November 22, 2023

Peak Interest Rates Reignite Technology

Wall Street has decided that interest rates have peaked. And the market loves it. The S&P 500 is up 8.4% so far this month and has made up most of the decline of the prior three months.

Rising interest rates, as a result of inflation, have dogged the market for the past two years. But inflation now seems to be under control and the Fed is indicating that it is done hiking the Fed Funds rate. The benchmark 10-year Treasury rate briefly touched the crucial 5% level at the end of October but plunged to below 4.5% on the inflation and Fed news.

With inflation and rising rates out of the way, the market is free to rally. It’s good news for defensive stocks in the utility and REIT sectors but even better news for technology stocks. That sector has driven the market for the past two decades. Rising rates held it back. Without rising rates and the additional artificial intelligence (AI) catalyst, the sector is soaring again.

The four portfolio positions in technology – Broadcom (AVGO), Qualcomm (QCOM), Intel (INTC), and Digital Realty Trust (DLR) – are catching fire. Three of the four stocks made a new 52-week high over the past week. The four stocks are collectively up an average of over 17% so far in November and 53% YTD.

Of course, things can change. The positive situation could discombobulate next year. The Goldilocks scenario where the economy is solid but not too strong could unravel. We’ll see what happens in the new year. But the prognosis for stocks looks good for at least the rest of the year.

The biggest opportunity for upside over the next year may be Qualcomm (QCOM). Although it has moved higher lately and returned 20% YTD, it has significantly lagged the technology sector, which is up 50% YTD. The problem has been lower revenue because of falling smartphone sales.

But it appears that the smartphone market may have bottomed out. At the same time, Qualcomm has very promising AI chips for smartphones and PCs scheduled to launch in 2024. While other companies have rallied strongly on the AI phenomenon already, Qualcomm should be a later bloomer as AI inevitably finds its way into mobile devices.

There are also two SELLS this week in Hess Corporation (HES) and Tractor Supply Company (TSCO).

Recent Activity

October 25
Hess Corporation – Rating change “BUY” to “HOLD”

November 8
Purchased Marathon Petroleum Corporation (MPC) - $143.50
USB Depository Shares (USB-PS) - Rating change “HOLD” to “BUY”
Vanguard Long-Term Corp. Bd. Index Fund (VCLT) - Rating change “HOLD” to “BUY”

November 22
SELL Hess Corporation (HES)
SELL Tractor Supply Company (TSCO)

High Yield Tier

Enterprise Product Partners (EPD – yield 7.6%) – This midstream energy partnership has done quite well in the past two challenging years for the market. It has consistent earnings that can hold up to inflation and a slowing economy and that huge yield is extremely well supported with 1.7 times cash flow coverage. In fact, Enterprise just increased the distribution by 5.3% in the last quarter. The growth in profits and distributions is likely to continue as the partnership is expanding operations in the high growth Permian basin. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.7%) – This midstream energy company has pulled off the recent high made in the middle of October and has been bouncing around the last month. ONEOK reported solid earnings with adjusted EBITDA growth of 11% over last year’s quarter as natural gas volumes were up 12%. The company also completed the acquisition of Magellan Midstream Partners and raised the guidance on projected consolidated earnings going forward. BUY

Realty Income (O – yield 5.8%) – This has been the one of the longest periods of sustained lousy performance for this legendary income REIT in a long time. But the future prognosis should be a whole lot better. O sells at one of the cheapest valuations ever. Peak interest rates should be a huge benefit for the REIT sector that could prompt a sustained rally. And its retail staple properties and new data center acquisitions should produce reliable revenue in just about any economy. BUY

The Williams Companies, Inc. (WMB – yield 5.0%) – The natural gas pipeline company reported strong earnings growth earlier this month. It also delivered good news in terms of acquisitions and expansions. It pays a well-supported 5.1% yield (with 2.38 times cash flow coverage) in a business with steady demand even in tough times. Its recent acquisitions and expansions ensure more solid growth going forward all the way out to 2028. This should be a solid holding in any environment. WMB continues to hover near the 52-week high but it’s still below the 2022 high. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 4.5%) – The drug maker has shrinking revenue and earnings this year because its blockbuster Humira drug is facing biosimilar competition in the U.S. But this has long been expected and the company’s new drugs and pipeline are well on pace to make the company a solid earnings grower in the years ahead.

