad scramble to spend money on AI products and services, to the benefit of companies that offer them. That’s why INTC and QCOM were upgraded to “BUY” last week.

The market could do anything in the second half. But these trends will persist regardless of the next scary headline, or GDP report, or who gets elected president.

Recent Activity

June 21

ONEOK Inc. - Rating change “HOLD” to “BUY”

June 28

Realty Income – Rating change “HOLD” to “BUY”

July 12

Purchased Digital Realty Trust, Inc. (DLR) - $117.75h

Qualcomm (QCOM) – Rating change “HOLD” to “BUY”

Intel (INTC) - Rating change “HOLD” to “BUY”

High Yield Tier

Digital Realty Trust, Inc. (DLR – yield 4.1%) – Despite an amazing track record since this REIT IPO’d in 2004, it had struggled since the beginning of last year. It was partially because of the tough technology and REIT markets, but also because of rising debt, which Digital is in the process of rectifying. It’s notable that DLR has gotten a huge bump from the AI craze since May. And for good reasons. The torrid pace of adaptation of the new technology will increase demand and usage of its data centers. The stock was cheap already and just got another huge tailwind. BUY

Enterprise Product Partners (EPD – yield 7.5%) – Slowly but surely EPD is getting the job done while paying a massive yield that is rock solid. EPD has returned over 15% YTD despite being in a sector that hadn’t participated in the market rally for almost the whole first half of the year. It’s also less than 2% from the 52-week high and may be headed for a breakout. The partnership also increased the quarterly distribution by 5.4%. Business is solid while most company earnings are shrinking. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 6.0%) – This midstream energy company has really sprung back after getting clobbered when the market hated its purchase of Magellan Midstream Partners; OKE has regained all of what it lost in May and then some. The deal will turn ONEOK from a natural gas operator to a diversified midstream company that services oil and refined products as well. The deal is a longer-term positive. And OKE should remain a solid performer with a high and safe dividend and reliable earnings in an earnings-challenged environment. HOLD

Realty Income (O – yield 5.1%) – After a very lame first half this legendary income stock is showing signs of life. It has a better than 10% bounce off the 52-week low and looks to have some momentum. It’s a tough earnings environment and investors are likely to come back to craving that 5% yield with a monthly payout if the market flattens out in the second half. O still sells well below the pre-pandemic high, despite having higher earnings. BUY

The Williams Companies, Inc. (WMB – yield 5.6%) – This had been a tough year for defensive stocks and energy stocks. But the broadening rally is lifting WMB. The stock is up over 17% since the beginning of June. And the momentum could last. WMB is still well off the 52-week high, and earnings have been growing strongly. Earnings per share grew a whopping 36% over last year’s quarter as natural gas volumes remained strong and growing. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 4.4%) – It’s been a terrible stretch for ABBV since May. The stock is down almost 20% from the 52-week high. This has not been a good recent phase for the pharma powerhouse. ABBV is a notoriously bouncy stock and the downward move started with disappointing earnings where its new drugs grew below projections in the long awaited Humira patent expiration. The company has a phenomenal pipeline capable of replacing lost Humira revenues in the next couple of years. But it appears to have already bottomed out and AbbVie reports second-quarter earnings late next week. Hopefully they will be positive. BUY

Broadcom Inc. (AVGO – yield 2.1%) – WOW! The initial AI surge isn’t giving anything back. AVGO just crossed over 900 per share. I expected this stalwart and big AI beneficiary to pull back after the massive surge. But AVGO is hanging tough near the high point of the recent much-higher range. The AVGO return now exceeds 100% since being added to the portfolio in early 2021. It is no doubt a great company and returns should be good over the next couple of years. The road higher may not be as bumpy as expected. HOLD

Brookfield Infrastructure Partners (BIP – yield 4.3%) – The infrastructure company stock has pulled back from the recent high and is down in June. But BIP is still around the higher levels of the recent range. The stock got new life after a sluggish period because Brookfield reported a solid earnings quarter with funds from operations (FFOs) per share growth of 12.5% last quarter. BIP is still reasonably priced with a good dividend ahead of a promising second half of the year. (This security generates a K-1 form at tax time.) BUY

