June 26, 2024

Will Neglected Sectors Pick Up the Slack?

The market has been fantastic. But it was driven higher by technology. Now, technology is rolling over. Will the market roll over too, or will the neglected sectors pick up the slack?

The S&P 500 is up more than 14% YTD, a nearly 30% annual pace. The index is also up over 30% since the low of last October. The reason for the market’s advance is technology stocks, driven higher primarily by the artificial intelligence catalyst.

As of last Friday’s close, the tech sector is up 28.35% YTD. No other market sector is up double digits. The S&P is up 14.47%. Over the last month, the tech sector is up 10.42% while the S&P is up 2.95%. Seven of the 11 sectors are negative for the past month.

Without technology, the market would be languishing. But technology stocks may be running out of gas. The tech-heavy Nasdaq index has been falling since last week. Star performing portfolio positions Broadcom (AVGO) and Qualcomm (QCOM) are down 12% and 15%, respectively, in the last week alone. The reason is likely investor profit-taking after a huge surge in AI-related stocks following the last round of earnings reports.

This kind of volatility is not usual in a strong bull market such as we are seeing in technology stocks with AI exposure. But if the rally in these stocks has indeed paused, what will the market do without the force that has propelled it higher all year?

The market will either go the way of technology stocks, to likely flatter performance, or the neglected sectors will pick up the slack. Hopefully, some of the underperforming REITs and other conservative dividend-paying stocks that are cheap and high yielding will compel investors. The midstream energy stocks have already started performing better in the midst of the tech decline.

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) – $1,000

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 company rallied strongly off the early-April dip. The company also raised the quarterly dividend by 6%. During sideways periods you still get the dividend and there could be a big move in store if interest rates trend significantly lower. (This security generates a K-1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 7.1%) – This midstream energy partnership is making a move to the high again as technology falters. EPD is still in an uptrend that began in late 2020. While the uptrend has been bouncy and slow, it has been unmistakable and EPD has been posting solid yearly returns while paying an enormous distribution yield that is very safe. The energy sector has been weaker because of falling oil prices but prices have spiked 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. I expect EPD to continue to pay the massive distribution and trend higher at a snail’s pace. (This security generates a K-1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 14.2%) – The massive-yielding BDC pulled back earlier this 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. FSK has moved off the recent lows and may start to trend higher again. 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 5.8%) – This Business Development Company pulled back somewhat after making a high in early May, but it has been trending higher again since late May. 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 5.9% because I only include the regularly scheduled dividend. Including the supplemental dividends, the yield is 8.4%. BUY

ONEOK Inc. (OKE – yield 4.9%) – This amazing midstream energy company stock has certainly leveled off since late April. But it is still very close to the high and might get a boost in the weeks ahead if technology stocks continue to flounder. 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. BUY

The Williams Companies, Inc. (WMB – yield 4.4%) – It’s another new high! This midstream company stock 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 has improved, it’s back to new highs while the other stocks are still catching up. Williams reported excellent earnings. 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. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.6%) – ABBV is back in business. The stock jumped more than 11% in the past month and appears to have broken out of its recent funk. It’s made up most of the April and May dip and might be making a run back to the old high and beyond. We’ll see what happens but a move to a new high would be very much in character with the past patterns of the stock. The company has one of the best pipelines and new drugs in the industry and it 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 3.3%) – AMT had a good May and is trading right near the May high after leveling out in June. That said, it’s been a disappointing year so far as AMT is down 10% YTD. As with the other REITs, better interest rate news should be good for this cell tower REIT. AMT rallied strongly after the REIT beat estimates for 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 1.3%) – The AI gods giveth and taketh away, but mostly giveth. It’s been a wild June. At the close on June 17, AVGO was up more than 37% for the month. It has since fallen over 12% in just the last week. But it is still up 20% for this month. Broadcom reported earnings that blew away revenue expectations with a 43% increase over last year and announced a 10-for-1 stock split, effective on July 15. These kinds of swings are typical of a strong bull market such as we are seeing in AI stocks. Things are still very good, just not quite as good as they seemed last week. 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 recently cracked the 150 per share level again for the first time since February. 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. Management recently stated that the REIT is seeing accelerating demand for AI-oriented opportunities. BUY

Eli Lilly and Company (LLY – yield 0.6%) – It’s another new day and another new high. I don’t know what to say about LLY anymore. This superstar pharmaceutical company stock is up 51% YTD. 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. It’s another day and another new all-time high. The latest high was made Tuesday. 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 had been weak. But it’s heating up again in June. HOLD

Qualcomm Inc. (QCOM – yield 1.7%) – It’s been a rough week of comeuppance for the mighty AI stocks. QCOM soared 39% from May 1 to June 18. But it has fallen 15% in the past week alone. Not to worry, it’s still up over 10% in June. The recent stock performance reflects profit taking in the AI space after a big surge from the last round of earnings reports. But QCOM 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. 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%) – 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 4.4%) – It’s been the road to Nowheresville for his life science specialty REIT. It looked like it might be going someplace in the first half of May, but it rolled over back near the YTD low. ARE has been a victim of the interest rate outlook. Things have improved on that front lately and ARE has moved a little higher. Alexandria reported strong earnings and raised the dividend again this past 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 more than 8% 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. 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. HOLD

USB Depository Shares (USB-PS – yield 5.6%) – This preferred stock has just weathered a strong interest rate storm and has still returned about 17% 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 OK 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

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.