March 6, 2024

The Rally Forges on, for Now

The market rally is forging ahead and making fools of the doubters, despite the Tuesday pullback. The S&P 500 is up 20% since late October and 7.5% so far this year as of Monday’s close.

The main driver is technology. The largest of all S&P sectors is 12.5% higher YTD. It is being driven by renewed excitement in the artificial intelligence catalyst and a rebound in the cyclical semiconductor industry. But many other sectors have delivered solid performance YTD as well as the rally has broadened.

The market rally paused for about a week as recent inflation data came in higher than expected, thus reducing the expectations for lower interest rates. But stocks got a boost again after last week’s inflation numbers came in as expected. But this interest rate issue is not over.

It is likely that investors will not get the rate cuts they are currently expecting. Inflation is down but it’s not out. This rally will likely end when investors come to the realization that those rate cuts aren’t coming, at least at the speed and extent currently expected. Stocks got a taste on Tuesday as stocks sold down after one of the Fed presidents said he sees just one rate cut this year.

But the current rally could go on longer. And most of the portfolio stocks are reaping the bounty. Eleven portfolio stocks are either at or very near the 52-week high or all-time high. Four of the stocks have returned over 100%, with one delivering a 446% return and another over 200%. Several of the recent portfolio additions are also thriving.

However, the defensive stocks in real estate and utilities have been lagging. That’s okay. Those stocks are well-positioned in case the market turns at some point down the road. It’s a well-balanced portfolio.

There has also been bizarre news in two stocks that have been downgraded to “HOLD” until there is more clarity on the issues.

Recent Activity

February 7^th
Visa Inc. (V) – Rating change “BUY” to “HOLD”

February 14^th
AbbVie Inc. (ABBV) – Rating change “HOLD” to “BUY”

March 6^th
Xcel Energy Inc. (XEL) – Rating change “BUY” to “HOLD”
UnitedHealth Group Inc. (UNH) – Rating change “BUY” to “HOLD”

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.6%) – The inflationary and rising interest rate environment beat up the utility sector over the past couple of years and BIP wasn’t spared. But it is unlikely that rates will continue to move higher. Meanwhile, BIP has some of the most defensive revenues possible. It’s also been expanding into cell towers, data centers and foundries as it is estimated the world needs to invest $1 trillion in digital infrastructure in the next decade. Despite the lousy stock performance, Brookfield continues to deliver strong results. Funds from operations grew 10% for 2023. This stock had blown away S&P returns for every measurable period prior to the past two years. It will rise again. (This security generates a K1 form at tax time). BUY

Enterprise Product Partners (EPD – yield 7.2%) – The midstream energy partnership is within pennies of the 52-week high after a solid earnings report. The company should deliver solid growth this year with anticipated steady hydrocarbon demand and $3.5 billion in recent growth acquisitions coming online. EPD has produced solid and steady returns in different market environments with a 17.45% return in 2023 after a strong bear market return of 15% in 2022. That massive distribution is extremely well supported, and the stock is still well below the all-time high despite much higher earnings. There is a good chance EPD delivers another solid year in 2024. (This security generates a K1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.3%) – It’s a new all-time high. Unlike most energy companies, OKE has eclipsed the pre-pandemic high and broken out to a new level. OKE tends to be more volatile than its midstream energy peers and has more upside potential. It’s up over 35% since last May and 12% since the beginning of February. Meanwhile, the company is justifying the strong stock performance operationally. ONEOK reported a 42% increase in profits over last year’s quarter on higher LNG volumes and the contributions of the recent Magellan Midstream acquisition. The company also set ambitious guidance for this year. BUY

Realty Income (O – yield 5.9%) – This beleaguered stock has consistently and historically been one of the very best income stocks to own of all time. The monthly dividend has been raised every year since 1969. But the last two years of inflation and rising interest rates have been among the worst two years in this stock’s history. That makes it dirt cheap ahead of an environment that will almost surely at least stop getting worse. It’s probably the very late innings of the recent market dynamic and O is well positioned ahead of a likely shift in the future. BUY

