May 31, 2023

AVGO Rockets

The technology sector is on fire. Before the market opened on Tuesday, the sector was up 5% for the past week, 15% for the last month, and 34% YTD. It’s also up more than 2% on Tuesday. What happened?

The outlook for many sector stocks greatly improved last Thursday. AI, or artificial intelligence, had been seen as a huge growth engine going forward as companies invest heavily in the technology. Those growth projections got a huge shot of adrenaline and the AI phenomenon got real when semiconductor company Nvidia (NVDA) reported earnings last week.

Earnings and guidance blew the doors off expectations because of much higher investment and spending in the technology than previously thought. It is estimated that investment in AI will more than double, to $1 trillion, by 2030. The projections for companies that benefit are being adjusted significantly higher.

The upheaval affects the three technology stocks in this portfolio. Intel (INTC) is the only stock that hasn’t benefited. Their new AI chip isn’t expected until 2025. The stock fell initially but has since gained back what it lost. The other two stocks, Qualcomm (QCOM) and Broadcom (AVGO), are benefiting in a big way.

Qualcomm, which has the cutting-edge AI chip for mobile devices, is up over 10% since Thursday and has been revitalized after stumbling the past month. But the big story is AVGO. That stock has soared a whopping 26% since late last week. It’s also up 40% since May 9. In addition to getting a huge benefit from higher AI investments, it also announced a new deal with Apple.

Apple announced it will invest multi-billion dollars with Broadcom to develop components for 5G radio frequencies. The deal marks a big change in perception. Apple had accounted for 20% of Broadcom revenues and investors had foreseen Apple reducing that business because of its focus on developing proprietary chips. That specter had been a cloud over Broadcom. This news eliminates a negative and adds a huge positive in one fell swoop.

AVGO has soared beyond even the most bullish price targets. A stock can’t soar forever, especially one this size. The company also reports earnings this week. That’s usually a positive as earnings have been stellar. But after such a rise there is a greater chance of disappointment. Let’s insure that we keep some of the profits from this huge move and sell half the position after this huge rally in a still highly uncertain market.

Recent Activity

May 10
Purchased Hess Corporation (HES) - $135.24

May 17
ONEOK, Inc. (OKE) - Rating change “BUY” to “HOLD”

May 23
SOLD ½ Eli Lilly and Company (LLY) - $423.21

May 31
AbbVie Inc. (ABBV) – Rating change “HOLD” to “BUY ANOTHER THIRD”
Broadcom Inc. (AVGO) – Rating change – “HOLD” to “SELL HALF”

High Yield Tier

Enterprise Product Partners (EPD – yield 7.7%) – 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. 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. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 6.7%) – The stock has bounced since being down sharply last week after the market hated its announced acquisition of 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 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. The stock has leveled off since the plunge. HOLD

Realty Income (O – yield 5.2%) – This legendary income REIT is down more than 20% from the high of last August. The market sold off late last summer. This year so far has been a tough one for defensive stocks and REITs. But it isn’t time to give up on the stock. This market rally might be out of gas and there is still the possibility of a looming recession. Defensive stocks may make up for lost time in the next several months. This is a company with safe consumer staple tenants that has raised the dividend in the last three recessions. HOLD

The Williams Companies, Inc. (WMB – yield 6.2%) – It’s been a crummy year so far for this midstream energy company stock. It’s down over 11% YTD. This year has not been kind to defensive stocks or energy stocks so far. There’s also natural gas. Prices have fallen largely because of the unusually warm winter temperatures throughout the country and the world. Anything natural gas related gets neglected. But it isn’t affecting the bottom line. Williams 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. BUY

Dividend Growth Tier

Rating change “HOLD” to “BUY ANOTHER THIRD”

AbbVie (ABBV – 4.3%) – What a difference a month makes. A month ago, ABBV was near the 52-week high after a three-month rally in a choppy market. In the last month ABBV has fallen over 20% and is within bad breath distance of the 52-week low. This is a notoriously bouncy stock and the downward move started with disappointing earnings where its new drugs grew below projections in the long-awaited Humira patent expiration year.

