July 24, 2024

Still Strong, but Vulnerable

The market took a jab to the face last week, but it still looks good. It’s still a strong market. But one that is showing some vulnerability.

After a great first half and a strong July, the market pulled back 2% last week, reversing most of the July gains. The culprit was a Biden administration announcement of new AI chip export restrictions to China. That news also combined with a perceived likelihood of a Trump presidency and the possibility of further trade frictions with China. The technology sector, and semiconductor stocks in particular, took it on the chin.

Many chip companies are dependent on China sales, and this was unwelcome news. But similar news has occurred before, and technology still has the AI catalyst which tends to flex its muscle during earnings season. Tech stocks and the S&P seem to be recovering already early this week.

No market goes straight up. And this has been a very minor hit so far. But the market is high, having spent most of the earlier part of July making a series of new highs. Strong, ever-higher markets make me nervous. And this market revealed some vulnerability to a bad headline, which toppy markets tend to do. The rally may forge on. But at some point, it has to take a hit, or at least flatten out.

That’s okay. I still believe the market will be higher by the end of the year unless interest rates rise significantly or the economy spirals towards recession, both of which I consider unlikely.

Recent Activity

July 10
Purchased Cheniere Energy. Inc. (LNG) - $174.92
SOLD Marathon Petroleum Corporation (MPC) - $162.18

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.2%) – This great infrastructure company stock finally got a move on. It is now at the highest price since last fall. It’s up over 14% in July alone. BIPC had been a stellar performer for many years prior to inflation and rising interest rates. Higher interest rates increase borrowing costs and limit the company’s ability to profitably fund growth projects. But there is pent-up upside in BIPC when interest rates significantly decline. The operational performance has been sound. Brookfield reported strong earnings last quarter and will report again in two weeks. (This security generates a K-1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 7.0%) – This midstream energy partnership just hit a new 52-week high, it hasn’t had the big move this month that the REITS had because it hadn’t been beaten up like those stocks. It just continues to trend higher at a snail’s pace. It has been trending higher for nearly four years. As this rally broadens out, the high yield and inflation protection make midstream energy companies an excellent choice. Last quarter’s earnings again showed Enterprise is solid operationally and that huge distribution yield is safe. The company reports the latest quarter next week. (This security generates a K-1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 13.7%) – The massive-yielding BDC pulled back last month after the quarterly payout went ex-dividend. When a yield is this high and this important to the stock, the ex-date has a noticeable impact. But after the BDC absorbed the ex-dividend, it has been crawling back toward the high and is now within pennies. So far, FSK is delivering as advertised. It’s continued to pay the massive dividend and the price has appreciated since it was added to the portfolio. BUY

Main Street Capital Corporation (MAIN – yield 5.6%) – Some of the best income stocks are rallying again in the broadening market rally. This Business Development Company pulled back somewhat after making a high in early May, but it has moved higher again since and made a new 52-week high last week. It’s still in an uptrend that began last fall and has been steady for weeks. MAIN paid the regular monthly dividend of $0.72 per share in the second quarter, marking a 6.7% increase year over year, as well as a $0.30 supplemental dividend. The current yield is reflected above as 5.6% because I only include the regularly scheduled dividend. Including the supplemental dividends, the yield is 8.1%. BUY

ONEOK Inc. (OKE – yield 4.7%) –This is an amazing midstream energy company. Earnings are rock solid with inflation protection and recession resilience. After a rare period of weakness between the middle of May and the middle of June, as investors focused on AI, OKE appears to be on its way back to the high. The high yield should be at a premium in a likely more sideways market going forward. It is a more volatile stock than the other midstream companies that have been in the portfolio. That has been a good thing in this market rally, and OKE has already returned 22% YTD. BUY

The Williams Companies, Inc. (WMB – yield 4.2%) – This midstream company stock made a new 52-week high this week. WMB tends to be the least volatile of the three in the portfolio. It didn’t fall in price as much during the earlier months and, as the environment for the subsector improved, it moved back to new highs before the other midstream energy stocks caught up. Williams reported excellent earnings last quarter and will report again in a couple of weeks after having guided to the upper half of 2024 estimates. WMB is still in an uptrend that began in the middle of February. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.6%) – The cutting-edge pharma stock got a 6% bump higher since early this month aided by an analyst upgrade. An analyst at BMO Capital raised the price target from 180 per share to 214 (currently 173). Although Humira sales are lower after coming off patent, it could be a lot worse, and already newer drugs Rinvoq and Skyrizi are offsetting the shortfall. Management said the company expects to return to moderate growth this year and robust growth next year. Earnings will be reported later this week. Hopefully, ABBV gets a boost. BUY

American Tower Corporation (AMT – yield 3.1%) – AMT had a surge earlier this month but has not pulled back. It was more beaten down than some of the other REITs and probably has more upside in the near term. AMT has been bouncing around with interest rates for a long time. But it has rallied to within about 4% of the 52-week high. The cell tower REIT reports earnings next week, and a good report could propel it to a new high. The REIT rallied strongly after beating estimates last quarter. It also raised guidance for 2024. It’s a solid REIT with stronger growth than most of its peers, but interest rates will be the biggest determinant of performance in the near term. BUY

