November 23, 2022

The Bear Market Will End, But Not Yet

I’m an optimist. That quality has served investors well for decades. There are many stocks at cheap prices that will likely be a lot higher in a year or two as a new bull market will emerge. But I don’t believe that the market is on its way to the Promise Land just yet.

The S&P rallied 15% from the October lows as a softer inflation report ignited optimism of a less aggressive Fed and a possible soft landing. Hopefully that will be the case. But I’m skeptical that stocks can gain sufficient traction to break out of this bear market while still facing high inflation, an aggressive Fed, and a looming recession.

Things will get better. But they might get worse first in the months ahead. While the market indexes may still hit a new low, it is likely that interest rate-sensitive stocks have already bottomed. Defensive dividend-paying stocks that got clobbered in the fall selloff as longer-term interest rates spiked higher have rallied strongly off the bottoms.

A weaker economy and certainly a recession will pressure rates lower. In fact, the 10-year Treasury rate has already started falling. Meanwhile, some of the very best companies to own in a recession got dirt cheap. These stocks should continue to rally in the months ahead.

At the same time, the portfolio still has exposure to more cyclical stocks with Visa (V), Qualcomm (QCOM), Broadcom (AVGO), and Intel (INTC). These stocks have moved sharply higher in the recent rally. Even if the market turns south in the near term, these stocks can make up for lost time when the market inevitably turns. Plus, you never know. This could be the rally that leads us out of the bear market and these stocks give us upside leverage if that happens.

High Yield Tier

Enterprise Product Partners (EPD – yield 7.7%) – This midstream energy partnership can seem like a bummer of a holding in some ways. EPD is more than 13% below the 52-week high and the stock is the same price it was at the beginning of March. It’s also been moving sideways for almost two months now. But add some perspective. EPD has delivered a total return, between distributions and appreciation, of 22% YTD in a year when the index is down almost 20%. Not bad. EPD also pays a massive 7.7% yield that is very safe. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.7%) – This midstream energy stock had been trending sharply higher since late September. After consolidating for a couple weeks, it appears to be on the move again. OKE tends to move along with the energy sector in the near term even though it has little commodity price exposure. But unlike much of the sector this company is extremely resilient in a recession as natural gas volumes should remain solid because of huge demand in Europe and Asia. The big fat dividend is another feature that should be in demand in the market going forward. BUY

Realty Income (O – yield 4.6%) – Earnings for this legendary income REIT surpassed estimates as it declared its 100^th consecutive quarterly dividend increase. Results continue to reflect the merger with VEREIT that was completed a year ago. Realty’s typical tenants of drug stores, convenience stores and supermarkets enabled it to continue raising the dividend through the pandemic and should prove resilient in this recession. This is a great safe dividend stock that got oversold in the last downturn and has been trending higher since the middle of last month. BUY

The Williams Companies, Inc. (WMB – yield 5.0%) – This midstream energy company has been quietly hot, soaring 20% from the recent low. WMB has leveled off in the past couple of weeks but hasn’t really pulled back. It continues to outperform its midstream energy peers and the overall market. It seems to hold up even when the sector hits a bump. A big reason for the solid performance is strong earnings amid resilient natural gas demand, something that is likely to endure through the recession based on shortages overseas. BUY

Medical Properties Trust, Inc. (MPW – yield 9.3%) – This unloved hospital property REIT has had a nice move higher this past month. It’s up about 27% from the October low. Of course, MPW is still down around 40% YTD, but it may have bottomed out. Earnings grew at about 30% for the quarter, which is an indication that perhaps the market has treated the stock unfairly. MPW got a bump after earnings and has been trending higher since. Results strongly indicate that the stratospheric dividend should be safe. The fundamentals support a much higher price and now some momentum is there too. HOLD

