November 29, 2023

The Rally Takes a Temporary Breather

The strong November rally has sputtered out with the S&P 500 up 8.7% for the month so far. Is that the end of this upside leg?

The month started with a bang after the Fed indicated it was done hiking rates, and jobs and inflation numbers seemed to confirm Wall Street’s opinion that interest rates have peaked. The benchmark ten-year Treasury tumbled all the way from 5% at the end of October to 4.34% at midday on Tuesday.

After a tremendous first three weeks of the month, the S&P has been moving sideways. But I don’t think the rally is out of gas. November is still on track to be the best month for the index in over a year. A consolidation or a breather is probably healthy. And the news is still good.

The current belief in peak interest rates and a “soft landing” has investors still in an optimistic mood. The VIX, known as the market’s fear gauge, hit the lowest level since January 2020 last week. Any piece of good news could ignite a further rally with the current kindling.

The big number expected this week is PCE inflation, which is due to come out on Thursday. It is the Fed’s preferred inflation measure. Indications from all other inflation readings are that it should be a good number, or at least not a bad one. Hopefully, that can start a rally that lasts for what is left of this year.

We’ll see if the optimism lasts into next year. But things still look strong for the rest of this year.

Recent Activity

November 8^th
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^nd
SELL Hess Corporation (HES)
SELL Tractor Supply Company (TSCO)

High Yield Tier

Enterprise Product Partners (EPD – yield 7.5%) – 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 in 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 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 K1 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. I expect more of the same solid performance going forward. BUY

Realty Income (O – yield 5.7%) – This has been one of the longest periods of sustained market underperformance for this legendary income REIT in a long time. The stock is still light years below the pre-pandemic high despite higher earnings. After the pandemic recovery, interest rates rose and pulled O back down. It’s actually not far from the pandemic low. 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. BUY

The Williams Companies, Inc. (WMB – yield 4.9%) – The natural gas pipeline company just made a new 52-week high last week. Williams 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. 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 over 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 1.9%) – The artificial intelligence juggernaut pulled back after making another new high at the beginning of last week as the market and the tech sector have taken a breather. Technology stocks have rallied strongly in the first three weeks of this month as interest rates have moved lower. AVGO had been held back by the tough environment for tech stocks and was unleashed again. A pullback is normal after a surge higher. Broadcom reports earnings next week and maybe a good report can reignite a move higher. HOLD

Brookfield Infrastructure Partners (BIP – yield 5.8%) – This infrastructure partnership appears to have finally bottomed out after an abysmal year and a half. For a long time, this had been a stock that never had sustained down periods like this. It’s one of the things that made BIP so attractive. But the recent weird environment turned that on its head. Rising interest rates have been the primary culprit. With interest rates apparently having peaked, BIP should have a great chance for upside in the year ahead. It has amazingly resilient earnings and a safe dividend. If the economy slows, BIP could be a star again in 2024. (This security generates a K1 form at tax time). BUY

Digital Realty Trust, Inc. (DLR – yield 3.6%) – This data center REIT continues to kick butt. It just made another new high on Monday. Even though REITS have been terrible this year, DLR has now returned over 40% YTD. It looks like REITs have bottomed out and are on their way higher as interest rates have likely peaked. Digital also has the additional catalyst of increasing AI spending and is getting a boost from the AI craze. Hopefully, REITs will continue to rally and give DLR a further boost. BUY

Eli Lilly and Company (LLY – yield 0.8%) – Weight loss drug Mounjaro was approved earlier this month. Some analysts estimate it 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 around the high with no pullback of any significance. Investors are unlikely to sour on the stock with its new drugs and expected 25% annual earnings growth in the years ahead. HOLD

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 an analyst upgrade this month and rallied nearly 7% on the same day to a 17-month high. INTC is up over 27% in the last month and over 69% 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%) – This massive pharmaceutical distributor hasn’t done much since it was added to the portfolio in October. Other sectors have taken the spotlight in the market rebound. But MCK has returned over 23% YTD in a year when most healthcare and other defensive stocks have struggled mightily. It has a business that will continue to thrive even if the economy slows next year. It’s a defensive and growing business and the stock should be a great holding in any environment. BUY

Marathon Petroleum Corporation (MPC – yield 2.2%) – This newly added oil refiner has blown away the performance of its peers and the overall market for several years. Even though the energy sector is negative YTD, MPC has managed a better than 32% return. While the environment can vary from quarter to quarter, it should remain an overall profitable environment for refiners over the next several years. It’s good to have something in the portfolio that benefits in case the economy continues to be stronger than expected. BUY

Qualcomm Inc. (QCOM – yield 2.5%) – 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. While 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 that phone sales have already bottomed. QCOM is back to the higher levels of its trading range this year and next year should be a lot better. BUY

UnitedHealth Group Inc. (UNH – yield 1.4%) – This healthcare insurer has a spectacular long-term track record but has struggled with just a 3.5% return this year. Most healthcare stocks have struggled in the 2023 market for a host of reasons. But those reasons are unlikely to persist going forward. It has a highly predictable and growing business with the aging population. When the sector ceases to be out of favor, and it will, UNH could make up for lost time. BUY

Visa Inc. (V – yield 0.8%) – This payment processing company is hitting new all-time highs. It has been one of the very best financial companies to own but was held back by the pandemic and last year’s bear market. But earnings have been stellar. 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 3.2%) – NEE had been riding high again until a couple of weeks ago. 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 over 8% the week of the report. NEE has 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 6.0%) – 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 11% since the beginning of the month. And USB-PS has now returned over 5% 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 9.6% price surge this month. This long-term bond fund is very 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 3.4%) – 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 positive momentum. BUY