November 30, 2022

The Rally Is Going Wobbly

The recent market rally has leveled off and is wavering. The next few days may determine whether the market rally continues, or the indexes retreat once again.

The latest upturn has been stoked by optimism over retreating inflation and a softer, gentler Fed. The Central Bank is widely expected to raise the Fed Funds rate at a slower 0.50% pace, versus the last four hikes of 0.75%, at the December meeting in two weeks. But Chairman Powell is giving a speech today. Any indication of a higher-than-expected hike will undo the major reason for the recent rally.

There’s also China. Massive protests are raising concerns of unrest. China is a huge economic player globally and trouble there would hamper the global economy, which accounts for roughly 50% of revenue for S&P 500 companies.

We’ll see what happens in the days and weeks ahead. But the longer-term story is the same regardless. The market is likely to turn around and recover from the bear market sometime next year. But there is a good chance that with continuing inflation and rate hikes and a looming recession, the market indexes hit new lows before ultimately recovering.

Opportunity is brewing. But it’s not ready to drink yet.

High Yield Tier

Enterprise Product Partners (EPD – yield 7.8%) – EPD is over 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 21% YTD in a year when the index is down 17%. EPD should also weather well in both inflation and recession, and it pays a massive 7.8% yield that is very safe. (This security generates a K1 form at tax time). BUY

Medical Properties Trust, Inc. (MPW – yield 9.2%) – I am becoming increasingly confident that this hospital property REIT has already hit bottom and is likely to continue trending higher from here. It’s up about 27% from the October low. The stock had become absurdly low. Investors recognized the undervaluation, which happens in markets like this, after the company delivered terrific earnings for the quarter with profits up 30% over last year. That was pretty good for a stock that was trading down 50% YTD. 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

ONEOK Inc. (OKE – yield 5.9%) – After trending sharply higher for almost two months, this midstream energy company has leveled off over the past two weeks. But it hasn’t gone down. And that’s a good sign. It appears to be forming a base at a higher level. 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%) – After an impressive rally from the October low, O has given some of it back over the last week. There isn’t any negative company-specific news behind the recent weakness. It’s somewhat typical of how this stock trades. O still has the right stuff for this market. It’s recession-resistant and a great source of income. But it may have gotten a little ahead of itself in the near term. It will still likely continue to trend higher, but perhaps in a choppier fashion than we’ve seen recently. BUY

The Williams Companies, Inc. (WMB – yield 5.1%) – This midstream energy company has been the strongest and best performer of the portfolio energy companies. Like OKE, it appears to be forming a base at a higher level. It may be poised to make a run at a new high as it is not far from it. 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

Dividend Growth Tier

AbbVie (ABBV – yield 3.7%) – Ever so quietly, this healthcare stud has been on the move. It’s up about 10% in the last month and 18% from the 52-week low. ABBV is now at its highest price since April and has returned over 21% YTD. The stock held like a rock in the last market selloff but hadn’t been moving higher 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 trended sharply higher 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 next week. The company is expected to report 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%) – This infrastructure company stock has been trending higher since the second week of October. And for good reasons. It got way oversold in the fall selloff. Brookfield also reported terrific earnings early this month. It soundly beat expectations with funds from operations (FFOs) growth of 24% for the quarter. Brookfield’s crucial assets will continue to deliver steady earnings through a recession, it has inflation adjustments built into its contracts, the dividend is solid, and the stock is cheap now. (This security generates a K1 form at tax time). BUY

Eli Lilly and Company (LLY – yield 1.1%) – This superstar big-pharma company stock just keeps on going. It doesn’t care if the world is going to Hell in a handbag. LLY made a new all-time high this month and has returned over 33% YTD. The stock may be poised to break out to new levels. Not only is Lilly expected to deliver annual earnings growth of 19% over the next five years, but it also has two incredible drugs in the pipeline that are potential future mega-blockbusters. HOLD

Intel Corporation (INTC – yield 5.1%) – It has been ugly for INTC. The stock got pummeled before the tech sector sold off this year. Then it took another drubbing with the sector selloff, taking the fall to a whole new level. INTC now sells near book value and pays a 5% yield that should be safe. At some point, the technology sector will certainly recover. After that, Intel’s individual prospects should significantly improve as growth investments come to fruition. It’s been a painful slog. But it could prove to be worth the pain over time. HOLD

Qualcomm Inc. (QCOM – yield 2.5%) – After a long time floundering in the abyss, QCOM moved 20% higher this month. 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. In the months ahead, the market will start to look toward the recovery. HOLD

Visa Inc. (V – yield 0.9%) – V made a nice move off the low as the market improved and the company once again killed it on earnings. The payments processing giant continues to benefit from the end of covid restrictions despite the slower economy. But the earnings growth should slow next year as earnings comparisons get tougher. This is a cyclical stock that is dependent on the market and economy. It’s one of the first stocks to rally when things improve but things could get worse before they get better. At some point in the quarters ahead the market may sniff out the recovery and V will likely take off and make up for lost time. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.0%) – This combination utility and clean energy powerhouse has been trending sharply higher since the recent low in October. 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 reversing as we head toward 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. 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 of 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.

1) Please tell me about a time you made money on one of my trades – how much? How fast? What did you do with your profits?

2) How would you describe Cabot Dividend Investor to a friend?
You can simply send your response by email to CDI@cabotwealth.com. We’ll share interesting responses, anonymously, with you on the website.