It’s Not Time to Bet on a Rally
Although the market is up over 7% this year, it has been moving sideways for the last six weeks. It can’t seem to decide whether it will go higher or lower. But it will have to choose eventually, and probably soon.
The resilience has been impressive. Despite a plethora of troubling issues and headlines, stocks have been hanging tough near this year’s high. While anything can happen, the next significant move is more likely to be lower than higher at this point.
The new concern is the debt limit. This situation has occurred several times over the years. In the past, there has been a lot of hemming and hawing about Armageddon. But they always strike a deal at the last minute. I suspect that will happen this time as well. I could be wrong. Maybe they’ll take it further this time and provoke trouble in the market. We’ll see.
But even if that problem gets “solved,” there is still inflation and recession. Core inflation remains sticky and there is a good chance that the Fed will leave rates higher for much longer than the market currently anticipates, even if they don’t raise rates again. Then there’s a possible looming recession.
The banking crisis, which may not be over, will at least result in smaller banks being less willing to lend. That will certainly hinder the economy. Many are predicting recession later this year or early next year. Although the economy doesn’t appear to be near recession yet, it can tank fast.
It’s difficult to see how the market can muster lasting traction to the upside from here without more clarity on these issues, especially considering the market has already rallied about 20% from the October lows. And clarity is at least several months away.
With more downside risk than upside potential in the near term, the portfolio remains defensive with mostly conservative stocks and a high cash position.
Eli Lilly and Company (LLY) – Rating change BUY to HOLD
Visa Inc. (V) – Rating change BUY to HOLD
BUY ½ position in NextEra Energy (NEE)
Purchased Hess Corporation (HES) - $135.24
ONEOK, Inc. (OKE) – Rating change BUY to HOLD
Fixed Income 20%
High Yield Tier
Enterprise Product Partners (EPD – yield 7.6%) – Enterprise reported another solid earnings quarter. Earnings per unit grew at 6.9% while distributable cash flow increased 5.5% over last year’s quarter. The partnership also increased the quarterly distribution by 5.4%. Business is solid while most company earnings are shrinking. EPD is also outperforming the other midstream energy companies in the portfolio this year.
That massive payout is rock solid and growing. The company has just a 55% payout ratio and the distribution is covered 1.8 times by cash flow. That’s among the very best coverage in the industry. And the distribution has grown for 25 straight years. High yield and earnings that are resilient in inflation and/or recession should continue to be a winning formula for the rest of this uncertain year. (This security generates a K1 form at tax time). BUY
Rating change – BUY to HOLD
ONEOK Inc. (OKE – yield 6.6%) – The stock fell over 9% on Monday after ONEOK announced a $19 billion deal to buy midstream company Magellan Midstream Partners (MMP). The deal will turn ONEOK from a natural gas operator to a diversified midstream company that services oil and refined products as well. The market doesn’t seem to like it because the benefits are primarily longer-term, and Wall Street doesn’t think like that. It involves the assumption of Magellan’s $5 billion in debt and $8.8 billion in new equity. That could hurt performance in the near term. We’ll see how things play out in the days ahead. But the portfolio is Holding for now. HOLD
Realty Income (O – yield 4.9%) – This legendary income REIT is the king of income stocks. The returns haven’t been inspiring so far but this stock has held its own in a choppy market. As the economy slows and perhaps moves towards recession, investors will continue to demand safety and O is a highly desirable safe income stock. Although Realty Income is a retail REIT, it is far less volatile than most because of the diversification and remarkably stable clients that offer essential services that are recession resistant. HOLD
The Williams Companies, Inc. (WMB – yield 6.1%) – The midstream energy company once again delivered on earnings and beat expectations for the fourth straight quarter. Earnings per share grew a whopping 36% over last year’s quarter as natural gas volumes remained strong and growing. WMB has been a struggling stock this year because of natural gas prices, which have crashed. Although the company is not highly levered to energy prices, it is affected by turbulence in its industry. But it should be a temporary problem for a fuel source that should own the next decade. BUY
Dividend Growth Tier
AbbVie (ABBV – yield 4.0%) – ABBV is a bouncy stock that trends higher over time because it has a great pipeline of drugs, and the population is aging at warp speed. This year it’s dealing with the Humira expiration, which is probably holding it back as well. But the stock should fly once investors start looking past this year toward a bright future. Humira sales fell sharply but less than expected. Its new autoimmune drugs, which are expected to pick up the slack in the years ahead, had sales below expectations. The market was disappointed and ABBV has been floundering ever since. Big pharma companies often have issues like this along the way. HOLD
Broadcom Inc. (AVGO – yield 2.9%) – AVGO is a highly resilient technology company that is mostly involved in technology infrastructure and earnings are not highly dependent on product sales. In the ugly technology market, AVGO returns have been about even since the sector began to sell off at the beginning of last year. It’s also up over 40% since the low of last October. Although it is still somewhat tied to the fortunes of the technology sector in the short run, it’s a great stock that has shown resilience in a tough market and should take off when the sector recovers. HOLD
Brookfield Infrastructure Partners (BIP – yield 4.3%) – The infrastructure company is having a good May so far. BIPC is up over 10% this month while the market has been flat over the same period. Brookfield reported a solid earnings quarter with funds from operations (FFOs) per share growth of 12.5% over last year’s quarter. The company benefited from recent expansions and acquisitions but also showed solid organic growth. Brookfield is showing strength amid market choppiness and should continue to be a solid holding amid inflation and/or recession. BUY
Eli Lilly and Company (LLY – yield 1.4%) – LLY continues to blow away the market. It’s up over 38% since being upgraded to a Buy in early March and just made another new all-time high. The stock got a huge bump after the earnings report when it reported very promising results from its obesity drug tirzepatide. Obesity is a massive problem, and this seemingly superior drug has mega-blockbuster potential. The following week, Lilly reported promising trial results for its Alzheimer’s drug, another potential blockbuster that could be approved within the year. HOLD
Hess Corporation (HES – yield 1.3%) – Energy stocks continue to be choppy for now. The risk of recession later this year or early next year is holding prices back. But the longer-term supply/demand dynamic favors energy very much and Hess is a special case. It can increase production almost at will with very low-cost production. It should be stellar when energy stocks move higher again. BUY
Intel Corporation (INTC – yield 1.7%) – Intel posted two quarters of negative earnings and guided for more of the same for the rest of the year. The company also slashed the dividend by 80% to save cash for its ambitious turnaround program. Yet, INTC is up 15% YTD. That indicates that the stock has likely bottomed out already. Also, the early release of its CPU chip for data centers indicated that production problems have been solved and bodes well for an earlier-than-expected turnaround. HOLD
Qualcomm Inc. (QCOM – yield 3.1%) – The chipmaker posted mixed earnings results that the market hated earlier this month. The stock fell 6% on the day of the report. Because of slower smartphone sales as the global economy slows and the market gets more saturated, revenue declined 17% and earnings fell 33% in the quarter. That wasn’t a surprise and Qualcomm beat expectations. But it was pessimistic about the rest of the year and indicated the handset chip market may not have bottomed out.