Its two new biosimilar drugs, Rinvoq and Skyrizi, grew sales by more than 50% in the last quarter and the company expects these drugs alone to eventually surpass Humira’s peak sales. The stock sells at a low valuation and investors sense that it might turn the Humira corner sooner ahead of a very bright future. The stock may seem like it’s dead money but once we get through this year things can improve dramatically. BUY

Broadcom Inc. (AVGO – yield 1.8%) – The artificial intelligence juggernaut has reignited. AVGO has soared over 18% this month to a new all-time high and is up 80% YTD. Technology stocks have rallied strongly this month as interest rates have moved lower. AVGO had been held back by the tough environment for tech stocks and has been unleashed again. Nvidia (NVDA) reports earnings after the bell on Tuesday. It was the Nvidia earnings report in May that ignited the furious AI rally in AVGO. We’ll see if this quarter’s earnings are a catalyst for further upside. HOLD

Brookfield Infrastructure Partners (BIP – yield 5.7%) – This is a fantastic partnership with crucial assets that generate reliable revenues in any environment. It also has a superior track record of market-beating performance over time. But lately, it has been mostly an interest rate play. It was a dog all year as intertest rates rose. However, the changing situation is seriously boosting BIP. If interest rates have indeed peaked, it should ignite BIP for the rest of this year and beyond. It’s dirt cheap with a great business and safe distribution. (This security generates a K-1 form at tax time). BUY

Digital Realty Trust, Inc. (DLR – yield 3.6%) – DLR rose to a new 52-week high last week as both REITs and technology stocks rallied because of falling interest rates and the perception that they’ve peaked. Data center spending is expected to grow 11% per year until 2030. Digital is an elite data center REIT that should muster better growth than that. There is also an additional catalyst of artificial intelligence spending and expansions. Even in a tough year for REITs, DLR has returned about 38% YTD. If interest rates have peaked, REITs should continue to rally, giving DLR a further boost. BUY

Eli Lilly and Company (LLY – yield 0.8%) – One of Lilly’s big drugs up for FDA approval got it earlier this month. It’s weight loss drug Mounjaro was approved. Some analysts estimate this could potentially be a $20 billion per year drug. That would match the best-selling drug ever. It still has its Alzheimer’s drug up for FDA approval in the months ahead. LLY continues to hover right around the highs with no consolidation. Investors are unlikely to sour on the stock with its new drugs and expected 25% annual earnings growth in the years ahead even without these new drugs. HOLD

Rating change – “HOLD” to “SELL”

Hess Corporation (HES – yield 1.2%) – This company had the unique ability to grow production at low costs. It had huge leverage to the upside with rising oil prices and strong resilience with flat or falling prices. But it was purchased by Chevron (CVX) for a lame premium in a deal that will close early next year. Now it trades just like owning CVX shares.

I’m not as bullish on the energy market as a whole as I was on HES. Oil prices peaked a little above $93 per barrel at the end of September and are currently languishing in the high $70s range as supply and demand have returned to parity. HES was held on the possibility of a widening conflict in the Middle East but it looks like that won’t happen. SELL

Intel Corporation (INTC – yield 1.1%) – Strong earnings, encouraging news about future business, and a much better market environment are turning INTC around. Intel received and analyst upgrade last week and rallied nearly 7% on the same day to a 17-month high. INTC is up over 17% in the last week, 28% in the last month, 37% in the past three months, and over 72% YTD. Earnings indicate that Intel’s turnaround is well on track. It has promising new chips coming out in high growth areas and its foundry business could be huge. The stock got dirt cheap, and investors are increasingly willing to bet on the company’s future. BUY

McKesson Corporation (MCK – yield 0.5%) – The market will bounce around in the near term. Sector performance rotates. In six months, we could have a solid economy or a recession. But McKesson’s business will continue to hum along regardless of what happens. It caters to a market that is growing all by itself and demand is unaffected by inflation, the Fed, GDP, or whoever is President. I don’t know what the next month holds for MCK, but the longer term should be stellar. BUY