Eli Lilly and Company (LLY – yield 1.0%) – LLY has pulled back somewhat from the huge spring surge. But it is still holding strong at much higher levels. There was more good news about its late-stage Alzheimer’s drug yesterday. A phase 3 trial showed the drug significantly slowed cognitive decline in people in the early stages of the disease, which further shows the drug’s potential as a mega-blockbuster. But the good news didn’t boost the stock. LLY has now returned 44% since February and over 200% since being added to the portfolio a little less than three years ago. HOLD

Hess Corporation (HES – yield 1.3%) – The exploration and production company stock has been going sideways for two months but got a bump recently. Hess is sensitive to energy prices, although not as much as its peers because of its ability to increase production at low costs. Oil prices have risen recently on the stronger-than-expected economy. There are also OPEC and Saudi production cuts. We’ll see if energy prices rise to a higher level now or in the quarters ahead. BUY

Intel Corporation (INTC – yield 1.5%) – INTC got a huge 30% bump with confidence in its chip production ability and the indirect benefits from the soaring demand for AI-related products and services. We’ll see if Intel can slay the competition with its new plan and its new chips down the road. But a surge in technology demand across the board provided by the magnitude of the AI frenzy will lift all boats. Intel’s future got a lot better with the recent AI bump. It might increasingly be seen as a cheap stock with a brighter future. BUY

Qualcomm Inc. (QCOM – yield 2.6%) – QCOM pulled back after the big rise in late May and early June from the AI craze. But it has regained all of that decline in the past week. Qualcomm has cutting-edge chips with AI capabilities and describes itself as the “on-device AI leader,” and the company should benefit mightily from the increasing shift towards AI and profits are now likely to soar sooner than previously expected. Although Qualcomm doesn’t benefit as directly and immediately from AI as some other companies, eventually the AI boost will find its way to mobile devices and QCOM will be in a great position. BUY

UnitedHealth Group Inc. (UNH – yield 1.4%) –The health insurance goliath is getting a huge gain since announcing earnings last week. The stock declined in June after the company said it was seeing rising costs from pent up demand for elective surgeries after the pandemic. But the company reported higher than expected earnings this quarter and raised its yearly guidance. The higher costs aren’t hurting the bottom line as originally thought. UNH is up 12% in just a few days and is now over 500 per share and may have further to run on this surge. BUY

Visa Inc. (V – yield 0.7%) – V loves the surprisingly strong economy and increasing soft-landing talk. Inflation is down, GDP was revised higher, and the consumer is still strong. In addition, Visa just purchased a Brazilian fintech company that rival MasterCard (MA) also wanted and beat them out. As a result, V soared to a new 52-week high and the highest price in about two years. The stock has broken out to a new level and may have further to run. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.6%) – This combination regulated and clean energy utility stock is currently at the lower end of its range. It is still more than 20% below the 52-week high. It has not been a good year for defensive stocks and the price is reflecting that. But the rally has broadened in the last month and there is an earnings recession. This company is targeting earnings per share growth of 6% to 8% annually through 2026 and 10% per year dividend growth through at least 2024. Hopefully, the second-quarter earnings report next week can turn things around. BUY

Xcel Energy (XEL – yield 3.2%) – This clean energy utility stock is also languishing. It has been trending lower since the beginning of April and still flounders, although it has shown some life in the past few weeks in the broader market rally. NEE tends to be bouncy and it is near the low point of the recent range. Defensive stocks are still a safe and promising place to be as the economy slows and overall market earnings continue to fall. This stock has become cheap ahead of a period of likely market outperformance. Xcel also reports earnings later this month. BUY

USB Depository Shares (USB-PS – yield 5.9%) – After pulling back in sympathy with the overall bank selloff, this preferred issue has trended higher. This is a preferred stock of one of the country’s largest banks that has rising deposits. The bank is rock solid, and this security should continue to move according to interest rates. Rates moved near the high point again but should fall if and when the economy slows. BUY

Invesco Preferred ETF (PGX – yield 6.4%) – Longer-term rates are bouncing around with an upward bias lately. But rates should fall in the event of a slowing economy and this fund should provide a good offset if the stock market stumbles. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.5%) – There could be some near-term turbulence with the price on the way to solid longer-term returns and diversification. The increased risk of a recession this year bodes well for the near-term total return of this fund. BUY