That’s a problem because handset chips accounted for 77% of revenue. The stock is already down more than 40% from the high on expected lower smartphone sales. There probably isn’t much downside in the stock from here. Hopefully, QCOM will level off over the next week. HOLD
UnitedHealth Group Inc. (UNH – yield 1.3%) – This recent portfolio addition has strong predictable revenues in a very defensive business ahead of a likely recession later this year. UNH has been a terrific stock to own in any market, as its three-, five- and 10-year returns attest. But it is also the epitome of a stock to own during an economic downturn. It pulled back since being added to the portfolio, but I expect the stock to be solidly higher in the months ahead. BUY
Visa Inc. (V – yield 0.8%) – V has been hanging very tough near the high point of the recent range. The payments processing company once again exceeded expectations on earnings. Visa grew earnings per share by 17% and revenues grew double digits versus last year’s quarter. And this is what the company does in a bear market with the economy slowing. It can really take off when the market recovers for good. V should be higher by the end of the year but there is a chance it pulls back somewhat after moving to recent highs. HOLD
Safe Income Tier
NextEra Energy (NEE – yield 3.0%) – This combination regulated and clean energy utility stock continues to bounce around near the low point of the recent range. It seems ideally suited for the current uncertain market with its predictable revenues. But it just can’t seem to get any traction. Nevertheless, it should be an excellent longer-term holding with both dependability and growth, and it should also outperform the market in the event of a recession and/or another market downturn. BUY
Xcel Energy (XEL – yield 3.0%) – This clean energy utility stock has been trending slightly lower since the beginning of April. But defensive stocks are still a safe and promising place to be as a recession later this year becomes more likely. This stock has the ability to both well-weather turbulent times and excel when the market finally recovers. BUY
USB Depository Shares (USB-PS – yield 5.8%) – This preferred stock took a big hit as the banking crisis heated up. It fell about 18% from the recent high but has since been recovering as panic has waned. Bank stocks have been under some pressure across the board. Although this is a preferred stock of one of the country’s largest banks, that has actually increased deposits, it has taken a hit along with everything else. The bank is rock solid, and this security should continue to rally higher. BUY
Invesco Preferred ETF (PGX – yield 6.2%) – Longer-term rates are bouncing around again with a bias toward lower since the bank failures increased the risk of recession later this year. This fund is also vulnerable to fluctuations resulting from banking troubles and many preferred issues are those of banks. The find is only threatened if things escalate into a more widescale problem. BUY
Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.4%) – There could be some near-term turbulence with the price on the way to solid longer-term returns and diversification. The increased risk of a recession this year bodes well for the near-term total return of this fund. BUY
High Yield Tier
|Security (Symbol)||Date Added||Price Added||Div Freq.||Indicated Annual Dividend||Yield On Cost||Price on close 5/15/23||Total Return||Current Yield||CDI Opinion||Pos. Size|
|Enterprise Product Partners (EPD)||8.30%||25||27%||7.70%||BUY|
|ONEOK Inc. (OKE)||6.00%||64||25%||5.90%||HOLD|
|Realty Income (O)||63||13%||4.86%||HOLD|
|The Williams Companies, Inc. (WMB)||8/10/22||33||Qtr.||1.7||5.30%||30||-8%||5.93%||BUY||1|
|Current High Yield Tier Totals:||6.00%||14.30%||6.10%|
Dividend Growth Tier
|Broadcom Inc. (AVGO)||629||51%||2.90%||HOLD|
|Brookfield Infrastucture Ptrs (BIP)||36||76%||4.30%||BUY|
|Eli Lily and Company (LLY)||433||198%||1.10%||HOLD|
|Intel Corporation (INTC)||31||-34%||1.60%||HOLD|
|Hess Corporation (HES)||135||0%||1.30%||BUY|
|UnitedHealth Group Inc. (UNH)||493||-7%||1.30%||BUY|
|Visa Inc. (V)||12/8/21||209||Qtr.||1.5||0.70%||232||13%||0.78%||HOLD||1|
|Current Dividend Growth Tier Totals:||2.20%||64.10%||2.20%|
Safe Income Tier
|U.S. Bancorp Depository Shares (USB-PS)||10/12/22||19||Qtr.||1.13||6.10%||18||2%||6.40%||BUY||1|
|Xcel Energy (XEL)||10/1/14||31||Qtr.||1.95||2.80%||69||189%||3.00%||BUY||1|