June 5, 2024

A Sideways Market

It’s been a great market for a while. But it has leveled off since the middle of May. I expect more of the same going forward.

The S&P 500 pulled back in early April after a five-month rally as sticky inflation soured the interest rate narrative. The index then recovered to new highs in the middle of May on an improved interest rate outlook. But stocks have since leveled off as the interest rate outlook got stuck in the mud.

This is where we are. It’s a tug-o-war between Fed rate cut hopes and the possibility that no rate cuts will come this year. It will take major news to resolve this standoff. But I don’t believe that kind of resolution is likely in the next several months. Therefore, in the absence of other market-moving events, the market is likely to be a lot more sideways going forward than it has been over the last six months.

That’s not a bad thing. Even raging bull markets take a break. As I’ve said before, unless interest rates rise to new highs or the economy spirals into recession, the market should be okay for the rest of the year. But it looks like it could be a sideways summer where income is king.

There are still portfolio positions hitting new highs including Eli Lilly (LLY), McKesson (MCK), and FS KKR Capital Corp. (FSK). But there is also an adjustment in the portfolio this week. Realty Income (O) is being sold.

Realty is a legendary income stock that has historically been one of the very best REITs to own. But that hasn’t been the case for some time. Since it was added to the portfolio in November of 2020 it has underperformed its peers in just about every kind of market. History is important. But more recent performance can’t be ignored and is telling a different story.

Recent Activity

May 8
Purchased FS KKR Capital Corp (FSK) – $19.40
Realty Income (O) – Rating change “BUY” to “HOLD”
SOLD Xcel Energy Inc. (XEL) – $54.93

June 5
SELL Realty Income (O)

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.6%) – It’s been a wild ride on the current interest rate narrative for this infrastructure company. It was an awful first half of April as the stock fell about 20% in the first two weeks. But Brookfield reported strong earnings and the company has rallied to make up some of that dip since. It was going good for a while but has been sputtering over the last couple of weeks as the interest rate narrative turned sour again. But earnings were solid. The company also raised the next quarterly dividend by 6%. Solid earnings and a dividend raise are indicative of a company that is operationally strong. (This security generates a K-1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 7.3%) – This rock-solid, high-yielding midstream partnership has moved down from the high made in early April. But it is down less than 6% from the high and is still in a longer-term uptrend. It hasn’t really pulled back but rather stopped going higher for now. Enterprise reported solid earnings with profits per share in line with estimates and revenues a lot better as new projects came to fruition, and the distribution is well covered. 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 13.5%) – 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. The ultra-high-yielding Business Development Company reported solid earnings that were roughly in line with estimates. FS also announced 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. I’m hopeful the position will provide a great dividend income with a little bit of appreciation. BUY

Main Street Capital Corporation (MAIN – yield 5.8%) – This Business Development Company reported stellar earnings that handily beat estimates. It paid a 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 in the quarter. MAIN has also shown resilience in tough markets. 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 5.9% because I only include the regularly scheduled dividend. Including the supplemental dividends, the yield is 8.3%. BUY

ONEOK Inc. (OKE – yield 5.0%) – This more volatile midstream energy company has been moving lower lately along with the energy sector. Oil prices have come down about 15% from the April peak to a four-month low on demand concerns going forward. Although midstream companies are not dependent on commodity prices, they tend to move with the overall sector in the short term. But the income continues to roll in while oil prices range back and forth in any given year. There is no major problem in the sector with good longer-term dynamics unless there is a recession. BUY

Rating change “HOLD” to “SELL”

Realty Income (O – yield 6.0%) – Enough is enough. Realty has historically been a legendary income stock that has raised the monthly payout every year since 1969. It also had been one of the best REITs to own. But that has not been the case for a while. Sure, it’s been a tough market for REITs these past couple of years, and fortunes change. But O has continually underperformed its peers and the REIT index in good times and bad for a long time now.