Marathon Petroleum Corporation (MPC – yield 2.2%) – This refiner and brand-new portfolio addition has been moving higher since being added to the portfolio earlier this month. Inflation is retreating. Interest rates have likely peaked. And the economy is still solid. That sets up well for refiners and Marathon in particular. The refining business can vary from month to month and quarter to quarter. But the longer-term dynamics are strong for U.S. refiners. Hopefully, MPC can continue to rally in the weeks and months ahead. BUY

Qualcomm Inc. (QCOM – yield 2.6%) – The struggling chipmaker stock got a big boost this month. While the overall tech sector rallied on falling interest rates, Qualcomm was also helped by the earnings report. Though results for the quarter still showed lower earnings and revenue, the future is looking increasingly bright, and investors took notice. Qualcomm is introducing new AI chips for PCs and smartphones that could be big sellers next year. Also, strong smartphone sales in China are indicating the phone sales have already bottomed. It’s looking like 2024 could be a very profitable year. QCOM could be among the next big beneficiaries of the AI craze in the year ahead. BUY

Rating change – “BUY” to “SELL”

Tractor Supply Company (TSCO – yield 2.1%) – I like this rural retail company stock and expect it to have a bright future. It has solid and consistent growth and generates solid revenues even in a slow economy with its strong array of staples products. That’s why it has managed to grow earnings for 31 straight years.

But the consumer, which had remained resilient, is starting to roll over. Big retailers earnings report are indicating a weaker consumer. More importantly, the situation is likely to get worse in the quarters ahead. The market doesn’t seem to care that rural consumers already rolled over and Tractor Supply is still delivering solid results. As investors sour on the consumer, they will likely take down TSCO with the rest of the bunch. There is more downside risk than upside potential ahead. Maybe we will revisit this one in a different environment. SELL

UnitedHealth Group Inc. (UNH – yield 1.4%) – Last month’s earnings report missed estimates slightly, due to temporary factors, and revenue grew 8.3% over last year’s quarter. The company also reiterated guidance for 7.5% earnings growth for the full year in 2023. The stock is higher since the report, and everything looks solid going forward. UNH is well positioned as a defensive company with highly reliable and predictable revenue in an uncertain environment. When the market rallies like it has this month, defensive plays like this get shunned. But you’ll be glad you have UNH if the economy rolls over next year. BUY

Visa Inc. (V – yield 0.8%) – It’s a new high! This payment processing company is thriving in the current environment. While the weakening consumer is a negative, international business and travel is thriving and more than offsetting the negatives for now. It has a strong business that should remain solid in all but a recessionary environment. If the economy continues to remain stronger than expected, V should have more upside. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 3.4%) – NEE had been riding high again until last week. NextEra reported earnings that beat estimates and grew 10.6% from last year’s quarter. Management also reiterated previous growth projections and said the company expects to deliver earnings near the top of the expected range through 2026. NEE spiked more than 8% the week of the report. NEE also made a very convincing 26% move off the low. But the stock pulled back after that as solar power companies came under pressure as its subsidiary NextEra Energy Partners (NEP) was downgraded citing pressure from higher interest rates. NEE seems to be bouncing back from that too. HOLD

USB Depository Shares (USB-PS – yield 6.1%) – November has been great news for this and other fixed rate investments. Interest rates appear to have peaked which means the selling is over in fixed income and prices are likely to rise as rates fall. The price has soared about 14% since the beginning of the month. And USB-PS has now returned more than 4% since being added to the portfolio a little over a year ago despite the rising interest rate environment. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.3%) – Peaking interest rates are also a huge positive for VCLT, as evidenced by the 8.2% price surge this month. This long-term bond fund is verry sensitive to interest rates. It held up relatively well in the rising rate environment and now it looks like rates are trending lower. BUY

Xcel Energy (XEL – yield 3.5%) – This clean energy utility stock has been trending higher since the beginning of last month. The low may be in. XEL had a convincing 13% move off the low. But, like NEE, XEL came under pressure last week as analysts expressed concern about the solar energy business amid the current high interest rates. But this is one of the best utility stocks to own and the recent debauchery may prove to be very temporary. XEL still sells near the lowest levels of the past several years and now has some positive momentum. BUY