June 20, 2024

Megatrends Drive the Market Higher

This market just continues to forge ever higher. The S&P 500 closed at new all-time highs four times last week. The index is now up 15% YTD, and we’re not even at the halfway point.

It did look like the rally was running out of gas at the end of last month. But it’s managing to bust a move higher again. However, the rally is somewhat deceiving. It’s only about artificial intelligence and technology.

The S&P is up 3.5% this past month. But that’s only because of the technology sector, which has soared more than 13% higher this past month. As the largest sector, it is driving the index higher. Meanwhile, eight of the other 10 S&P 500 sectors are in negative territory for the same period.

The rest of the market has been languishing even though the interest rate narrative has improved. Better-than-expected CPI and wholesale inflation reports for May have increased expectations of a Fed rate cut before the end of the year. And the benchmark 10-year Treasury rate is trending lower. But interest rate-sensitive stocks are barely budging.

I don’t know if investors have finally tired of the ever-changing interest rate narrative or the summer malaise has already begun. Maybe it’s just a delayed reaction and some of the interest rate-sensitive stocks will get a move on in the weeks ahead. We’ll see.

Broadcom (AVGO) reported better-than-expected earnings last week and also announced a 10-for-1 stock split, effective on July 15^th. AVGO has rallied 22% since the report last Wednesday and is now up 63% YTD.

It’s worth noting that five of the current portfolio positions are at all-time highs. Of the five, two are technology stocks and two are healthcare stocks. All four of these stocks also have spectacular year-to-date returns. I’ve often mentioned in monthly issues that stocks poised in front of a megatrend (technological proliferation and the aging population) have a massive advantage over everything else. It’s not an accident that those four stocks are killing it.

Recent Activity

June 5
SOLD Realty Income (O) – $54.03

June 12
NextEra Energy (NEE) – Rating change “BUY” to “HOLD”
GTC order Eli Lilly (LLY) – $580
GTC order Broadcom (AVGO) – $1000

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.6%) – Just when this one starts to get some upside traction, it reverts to its recent meandering ways. This infrastructure company that used to be a market superstar in years past has been going sideways since the end of last year. The operational performance has been sound. Brookfield reported strong earnings and the stock rallied strongly off the early April dip. But it’s been stuck in the mud again. The company did raise the quarterly dividend by 6%. (This security generates a K1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 7.3%) – This midstream energy partnership pulled back a little bit from the high of early April but mostly it has just stopped going higher for now. The energy sector has been weaker because of falling oil prices but prices are spiking higher in June. We’ll see if it is just a bounce or more of a sustained move. Earnings again showed Enterprise is solid operationally and that huge distribution yield is safe. I expect EPD to continue to pay the massive distribution and trend higher at a snail’s pace. (This security generates a K1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 13.5%) – The massive-yielding BDC pulled back a little last week, most likely because the stock went ex-dividend last Wednesday. That date is a big deal when a stock has a yield this high. 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. FS will pay a second-quarter regular dividend of 0.70 per share and a supplemental dividend of 0.05, reflecting confidence in the BDC’s ability to cover the payout and support shareholders. Hopefully, FSK can muster some upward momentum after the dividend. BUY

Main Street Capital Corporation (MAIN – yield 5.8%) – This Business Development Company pulled back somewhat, about 2 per share, from the high made about a month ago. 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 safe and high yield pays dividends every single month with a strong possibility of supplemental dividends over the course of the year as well. The current yield is reflected above as 5.8% because I only include the regularly scheduled dividend. Including the supplemental dividends, the yield is 8.4%. BUY

ONEOK Inc. (OKE – yield 5.0%) – This is an amazing midstream energy company. Earnings are rock solid with inflation protection and recession resilience. 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 a strong energy market. The stock is still at the same price it was at the beginning of April. But it has periods like that every year, and I’m still bullish on midstream energy companies. BUY

The Williams Companies, Inc. (WMB – yield 4.6%) – The midstream energy company reported excellent earnings and the stock rose to a new 52-week high. Although WMB has leveled off over the past couple of weeks, it’s still within pennies of the high despite a weak energy sector. The midstream company soundly beat estimates on both net income and earnings per share and guided to the upper half of 2024 guidance. WMB is still in an uptrend that began in the middle of February. It’s a stable high-yield stock and the company should deliver solid and dependable earnings in just about any economy. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.6%) – ABBV is back in business. The stock jumped over 11% in just a few weeks and appears to have broken out of its recent funk. It’s made up about half the recent dip so far. We’ll see if this is the first part of a new surge to a new high or just a bounce along the way. But several good news reports for drugs in the pipeline might usher in a lasting move higher. The company has one of the best pipelines and new drugs in the industry and usually doesn’t stay down for long. It’s still cheap ahead of what is likely a return to robust earnings growth next year. BUY

American Tower Corporation (AMT – yield 3.4%) – AMT has been bouncing around with the interest rate narrative. The stock price has gone nowhere in June, but it’s up nicely since the middle of April. The interest rate-sensitive stocks have had a disappointing reaction to the recent good news. Hopefully, the positive reaction is just delayed and AMT will bust a move in the next few weeks. American Tower rallied strongly after the REIT beat estimates on both revenue and earnings with 9.8% adjusted funds from operations per share growth over last year’s quarter. The REIT also raised guidance for 2024. BUY