Broadcom Inc. (AVGO – yield 1.3%) – This AI chip and software giant took a gut punch last week when reports of new AI chip export restrictions to China by the current Administration triggered a steep selloff in semiconductor stocks. There may also be some concern about trade relations with China in the event of a Trump presidency. But things like this have happened periodically. AVGO is already recovering from the recent low and I believe it is highly likely that the price creeps back to a new high, especially with earnings reports in the weeks ahead. HOLD

Cheniere Energy, Inc. (LNG – yield 1.0%) – There isn’t much to say about this newest portfolio addition in the short time since it was added to the portfolio. It’s up so far along with the rest of the market. The LNG export market has a very promising future as Europe and Asia will have a huge demand for the stuff for many years to come. In the near term, LNG is up 9% in the last month and appears to be on its way back to the 52-week high. BUY

Digital Realty Trust, Inc. (DLR – yield 3.1%) – This data center REIT pulled back about 4% since last week’s new high amid the tech turbulence. It had made a big move higher since April. But this weakness in technology may be short-lived as earnings could be a catalyst for more upside in the sector. REITs have come alive again, and DLR is also moving higher with the group. It’s been bouncy, but make no mistake about it, DLR has vastly outperformed the REIT index over the past several years because of the data center exposure. BUY

Eli Lilly and Company (LLY – yield 0.6%) – It’s been a rare pullback for this superstar. LLY fell over 10% in a week after Roche Holding (RHHBY) reported strong clinical results for its new weight-loss drug. It could be significant competition that could limit future sales. But this was inevitable, and the weight-loss market is massive. Meanwhile, Lilly’s weight loss drug, Zepbound, was just approved in China. The competition news is a given for any pharmaceutical company, and LLY has already been moving off the recent low. Everybody wants to get into this lucrative market and there will be more competition. We’ll see how good these drugs are and how long it takes to get them to market. Lilly also has its Alzheimer’s drug up for FDA approval soon. HOLD

McKesson Corporation (MCK – yield 0.4%) – The supply chain pharmaceutical giant stock hasn’t made a new high since late June. In fact, it moved 5% below the high. That’s okay. Nothing goes straight up all the time. MCK is still very much in an uptrend that began after the pandemic, and it’s still up over 23% YTD. McKesson indicated earnings growth of 14% to 17% for this year. The pharmaceutical supply chain Goliath dominates a market that grows all by itself because of the aging population. The next earnings report in a couple of weeks could reignite MCK. BUY

Qualcomm Inc. (QCOM – yield 1.7%) – The technology sector, and chip stocks in particular, took a huge hit last week. The technology-laden Nasdaq index fell over 3.6% last week alone. QCOM fell 8% in the same week after having already declined nearly 15% from the high. The issue was the Biden administration put additional restrictions on AI chip exports to China and at the same time a Trump presidency seemed more likely. Chip makers that sell to China took a huge hit because of not only the export curbs but fears of retaliation. This sort of thing happens periodically. We’ll see if the market overreacted. Qualcomm is still well positioned ahead of AI coming to mobile devices, which should trump any of these issues over time. BUY

UnitedHealth Group Inc. (UNH – yield 1.5%) – The previously beleaguered healthcare insurance giant got a new lease on life. After wallowing in oblivion for seemingly forever, UNH soared about 18% in less than two weeks and made a new 52-week high. Earnings drove the stock. UnitedHealth beat earnings forecasts as it added more patients and pharmaceutical customers despite a continuing negative effect on profits from the February cyberattack. UnitedHealth also reaffirmed its previous guidance for 2024. The market is apparently happy and reassured. BUY

Visa Inc. (V – yield 0.8%) – The payment processing global Goliath again reported stellar earnings last quarter. The stock has been a dud for a while now, probably due to a litigation issue, but it reports second-quarter earnings this week. Hopefully, V gets a bump from these earnings like it has at times in the past. We’ll see. It is still thriving from cross-border transactions. Visa also reported upbeat guidance for the rest of this year. But it has been floundering since March. Hopefully a good report gets it out of this funk. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.1%) Earnings – The niche REIT that owns and operates innovation campuses reported earnings on Monday that were basically solid. The REIT beat on earnings and missed on revenue and reiterated guidance. Yet, earnings were only up 5.4% while revenues jumped 7.4%. The lease rates were solid, and Alexandria reported a healthy amount of new acquisitions. So far, the market is poopooing the results, and ARE was down 3% at midday on Tuesday. It may be giving back some of its recent advance in the absence of an exciting earnings report. BUY

NextEra Energy (NEE – yield 2.8%) – Things have been very bouncy but mostly good for this combination regulated and alternative energy utility. Yeah, it’s down almost 9% from the high made at the end of May. But it is still up 33% since early March. The stock price is still well below the all-time high but it has come way off the lows of late 2023. NEE has become a more volatile stock over the past year as the interest rate narrative changes. But NextEra posted solid earnings last quarter and reports the most recent quarter this week. NEE had been a superstar performer before inflation and rising interest rates. I expect solid performance going forward over the longer term. HOLD

USB Depository Shares (USB-PS – yield 5.5%) – This preferred stock has just weathered a strong interest rate storm and has still returned about 20% since being added to the portfolio. I believe it is unlikely that rates eclipse the high of this cycle. Rates have fallen over the last month and may be a harbinger of things to come. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.0%) – Ditto for VCLT. It doesn’t like rising rates. But that’s okay unless rates rise to new levels beyond what has been seen in this cycle. I believe that VCLT is still well positioned after the worst two years for fixed income ever. BUY

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