October 18, 2023

Good Vibes and Headline Caution

The market is distinctly more optimistic this month as “soft landing’ hopes revive.

After a rough couple of months, the S&P is trending higher in October. The economy is still solid. In fact, retail sales numbers for September blew away expectations, once again showing that a recession is nowhere in sight.

At the same time, the Fed insinuated last week that it may be done hiking the Fed Funds rate because the higher longer-term rates will do the job of quelling inflation. There is growing optimism that interest rates may have peaked, and we may yet get through this rate hiking cycle without much economic pain.

The good vibes are back for now and they may be enough to muster an impressive October. It’s also earnings season and there is optimism that the average S&P 500 company will show earnings growth for the first time in several quarters. The earnings recession may be over.

But headline risks are growing. There is still a risk that the Israel situation spreads into a wider conflict. Bad news on that front could trump everything else and send the market reeling. It’s also probably true that the cloud is tempering the current optimism. If the crisis fades, the market could make up for some lost time.

The short-term prognosis is positive with an eye out for possible headline trouble in the next couple of weeks. Meanwhile, the midstream energy companies are hot again. Eli Lilly (LLY) is making new highs again. And the beleaguered utility stocks, NextEra Energy (NEE) and Xcel Energy (XEL), have moved convincingly off the lows.

Recent Activity

October 4
SELL Invesco Preferred ETF (PGX)
USB Depository Shares (USB-PS) – Rating change “BUY” to “HOLD”
Vanguard Long-Term Corp. Bd. Index Fund (VCLT) – Rating change “BUY” to “HOLD”

October 11
Purchased McKesson Corporation (MCK) - $456.66
ONEOK, Inc. – Rating change “HOLD” to “BUY”

High Yield Tier

Enterprise Product Partners (EPD – yield 7.2%) – While the market is down from the high of late July, this midstream energy partnership is making new 52-week highs. The selloff in defensive dividend stocks didn’t affect it because of its connection to energy and recently rising prices. EPD has returned a solid 21% YTD after a strong performance in last year’s bear market. That huge yield is safe, and earnings are resilient in just about any economy. Meanwhile, the stock still trades below the pre-pandemic high despite much higher earnings. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.5%) – This historically more volatile midstream energy company stock is having a terrific October and is within bad breath distance of the 52-week high. OKE pulled back a lot last month, but it seems midstream energy companies are hot again. The stock has soared by more than 14% since October 4. The strong economy is probably helping these stocks but earnings are resilient in any economy and the high dividend is very well covered. The company also raised earnings guidance for the rest of the year. BUY

Realty Income (O – yield 6.1%) – This rock solid, legendary income REIT has not lived up to its reputation of late. O just hit a brand-new low that is the lowest price for the REIT since the pandemic bear market more than three years ago. Defensive stocks have been poor performers all year. But operational performance has been sound as earnings were solid with a stellar 99% occupancy rate for its properties and an additional $3.1 billion invested in the quarter in 710 properties. O has moved higher from the low. Maybe a great track record and a 6% dividend can perk enough investor interest to drive the stock higher from here. BUY

The Williams Companies, Inc. (WMB – yield 5.0%) – It’s a new 52-week high. Midstream energy companies are dividend stocks that have held up relatively well in the market despite rising interest rates. While other, more defensive dividend-paying stocks are struggling, midstream energy companies have been rolling merrily along. It is likely that strength in the more commodity price-sensitive energy stocks is helping the stock. It also operates in an inflation-resistant business and revenues should remain solid even in a slow economy. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 4.0%) – This cutting-edge biopharmaceutical company stock is getting through this challenging year in decent shape. It has returned -5% YTD. But it has been a lot better over the last three months when it has been up about 12%. Healthcare is a good sector to be in when the overall market struggles. Shrinking Humira revenues should be overcome thanks to the company’s strong new drugs and pipeline in the future. If AbbVie can follow last quarter’s positive earnings surprise when it reports later this month, the stock could surge higher as investors sense that it might turn the Humira corner sooner. BUY

Broadcom Inc. (AVGO – yield 2.1%) – This AI juggernaut has rallied this month and is right back near the high. While the stock has basically gone sideways since June, it has found a home in the much higher range after the spring surge. It isn’t giving it back. AVGO has already returned 64% YTD and it might not be done yet. Artificial intelligence gives the company a huge growth catalyst going forward, and it isn’t going away. HOLD

Brookfield Infrastructure Partners (BIP – yield 5.9%) – It’s a tough market for defensive dividend stocks and BIP is getting clobbered. It’s down 30% in the last three months. Despite strong operational performance, the stock performance just keeps getting worse. Utilities like this have relatively high debt and high interest rates will increase costs. But even if the high rates take a bite out of growth, the damage should be more than factored into the price already. And this operator of cell towers, data centers, railways, terminals, toll roads and more will have resilient earnings in any economy. Hopefully, the earnings report in a few weeks will remind investors of that fact. (This security generates a K-1 form at tax time). BUY