Broadcom Inc. (AVGO – yield 1.2%) – Holy AI Batman. Earnings were worth the wait. Last week Broadcom reported earnings that blew away revenue expectations with a 43% increase over last year. Revenue was driven by increased AI demand with AI products selling $3.1 billion for the quarter. The stock has rallied over 22% since last Wednesday’s report. It’s now up 62% year to date and 342% since being added to the portfolio. The company also announced a 10-for-1 stock split that will take place on July 15^th. That’s always a big hit with investors. If trading at the current 1,800 per share, your shares will be worth 180, but you will own ten times as many shares. HOLD

Digital Realty Trust, Inc. (DLR – yield 3.3%) – The data center REIT has been trending higher for 13 months. The uptrend sort of sputtered in April and May. But it’s moving higher again this month and just cracked the 150 per share level again for the first time since February. DLR isn’t far from the high and could be on the cusp of a breakout. We’ll see. Management recently stated that the REIT is seeing accelerating demand for AI-oriented opportunities. A big reason the stock was added to the portfolio was the additional growth catalyst provided by AI. The statement indicates that this is happening. BUY

Eli Lilly and Company (LLY – yield 0.6%) – It’s another new day and another new high. This superstar pharmaceutical company stock is up 22% since the beginning of May, 53% YTD, and 511% since being added to the portfolio. The catalyst this time is good news from its Alzheimer’s drug Donanemab. The drug got a very favorable report from the FDA Panel which has a huge input on whether a drug is approved or not. The report was practically a rave. Between the need for the drug, the prior approval of Novo Nordisk’s (NVO) inferior drug, and the panel nod, it is now a near certainty the drug will gain FDA approval, and probably soon. HOLD

McKesson Corporation (MCK – yield 0.4%) – Nothing new. Another week. Another new all-time high. The latest high was made this week. MCK moves slowly, at least compared to a lot of growth stocks. But it trends unmistakably higher. The wholesale pharmaceutical giant indicated earnings growth of 14% to 17% for this year and the stock has trended higher since the report. In fact, MCK has been trending higher with few interruptions since March of 2023. It just continues to forge quietly higher while no one seems to notice. MCK is up 30% YTD. The pharmaceutical supply chain Goliath dominates a market that grows all by itself because of the aging population. BUY

Marathon Petroleum Corporation (MPC – yield 1.9%) – The country’s largest refiner fell significantly after reporting lower earnings amid record maintenance shutdowns. But things aren’t nearly as bad as they seem. The company beat earnings and revenue forecasts. Earnings are down because of reduced crack spreads versus last year’s near-record first quarter but profits are still historically high. The maintenance shutdowns are necessary and set the company up well for increased volumes ahead of the driving season. The stock was red hot, then turned ice cold, but has been leveling off this month. The energy sector has been weak. But it’s heating up again in June. HOLD

Qualcomm Inc. (QCOM – yield 1.5%) – Look out. The mobile device chipmaker stock was showing signs of leveling off and consolidating after a big surge. But not much can seem to slow it down and it’s up 11% so far in June. Being perfectly positioned ahead of the next phase of artificial intelligence, in mobile devices, is very compelling to investors. A very bright future is driving the stock price higher. It should continue to deliver as several analysts see a major smartphone upgrade cycle for AI next year. Qualcomm is at the leading edge of chips that enable AI for smartphones and should benefit mightily. AI is hot stuff and Qualcomm appears to be poised in front of the next wave. BUY

UnitedHealth Group Inc. (UNH – yield 1.7%) – The stock reversed its negative course after earnings put fears about the hacking to rest. UnitedHealth reported earnings last month that soundly beat expectations with an 8.6% revenue rise and a better than 10% increase in adjusted earnings from last year’s quarter. The company also issued strong guidance. The stock rose about 20% after the report but has since given some back. The stock was under pressure early this month after management raised a red flag about Medicare reimbursement rates, but the stock has regained its footing since. BUY

Visa Inc. (V – yield 0.8%) – Sorry, I still don’t have anything new to say about this one. The payment processing global Goliath again reported stellar earnings. It reported a 10% jump in revenue and a 20% increase in adjusted earnings per share over last year’s quarter. It is still thriving from cross-border transactions and benefits from the recent economic news. Visa also reported upbeat guidance for the rest of this year. But somehow it has been floundering since March. Although performance has leveled off, V should be solid if the economy holds up. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.5%) – This life science specialty REIT was up a little over the past week. The improved interest rate outlook should be good for ARE but it hasn’t moved higher yet. The REIT has been bouncing around all year and is currently at the low range of the bounces. Hopefully, it can catch a wave in the weeks ahead. This is a solid REIT that reported strong earnings and raised the dividend again this quarter. ARE will likely bounce around somewhat at the mercy of the interest rate narrative and not significantly surge higher until rates muster a sustained move downward. BUY

NextEra Energy (NEE – yield 2.8%) – After a huge run higher from March until the end of May, NEE is having a comeuppance in June. After a 40% run higher, the stock has pulled back over 10% so far this month. The story hasn’t changed. It’s just that the rally had to run out of gas at some point. The quite long-in-the-tooth rally is the main reason NEE was downgraded to a HOLD last week. But NextEra posted solid earnings in the recent quarter, which also added to the stock’s revitalization. NEE had been a superstar performer before inflation and rising interest rates. I expect solid performance going forward over the longer term despite the current pullback. HOLD

USB Depository Shares (USB-PS – yield 5.7%) – This preferred stock has just weathered a strong interest rate storm and has still returned about 15% 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 5.1%) – 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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