All Eyes on the Fed
It’s all about the Fed right now. The recent rally in stocks may continue or abruptly end based on what the Central Bankers say today.
Today is the Fed’s November meeting where the way-late-to-the-party inflation tamers are widely expected to raise the Fed Funds rate another 0.75% for the fourth time this year. That’s baked into the cake. The main event today will be what the Chairman says about the future course of rate hikes.
The Fed has previously indicated it intends to raise rates to 4.5% to 5.0% by early next year. But today’s hike would put the rate at about 4%, with only 0.5% to 1.0% to go to achieve the previously stated target. Investors are hopeful that the 0.75% hikes are done, and that peak hawkishness is over. That would suggest a major turnaround in a huge contributor to this bear market.
If the Fed indicates that the worst might be over, the rally should continue. If the Fed throws cold water on that notion, the rally may end abruptly. We’ll see what happens.
But even if investors get the news they crave and the market rallies, we’re not out of the woods yet. It remains to be seen if inflation will seriously decline. If it’s stubborn, the Fed will have to be more aggressive than previously anticipated. And if the completed hikes do put the kibosh on economic growth, investors will have to contend with crummy earnings in the quarters ahead.
While the market indexes may not have yet bottomed, interest rate-sensitive stocks may have. A recession is likely to put downward pressure on longer-term interest rates and the selling in utilities and REITs may have been way overdone. That’s why defensive and recession-resistant positions NextEra Energy (NEE), Xcel Energy (XEL), and Brookfield Infrastructure Partners (BIP) have been recently upgraded to “BUY”.
High Yield TierEnterprise Product Partners (EPD – yield 7.6%) – The midstream energy partnership reported strong earnings yesterday. Cash flow from operation was up 13.2% and distributable cash flow rose 16% for distribution coverage of a sensational 1.8 times. Enterprise also reported record volumes of throughput of oil and gas, the main driver of profits. But the market yawned, and the stock barely budged.
EPD is still well off the high of June. It seems to have gotten somewhat caught up in a more inclusive market malaise. But with decent price performance and that amazing distribution yield, EPD is a huge winner in this environment. I expect the same or better going forward. (This security generates a K-1 form at tax time.) BUY
ONEOK, Inc. (OKE – yield 6.2%) – ONEOK reported earnings this morning that beat estimates for the third quarter and expected a more than 10% increase in net income for 2023. Demand and volumes for natural gas continue to be resilient and are expected to remain so as demand in Europe and Asia remains huge. The huge dividend is safe and the company also has automatic inflation adjustments built into its contracts. This midstream energy company should be ideal for this market. BUY
Realty Income (O – yield 4.8%) – This legendary monthly income payer is up over 13% from the low in mid-October. It took a drubbing from rising interest rates along with other conservative dividend-paying stocks during the last selloff. But the selling is likely overdone as Realty’s earnings should be resilient in a recession and interest rates may also move lower. In addition, Realty should grow above normal rates and a recent large acquisition should prompt strong growth in the quarters ahead. Realty reports earnings after the close today. BUY
The Williams Companies, Inc. (WMB – yield 5.1%) – This midstream energy company in the form of a corporation has also recovered nicely after a steep fall in September. It’s up over 17% from the September low and only about 12% from the 52-week high and recently topped the 200-day moving average. Williams reported earnings yesterday that topped estimates with earnings growth of 15% over last year’s quarter. A big reason for the strong earnings is resilient natural gas demand, something that is likely to endure through the recession based on shortages overseas. The stock is getting a bump and the good times should continue. BUY
Medical Properties Trust, Inc. (MPW – yield 10.0%) – Earnings continue to be solid for this unloved and neglected hospital property REIT. Earnings grew at about 30% for the quarter and the stock has risen about 7% over the past week. Results strongly indicate that the stratospheric dividend should be safe. The stock had been beaten to a pulp with shares down about 50% YTD. It’s been an unforgiving market where negative sentiment stays entrenched. But fundamentals should win in the end. HOLD
Dividend Growth TierAbbVie (ABBV – yield 4.0%) – ABBV is one of the very few stocks that is actually trading higher since the beginning of August. It also has a positive return YTD, which makes it somewhat of a superstar in this crummy market. But ABBV is still way off the high of last spring and has been sort of floundering since. It may be due to worries about the Humira patent expiration next year.
But those worries are overblown as the company already has two worthy successors to the drug whose sales won’t fall off a cliff after expiration. It also has one of the best pipelines in the business. In addition, Humira worries are already very much baked into the price and overblown. ABBV sells at just 12 times forward earnings. HOLD
Broadcom Inc. (AVGO – yield 3.5%) – While the chip maker and infrastructure software provider continues to deliver on an operational basis, it’s getting creamed by this market. Broadcom once again delivered on earnings with 40% earnings growth and a 25% revenue increase versus last year’s quarter. It also raised guidance for the rest of the year. But that seems to matter very little in a year when the whole technology sector continues to get crushed. But the tech sector will recover. And when it does, AVGO will make up for lost time. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.9%) – The infrastructure partnership reported terrific earnings this morning. It soundly beat expectations with funds from operations (FFOs) growth of 24% for the quarter. That’s impressive considering BIP has fallen more than 20% from the high over the past couple of months. Rising interest rates soured investors as fixed rate alternatives became more attractive. There was also some concern about the strong dollar and negative exchange rate effect. But this is a terrific company with reliable earnings in a recession that should be performing better. BUY
Eli Lilly and Company (LLY – yield 1.1%) – The superstar big pharma company reported earnings on Monday that beat expectations but slightly lowered guidance for 2022. Guidance was lowered because of the strong dollar effect. But the stock is only down a couple of dollars per share since because that’s not the main story. It has two potential mega blockbusters pending approval.