The company has a phenomenal pipeline capable of replacing lost Humira revenues in the next couple of years. And the longer-term prognosis is extremely bright. It’s also a defensive stock ahead of a likely time where such stocks thrive. It sells at a dirt-cheap valuation and the stock could fly again once investors start looking past this year. If you own the stock already, increase the two-thirds position to a full position by buying another third. BUY

Rating change – “HOLD” to “SELL HALF”

Broadcom Inc. (AVGO – yield 2.7%) – WOW! The semiconductor and software infrastructure stock has blasted off. As of Tuesday morning, AVGO is up 26% for the last week, 40% since May 9, and 108% from the 52-week low. The company is benefiting from skyrocketing market projections for AI-related investments. At the same time, Apple announced it will invest multi-billion dollars with Broadcom to develop components for 5G radio frequencies.

Although the amount of investment is still unclear, it marks a big change in perception. Apple had accounted for 20% of Broadcom revenues and investors had foreseen Apple reducing that business because of its focus on developing proprietary chips. That specter had been a cloud over Broadcom. This news eliminates a negative and adds a huge positive in one fell swoop.

The furious rally in the stock has taken the stock beyond any of the most bullish price target as it now trades between 850 and 900 per share. A stock can’t soar forever, especially one this size. The company also reports earnings this week. That’s usually a positive as earnings have been stellar. But after such a rise there is a greater chance of disappointment. Let’s insure that we keep some of the profits from this huge move in a market that’s still uncertain. SELL HALF

Brookfield Infrastructure Partners (BIP – yield 4.2%) – The infrastructure company is up over 10% this month while the market is slightly negative over the same period. The stock got new life after a sluggish period because Brookfield reported a solid earnings quarter with funds from operations (FFOs) per share growth of 12.5% over last year’s quarter. BIP did pull back a couple of days last week when the overall market sold off. But the stock has since regained its footing and moved back higher. It is still well positioned for a sluggish economy. (This security generates a K-1 form at tax time). BUY

Eli Lilly and Company (LLY – yield 1.1%) – LLY has begun to pull back a little bit after a huge surge. It may hold around here because it has two potential mega-blockbuster drugs up for approval later this year or early next as well as solidly growing earnings in any market. But the stock tends to pull back after big surges and half of the position was sold last week to lock in some if the recent profits in an uncertain market. 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 1.8%) – Nvidia (NVDA) rocked the market with blowout earnings and Intel got left behind. Intel fell 7% on the day of the announcement. What gives? Intel doesn’t really have a competitive AI chip. There’s one in the works. But it isn’t expected to launch until 2025. While analysts are upgrading the profit projections of other tech companies, Intel’s expectations are not changing for this year and next. It’s a bad relative comparison in the near term. But INTC gas bounced back and regained what it lost. HOLD

Qualcomm Inc. (QCOM – yield 2.9%) – After stumbling badly in recent months, QCOM has come back to life in a big way from all the AI hysteria last week. The stock has popped 10% since last Thursday and over 6% on Friday alone. Qualcomm describes itself as the “on device AI leader,” as opposed to Nvidia’s data center chips. The company will surely benefit as investment and profits from AI are now likely to soar sooner than previously expected. Also, smartphone demand is expected to pick up in the third and fourth quarters. HOLD

UnitedHealth Group Inc. (UNH – yield 1.4%) – UnitedHealth has strong predictable revenues in a very defensive business ahead of a possible recession later this year or early next. 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 has pulled back since being added to the portfolio, but the lag in defensive stocks is likely to correct itself in the months ahead. BUY

Visa Inc. (V – yield 0.8%) – V has been hanging in there despite a nowhere market. The payments processing company grew earnings per share by 17% and revenues grew double digits versus last year’s quarter. That’s terrific when the average stock is posting lower earnings. Plus, it can really take off when the market recovers for good. This is a great stock in an up market. The resilience in this market is encouraging and makes the stock easy to hold. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.5%) – This combination regulated and clean energy utility stock is currently at the lower end of its range. It is still more than 20% below the 52-week high. It has not been a good year for defensive stocks and the price is a reflection of that. But that could change in a big way if there is a recession and the market turns south. This company is targeting earnings per share growth of 6% to 8% annually through 2026 and 10% per year dividend growth through at least 2024.BUY

Xcel Energy (XEL – yield 3.2%) – This clean energy utility stock has been trending lower since the beginning of April. Although this stock tends to be bouncy, the recent weakness doesn’t make much sense. Defensive stocks are still a safe and promising place to be as a recession later this year becomes more likely. This stock has gotten cheap ahead of a period of likely market outperformance. BUY

USB Depository Shares (USB-PS – yield 5.8%) – This preferred stock took a big hit when 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, which has 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 fund 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