Dividend Growth Tier

AbbVie (ABBV – yield 3.7%) – Ever so quietly, this healthcare stud has been on the move. It’s up almost 20% since the end of September and over 10% in the last three weeks. ABBV is now at the highest price since April and has returned 23% YTD. The stock held like a rock in the last market selloff but hadn’t been going anywhere until recently. The market loves the defensive business as a recession looms. Plus, AbbVie has 11 other drugs besides Humira that are on track to top $1 billion in net revenue this year. It’s a great company meeting a friendly market environment for the sector. HOLD

Broadcom Inc. (AVGO – yield 3.1%) – This technology stalwart has been busting a move. It’s up 20% since early this month. The oversold semiconductor sector has been hot, and Broadcom is an exceptional company in the industry. Earnings are always reported late and will be posted at the beginning of next month. The company is expected to post earnings per share growth of 31.5% for the quarter. And it usually beats expectations. AVGO is still a million miles from the 52-week high and can move back up fast when the technology environment improves. And it will. HOLD

Brookfield Infrastructure Partners (BIP – yield 3.8%) – The infrastructure company reported terrific earnings early this month. It soundly beat expectations with funds from operations (FFOs) growth of 24% for the quarter. BIP had fallen more than 20% from the high in the last market selloff but the selling was unjustified as Brookfield’s crucial assets will continue to deliver steady earnings through a recession. The dividend is solid, and the stock is still cheap. (This security generates a K-1 form at tax time). BUY

Eli Lilly and Company (LLY – yield 1.1%) – The superstar big pharma company stock has been hovering right around the all-time high all month. 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. There’s also the Alzheimer’s drug that could be huge. The high percentage chance of launching what may become a mega blockbuster in the near future should keep this stock high and potentially soaring to new levels regardless of what the market does. HOLD

Intel Corporation (INTC – yield 4.9%) – This stock may well have bottomed out. Earnings were terrible again but that’s probably already baked into the price. The near term is ugly, but the dividend is safe, and the future could be very bright. INTC currently sells near book value. It also has significant promise in its growing foundry business that should be further aided by government subsidies. The long term is promising. It’s the short term that has been the problem. But INTC has quietly moved nearly 30% higher off the low of last month. HOLD

Qualcomm Inc. (QCOM – yield 2.5%) – After a long time floundering in the abyss, QCOM moved 25% higher in the last three weeks. The cooler inflation numbers ignited a big rally in tech. Even if the worst still isn’t over for the sector, QCOM is showing you how fast it can move higher when the tech sector environment improves, and it surely will. Remember, the market anticipates. Qualcomm just announced a profit slowdown for the quarters ahead. But the market has been pricing that in all year, even when current profits were still booming. Now the market is starting to look toward the recovery. HOLD

Visa Inc. (V – yield 0.9%) – This stock soared about 18% in the last five weeks. Visa reported earnings 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. The recent market rally is more evidence that V quickly benefits when the market turns. It’s been on a roll that hopefully lasts longer. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.0%) – I do love it so. NEE is up over 14% since being upgraded to a BUY last month. Even if the overall market hits a new bottom again, I believe NEE has already seen the bottom and will continue to recover. The interest rate spike that sent utility stocks reeling is already reversing as we head towards recession. NEE has already regained most of what it lost in the fall selloff. And it’s probably not done yet. BUY

Xcel Energy (XEL – yield 2.8%) – This clean energy utility was oversold in the September market plunge and has had a recovery very similar to NEE’s. It was upgraded to BUY because it was timely after a huge selloff that is proving to have been unjustified. The near term is shaping up well and the longer-term prognosis is also excellent. 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 5.5%) – The high paying investment grade preferred stock is certainly working so far. It was added to the portfolio after interest rates spiked to a 15-year high. Rates have since been plunging as inflation cools and we barrel toward recession. Hopefully, you got the stock last month when the yield was over 6%. BUY

Invesco Preferred ETF (PGX – yield 6.2%) – Ditto what I said about USB-PS. Longer-term rates have fallen significantly since this preferred stock ETF was added to the portfolio early this month. Although interest rates may have peaked for the foreseeable future, it’s still a good time to lock in this high yield as a recession is likely to pressure rates lower.

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