History is important, but performance can’t be ignored. It’s telling us something. Perhaps the REIT has just gotten too big and become more like a traditional utility. The decision is not a hasty one. O has been in the portfolio since November of 2020. In that time, it has returned just 3% compared to a 56% return for the S&P and a 12.5% return for the benchmark Vanguard Real Estate Index Fund ETF (VNQ). There are better-performing and more promising REITs in the portfolio that I believe will provide better returns going forward. SELL

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 a dollar of the high despite a week 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 3.9%) – ABBV pulled back substantially from the high made at the very end of March. But it has come off the recent low in the past week. This is typical behavior for this stock. It tends to have a surge and then consolidates for a while before the next one. The biopharmaceutical company reported earnings that beat expectations. Although Humira sales fell, the other immunology drugs, Skyrizi and Rinvoq, grew at torrid paces with revenue of $3.1 billion for the quarter. The company is well on track to replace Humira revenues and return to robust growth in the years ahead. BUY

American Tower Corporation (AMT – yield 3.3%) – This previously struggling cell tower REIT had a terrific May. It’s up 15% since the end of April. The market for REITs has improved. But AMT is significantly outperforming its peers. VNQ is only up 4% over the same period. This is a REIT that tends to outperform when the market is good for REITs. After two rotten years for the sector and a slowing economy, there is a good chance of a strong REIT market going forward. AMT rallied strongly after the REIT beat estimates on both revenue and earnings and raised guidance for 2024. It’s a solid REIT with stronger growth than most of its peers. BUY

Broadcom Inc. (AVGO – yield 1.6%) – Yeah, AVGO hit a new all-time high in May. But it’s been bouncy and is currently at the same price it was at the end of February. It had a big surge late last year and early this year. But it hasn’t pulled back. It’s just consolidated sideways. It did get a bounce from the stellar Nvidia (NVDA) earnings report. But the main catalyst for Broadcom should be its own earnings report next week on June 12. AVGO tends to surge and level off and then surge again. Hopefully, the report can ignite the next surge higher. HOLD

Digital Realty Trust, Inc. (DLR – yield 3.4%) – After a big move higher, DLR has been going sideways since the end of January. As a REIT it is also subject to the latest interest rate narrative. But it also has a catalyst from artificial intelligence as that technology should enhance demand for data center space. The last earnings report included a statement by management 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 0.7%) – This superstar pharmaceutical company stock hit a brand new all-time high this week. LLY had leveled off since February but spiked to a higher level in May. This stock tends to go for a while after spiking to a new level. Hopefully, it has another run ahead. The weight-loss drug is a monster and looks like a mega-blockbuster, and the Alzheimer’s drug should get the FDA nod in the next few months. HOLD

McKesson Corporation (MCK – yield 0.4%) – This pharmaceutical supply chain oligopoly has been trending steadily higher since March of last year. It hit another new all-time high, as it does almost every week. MCK has now returned 26% since being added to the portfolio last October. McKesson indicated earnings growth of 14% to 17% for this year in the last quarterly report. MCK just continues to forge quietly higher while no one seems to notice. 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 actually 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 leveled off over the last month. HOLD

Qualcomm Inc. (QCOM – yield 1.6%) – It looks like the end of the recent surge, which was inevitable at some point. QCOM pulled back 7% from the recent high. It soared nearly 40% at its high between April 19^th and last week. Earnings beat estimates and the company raised earnings guidance for 2024. But the real excitement is the growing talk about artificial intelligence coming to smartphones, and Qualcomm as a major beneficiary of the upgrade cycle. Several analysts are contending that an AI-driven super cycle is coming soon. Qualcomm is at the leading edge of chips that enable AI for smartphones and PCs and should benefit mightily. BUY

UnitedHealth Group Inc. (UNH – yield 1.5%) – 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 last week 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%) – This 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. Although performance has leveled off over the past few months, V should be solid if the economy holds up. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.3%) – The recent good interest rate news hit a wall over the past couple of weeks. After bouncing around with the interest rate narrative for the past few years, this one-of-a-kind life science property REIT was having a good month in May. But it gave up the gains. This is a solid REIT that reported strong earnings and raised the dividend in the last 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 2.7%) – NEE has pulled back a little from the high, and the recent torrid surge may be over. NEE made a 40% upside move since early March and a 64% move from the October low as of last week. That’s not too shabby for a utility stock. The stock has continued to move higher after a solid earnings report in the recent quarter. The strong growth story is still very much alive. NEE had been a superstar performer before inflation and rising interest rates. It provides both safety from its best-in-class regulated utility business and growth from its considerable clean energy business. BUY

USB Depository Shares (USB-PS – yield 5.6%) – This preferred stock has just weathered a strong interest rate storm and has still returned about 16% since being added to the portfolio. I believe it is unlikely that rates eclipse the high of this cycle. Even if they do this security can handle it well. It’s also quite possible that rates fall from here and stock behaves very well. 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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