Its diabetes drug, Mounjaro, is pending fast track approval for weight loss. Studies so far have made the drug one of the most promising ever seen in a country where nearly 2 in 5 adults are considered obese. Some analysts estimate the drug could have annual sales of $25 billion. There’s also the Alzheimer’s drug that could be huge. HOLD
Intel Corporation (INTC – yield 5.1%) – This stock may well have bottomed. The company reported earnings last week that missed estimates and lowered 2022 guidance, and the stock traded higher on the news. Revenue shrunk 20% over last year’s quarter but beat estimates while earnings of $0.25 per share were short of the expected $0.32. It also lowered 2022 revenue estimates to $63 billion to $64 billion, below the previous guidance of $65 billion to $68 billion. Intel cited a “pronounced slowdown in demand” but improvement in the beleaguered PC sector.
The bad news was already in the stock as it sells near book value. It also has significant promise in its growing foundry business that should be further aided by government subsidies. The company isn’t at risk of bankruptcy and the dividend is safe with a low payout ratio. It looks like the bottom is already in and the stock should trend higher from here. HOLD
Qualcomm Inc. (QCOM – yield 2.6%) – The tech sector still can’t get out of its own way. Inflation and rising interest rates persist, and tech earnings continue to be downgraded. Even though business is strong, QCOM can’t fight the gravity of a sinking sector. However, Qualcomm reports earnings today. The company had forecast earnings growth of 23% in the second half of this year. Hopefully another positive report will get the stock moving higher. HOLD
Visa Inc. (V – yield 0.9%) – Visa reported earnings last week that once again killed it. Revenue spiked 22% and earnings were up 27% from last year’s quarter. The payments processing giant continues to benefit from the end of Covid restrictions despite the slower economy. V got a nice bump after earnings. But the situation is murkier going forward as the U.S. and global economies continue to deteriorate and the dollar continues to rise in value. HOLD
Safe Income TierNextEra Energy (NEE – yield 2.2%) – The alternative energy utility continues to rebound since being upgraded to a BUY. This is one of the best utilities on the market with reliable revenues in any economy and growth from its huge clean energy business. The stock was decimated in the recent selloff because of spiking interest rates. But the evolving recession is likely to knock rates down in the months ahead. And NEE should be a stellar relative performer in a recession. BUY
Xcel Energy (XEL – yield 3.2%) – Xcel reported a slight miss in earnings last week. But the stock has been trending higher anyway because it was oversold in the September market plunge. XEL is up about 15% since the low in mid-October. This stock does tend to bounce around a lot on a longer-term upward trend. It should also benefit from new legislation from Washington that will reduce costs on its considerable clean energy production. The stock should be solid in a recession. BUY
USB Depository Shares (USB-PS – yield 6.1%) – Interest rates have spiked to the highest level in more than a decade. This investment grade fixed-rate investment is something that income investors have missed for many years: a sizable yield on a safe income investment that is diversified from the stock market. Interest rates may go higher. But they are less likely to average higher over the next several years as a recession will put negative pressure on rates. BUY
|High Yield Tier|
|Security (Symbol)||Date Added||Price Added||Div Freq.||Indicated Annual Dividend||Yield On Cost|
|Total Return||Current Yield||CDI Opinion||Pos. Size|
|Enterprise Product Partners (EPD)||02-25-19||28||Qtr.||1.90||8.30%||25||19%||7.6%||BUY||1|
|ONEOK Inc. (OKE)||05-12-21||53||Qtr.||3.74||6.00%||60||26%||6.2%||BUY||1|
|Realty Income (O)||11-11-20||62||Monthly||2.98||4.2%||62||10%||4.80%||BUY||1|
|The Williams Companies, Inc.||08-10-22||33||Qtr.||1.70||5.3%||33||3%||5.20%||BUY||1|
|Medical Properties Trust, Inc.||09-14-22||14||Qtr.||1.16||8.4%||12||-14%||10.00%||HOLD||1/2|
|Current High Yield Tier Totals:||6.4%||8.8%||6.8%|
|Dividend Growth Tier|
|Broadcom Inc. (AVGO)||01-14-21||455||Qtr.||16.40||2.6%||468||9%||3.5%||HOLD||1|
|Brookfield Infrastucture Ptrs (BIP)||03-26-19||24||Qtr.||1.44||3.6%||37||71%||3.9%||BUY||2/3|
|Eli Lily and Company (LLY)||08-12-20||152||Qtr.||3.92||1.3%||353||140%||1.1%||HOLD||2/3|
|Intel Corporation (INTC)||03-09-22||48||Qtr.||1.46||3.1%||28||-39%||5.1%||HOLD||1|
|Visa Inc. (V)||12-08-21||209||Qtr.||1.50||0.7%||207||0%||0.90%||HOLD||1|
|Current Dividend Growth Tier Totals:||2.5%||40.3%||3.0%|
|Safe Income Tier|
|NextEra Energy (NEE)||11-29-18||44||Qtr.||1.66||1.7%||78||91%||2.2%||BUY||1/2|
|Xcel Energy (XEL)||10-01-14||31||Qtr.||1.95||2.8%||66||176%||3.0%||BUY||2/3|
|U.S. Bancorp Depository Shares||10-12-22||19||Qtr.||1.13||6.1%||19||-1%||6.1%||BUY||1|
|Current Safe Income Tier Totals:||2.3%||133.5%||2.6%|
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