The Williams Companies, Inc. (WMB – yield 5.2%) – The year started awfully for dividend stocks and the energy sector. That’s an ugly backdrop for WMB. It fell near the lowest level since last fall. But the defensive and high-end midstream energy stock has been moving higher again of late as earnings beat expectations and the company raised guidance for 2024. While the market environment temporarily turned against WMB, it is still thriving operationally, and the stock price recently recovered to near the 52-week high. Recent acquisitions and expansions ensure more solid growth going forward all the way out to 2028. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.5%) – ABBV is coming off a tough 2023 as it had to deal with shrinking revenues and earnings as its mega-blockbuster drug Humira lost patent exclusivity in the U.S. But that has been long-expected and well-planned for. Investors are now looking toward the promising future beyond as management expects moderate earnings growth this year and robust growth next year. Management expects combined sales of just two immunology replacement drugs Skyrizi and Rinvoq will be $16 billion this year (Humira peak sales were $21 billion) and $27 billion in 2027. ABBV has broken out of the old range to a new all-time high as investors are starting to price in the company turning the corner on the way to a bright future. BUY

American Tower Corporation (AMT – yield 3.4%) – Stock performance has been bouncing around with the interest rate prognosis. AMT got hammered most of the last two calendar years with inflation and rising rates. It had a huge rally in the last two months of 2023 and then pulled back again earlier this year as the interest rate situation reversed. But AMT is coming back and has surged 9% since the end of February. This is one of the best REITs on the market that deals in very high-quality properties. The cell tower properties will only grow in demand in the years ahead, and in any other interest rate environment, AMT will sell at a much higher price. AMT will most certainly shine again. In the meantime, it pays you to wait. BUY

Broadcom Inc. (AVGO – yield 1.5%) – There seems to be no end in sight. Despite soaring over 100% in 2023, AVGO is up 29% YTD. The recent run-up is largely because of a recent positive report on AI sales from Dell that rallied stocks involved with the technology. There is also building excitement regarding the fourth-quarter earnings report which comes out this Thursday. Broadcom usually reports solid earnings and gets a further bump. A positive statement about the growth of the AI business should rally the stock. Regardless, AI provides certain technology companies with a huge growth catalyst that should last for years, and despite the monster performance, AVGO still sells at a reasonable valuation. HOLD

Digital Realty Trust, Inc. (DLR – yield 3.2%) – The data center REIT is getting hot again. It’s up 13% in just the last couple of weeks. DLR had surged 50% at the end of last year. It pulled back a little after earnings disappointed. But the recent surge in AI-related stocks is taking DLR with it. The data centers will benefit from increasing AI spending, providing Digital with an additional growth catalyst that could last for years. DLR just made a new 52-week high but is notably still well below the all-time high made at the end of 2021 before the inflation bear market. But earnings and prospects are much better now. BUY

Eli Lilly and Company (LLY – yield 0.7%) – Lilly again killed on earnings and guided higher for 2024. It’s highly watched, newly approved weight loss drug Zepbound more than doubled sales expectations for the quarter. The mega-blockbuster potential is enormous, and Lilly just opened a $2.5 billion plant in Germany to crank up production to meet soaring demand. The company also has an important Alzheimer’s drug awaiting FDA approval in the next few months. LLY is already up over 34% YTD and has returned 446% since being added to the portfolio about three and a half years ago. It never seems to stop trending higher. HOLD

Intel Corporation (INTC – yield 1.1%) – The red-hot chipmaker finally cooled off after earnings guidance disappointed and the stock fell from the recent high. But the selling has ended, and INTC has been moving higher over the past week along with the other semiconductor and AI stocks. The bounty from the new chips and the foundry business might not come as soon as optimistic investors had been hoping. The future is still bright though. There are great days ahead. Headline risk probably favors the upside for this stock in the months ahead with AI speculation still strong. BUY

McKesson Corporation (MCK – yield 0.5%) – The world keeps going on with Fed and interest rate speculation, the rally in technology stocks, and the crazy politics. But MCK just continues to forge quietly higher while no one seems to notice. It’s been making a series of new all-time highs for the last year and just hit another one this week. It’s already up over 13% YTD while investors focus elsewhere. Earnings were stellar with 15% revenue growth and 12% earnings growth, and McKesson raised guidance for 2024. The company dominates a market that grows all by itself because of the aging population. MCK continues to roll forward. It’s been in an uptrend since the pandemic. BUY