Digital Realty Trust, Inc. (DLR – yield 3.9%) – This data center REIT has come nicely off the recent bottom and has had upward momentum for the past two weeks. It retreated in September after making a 52-week high at the end of August. The long-term prognosis is solid because voracious AI spending upgrades should provide another growth catalyst, in addition to a move toward the cloud. It may have started a move toward a new high or it could continue to bounce around in the short-term, depending on the overall market. BUY

Eli Lilly and Company (LLY – yield 0.7%) – Let the good times roll! Just when you think LLY might consolidate after moving so much higher, it thrusts to new heights once again. The stock made another brand new high on Monday and is now up 70% YTD. Investors are unlikely to sour on LLY because it has two potential mega blockbuster drugs up for FDA approval this year as well as stellar earnings growth for the next several years. HOLD

Hess Corporation (HES – yield 1.1%) – The energy exploration and production company stock had been bouncing around with oil prices, which peaked in late September. The company is highly levered to prices because they determine profit margins. But lately HES has moved higher even though oil prices have leveled off. Part of it is the possibility of a surge in prices if the situation in the Middle East escalates. But it is most likely because the company reports earnings later this month that are likely to be stellar. BUY

Intel Corporation (INTC – yield 1.4%) – After a 15% pullback in September, the bleeding has stopped and INTC has been rallying higher in a tough market. The stock had a huge spike higher in the late summer and a pullback after such a move is normal, especially in a lousy market. The fact that INTC is avoiding falling back into the abyss inspires confidence that the stock is cheap ahead of a brighter future and investors are interested. It seems to want to go higher in all but the toughest markets for the overall technology sector. 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

Qualcomm Inc. (QCOM – yield 2.9%) – The chipmaker stock continues to struggle. It has returned just 1% YTD while the technology sector is up over 30% over the same period. The sector is being driven by stocks with exposure to AI that are benefiting right now. It’s a little soon for Qualcomm. The company is highly dependent on smartphones. And sales have been falling as the 5G cycle comes to an end and the global economy is sputtering. But smartphone sales appear to be bottoming out and QCOM could benefit mightily and move fast when things turn around. BUY

Tractor Supply Company (TSCO – yield 2.0%) – The farm and ranch retail company stock had been getting slapped around as investors worried about the continued resiliency of the consumer. But Tractor’s rural consumers have already been weak for a while and the company has been successfully compensating with its vast array of staple products. Last quarter, the company delivered 8.5% EPS while average S&P 500 earnings were down. The stock is also getting a boost this week from the strong consumer numbers and has moved over 6% higher in the last couple of days. BUY

UnitedHealth Group Inc. (UNH – yield 1.4%) – The recently underperforming healthcare stalwart has gotten hot. It’s up over 12% in the last month. The company has extremely resilient and defensive earnings in an uncertain market. Operational performance is stellar and UNH is a superstar that has blown away the returns of the overall market over the past five- and 10-year periods. The stock may be coming alive again. Hopefully, the positive momentum continues. BUY

Visa Inc. (V – yield 0.7%) – V did pull back from the high made in September in the tough market. But it has significantly outperformed the market over the past year and is still in a longer-term uptrend. It could take off again if the good economic news continues and the consumer stays strong. But it has also shown resiliency in lousy environments. V returned -3.4% in last year’s bear market. It should be a longer-term winner. We’ll see what happens in the next few months. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 3.4%) – This alternative energy utility stock has moved convincingly off the bottom after a disastrous couple of weeks. The already beleaguered stock fell another 27% after its subsidiary, NextEra Energy Partners, LP (NEP), announced that it is cutting the projected distribution growth rate from 12% to around 6%. Investors feared that slower subsidiary growth will negatively affect the parent company’s growth rate even though NextEra is sticking with its growth projections.

The stock fell near the cheapest valuations ever but then had a convincing 15% move off the low in the past week. The selling is way overdone, even if earnings do decline, and investors are realizing the value. Hopefully, the momentum continues. HOLD

USB Depository Shares (USB-PS – yield 6.7%) – This preferred issue has had a tough month and now sells at the lowest price since being added to the portfolio. The reason is high interest rates and the Fed’s “higher for longer” prognosis. But this investment grade fixed income vehicle now yields 6.7%. And interest rates may be peaking. HOLD

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.0%) – There could be some near-term turbulence with the price. This long-term bond fund is vulnerable to rising interest rates. There is a good chance rates will be lower than they are now down the road, but they could go higher in the near term. HOLD

Xcel Energy (XEL – yield 3.5%) – The dark days for utilities may be over. The lows may be in. XEL is having a convincing 10% move off the low. This is one of the best utility stocks to own and the recent weeks’ debauchery may prove to have been very temporary. BUY