Marathon Petroleum Corporation (MPC – yield 1.9%) – The refiner is another member of the all-time high club. It just hit a new one on Monday. MPC has also been in an uptrend since the pandemic and it’s up over 15% already this year. Although profits are down from last year’s historic levels, they remain very strong by historical standards. The company is flush with cash from the boom times while robust profits continue to roll in. This stock has consistently outperformed its peers and has been solid even in environments when the overall energy sector struggled. BUY

Qualcomm Inc. (QCOM – yield 2.0%) – After a year where it underperformed the technology sector, QCOM is moving higher again. It’s up 60% since late October and 19% YTD. Semiconductors and AI stocks have gotten hot, and the strength may last a while longer. Qualcomm is secretly one of the best semiconductor and AI stocks to own. It had been held back by cyclicality, both in semiconductors and smartphones. But the negative cycle is coming to an end. Qualcomm is also introducing new AI chips for PCs and smartphones that could be big sellers this year. It’s an AI beneficiary that is just now coming into the spotlight. BUY

Rating change – “BUY” to “HOLD”

UnitedHealth Group Inc. (UNH – yield 1.5%) – This is the only healthcare stock in the portfolio that isn’t killing it. UNH has gone nowhere in the last two years. It had been moving higher but then plunged 9% in the last two weeks. It’s because of a cyber attack on its Change Healthcare unit that is threatening the security of patient information. The hack is also disrupting functions like discharges and prescriptions. It’s sending ripples through the industry as hospitals are struggling with payrolls and delayed approval for patient services. Although these issues will likely prove temporary, the disruption is still ongoing and the extent of the damage is still unknown. UNH is downgraded to HOLD until there is more clarity on this bizarre issue. HOLD

Visa Inc. (V – yield 0.7%) – This payment processing global goliath is thriving. V has been making a series of new highs since early November. It’s still in an uptrend that began in the fall of 2022. V was slow to recover from the pandemic because the global economy lagged. But now it’s making up for lost time. It’s up 9% YTD and will likely continue rising slowly unless and until the economy tanks. Earnings last month beat estimates with upbeat guidance through 2024. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.1%) – The life science property REIT had mostly a terrible last two calendar years as interest rates rose and the REIT sector took it on the chin. Alexandria also got lumped in with office REITs, which are suffering from the work-from-home trend with low occupancy rates. But the company provides lab space and related offices that aren’t affected. ARE surged far more than its peers in the last two months of last year as the interest rate trade reversed. But it has struggled through most of this year so far as interest rates moved up again amid the stronger economy. Things might be changing though. ARE has broken the recent downtrend and has moved up 12% in the last month. BUY

NextEra Energy (NEE – yield 3.7%) – The past two years have been awful for this combination regulated and clean energy utility. But it’s cheap with a great long-term track record. 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. The utility reported strong earnings that exceeded expectations again last month and reiterated its growth projections for this year. The interest rate-related weakness should at least diminish going forward as rates have likely peaked. BUY

USB Depository Shares (USB-PS – yield 5.4%) – The party isn’t over for fixed income. Rates have peaked and may trend lower for the year. The price has soared from the low of late October and has provided a 19% total return since being added to the portfolio in October of 2022. After the worst two years ever for fixed income, this preferred issue is well positioned for a further rebound. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.7%) – Ditto for VCLT, as evidenced by the recent 20% price surge. This long-term bond fund is very sensitive to interest rates. It held up relatively well in the rising rate environment and now rates may continue to trend lower. If the economic strength lasts, VCLT should remain stable and deliver a strong income. If the economy weakens, and/or rates move lower, there should be more upside for the price. BUY

Rating change – “BUY” to “HOLD”

Xcel Energy (XEL – yield 4.4%) – The alternative energy utility had a terrible week. The stock crashed 14% after it was reported last Wednesday that Xcel could be held liable for damages for the raging Texas wildfire, which is the worst in the state’s history and encompasses a land mass larger than the state of Rhode Island. Several utilities have been held liable for wildfires in recent years. It is an ongoing story. XEL has recovered 3% in Monday’s trading. But this weird development is also ongoing, and the scope of the damage is unknown. NEE is downgraded to a HOLD until there is more clarity on the matter. HOLD

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