September 6, 2023

Investors are Still Optimistic

The summer is over. The post-Labor Day market has arrived. What can we expect?

Historically, September is the worst month for the market. Sobered up investors back from vacation tend to be cranky when they take a fresh look at things. But seasonality doesn’t always apply. And there are some reasons for optimism.

The pullback or consolidation in August is normal and healthy after a market surge in the earlier part of the year. It’s also encouraging that August closed with an up week. Right now, investors see a somewhat nirvana situation unfolding.

The economy is slowing just a little bit but not much. The weaker employment and manufacturing numbers may alleviate the Fed’s hawkishness. But the economy isn’t weak enough to really threaten profitability. It’s looking like a soft landing with the Fed almost done hiking rates and making hawkish noises. The market can resume the rally with such a vision.

Of course, that rosy scenario can discombobulate. Energy prices are soaring as oil hit the highest price per barrel in almost a year. Interest rates continue to hover near the highest levels since 2007. The current delicate balance could tip toward a significantly slowing economy or a stronger economy that reinvigorates inflation and a hawkish Fed.

Anything can happen in the months ahead. But there doesn’t seem to be a catalyst to drive stocks significantly lower at this point. Meanwhile, technology and energy stocks continue to thrive.

Recent Activity

August 9
Purchased Tractor Supply Company (TSCO) - $224.16

August 29^th
Invesco Preferred ETF (PGX) – Rating change “BUY” to “HOLD”

High Yield Tier

Enterprise Product Partners (EPD – yield 7.4%) – EPD keeps humming along and is within bad breath distance of the 52-week high. After a stellar 2022 in a bear market, EPD has returned more than 16% YTD. Energy stocks have made a strong comeback after a dismal first five months of the year as oil prices have trended higher and are on the rise again in recent weeks. We’ll see how high oil prices go in the fall, but enterprise should continue to have the right stuff going forward as earnings should be resilient in almost any economy. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.8%) – Energy has perked up again after a lull following the sector’s spring and summer surge. OKE moved sharply higher in the early summer but has since leveled off. The midstream energy company reported solid earnings and raised earnings guidance for the year. We’ll see if OKE can resume the upside rally in lieu of renewed energy sector strength. Longer term the stock looks solid as the company is expected to grow revenue by an average of 10% per year over the next three years. HOLD

Realty Income (O – yield 5.5%) – It isn’t only hard times for utility stocks. Conservative REITs remain out-of-favor as well. This legendary monthly income stock floundered to a new 52-week low, beyond the low of last October. It may be a new bull market for the indexes, but it is still a bear market for O. Yet, 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. This is now a very cheap and high-yielding stock with an excellent historical track record. BUY

The Williams Companies, Inc. (WMB – yield 5.2%) – The midstream energy company stock moved sharply higher in the summer until leveling off around the middle of August. Perhaps the recent strength in the more commodity price sensitive energy stock can reignite further upside from here. Earnings were solid and recent expansion and acquisition activity bodes well for growth in 2023 and 2024 beyond what was expected. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 4.0%) – The cutting-edge biopharmaceutical company stock leveled off in the ugly August market after a sharp rise from the bottom in July. I like the way the health care sector is set up ahead of a slowing economy and perhaps a further correction in the market this fall. Meanwhile, AbbVie reported earnings that beat on both earnings and revenue and raised guidance for the year. The report emboldens the notion that the revenue drop from the Humira patent expiration will be temporary and AbbVie will turn the corner sooner than expected. BUY

Broadcom Inc. (AVGO – yield 2.1%) – This past week was a rollercoaster for the AI juggernaut. The earnings report was the big catalyst. Past reports have been consistently stellar and AVGO soared to a new 52-week high ahead of the report. Earnings soundly beat estimates, but the company failed to raise guidance for the rest of the year. The stock fell over 4% the day of the report and gave up a lot of the earlier rally. Results were strong but the stock was priced for perfection, and not raising guidance is seen as an imperfection. But the stock still has a great outlook. HOLD

Brookfield Infrastructure Partners (BIP – yield 4.8%) – The tough times for safe stocks continue. Despite strong operational performance in a period of shrinking earnings for most companies, BIP continues to wallow near the 52-week low. But these periods of bizarre underperformance never last. Sure, the stock could languish for a while longer, but it is highly likely to be a lot higher a year from now. Brookfield is targeting 10% average earnings growth and 5% to 9% distribution growth over the next several years. (This security generates a K-1 form at tax time). BUY

Digital Realty Trust, Inc. (DLR – yield 3.7%) – This data center REIT has been firing on all cylinders. It’s up over 30% YTD, 5% in the last week, and just hit a new 52-week high. DLR was also immune to the down market in August. Digital reported better-than-expected earnings because of strong data center demand and solid growth. Even more importantly, the company assuaged fears that had driven the stock price down earlier this year by executing capital recycling plans that raised over $2 billion by selling joint venture assets. The move strengthens the balance sheet and secures the dividend. Now the REIT is poised to benefit from accelerating data center demand growth prompted by the AI craze. BUY

Eli Lilly and Company (LLY – yield 0.8%) – LLY is on its own schedule. It thrives regardless of what the rest of the market does. I thought this big pharma juggernaut would pull back after the huge 59% spike from early March until the end of June. But it hung tough near the high through July and then soared another 23% in August. LLY is up over 53% YTD and has returned 82% over the past year. It has also returned a stellar 283% since being added to the portfolio three years ago. 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%) – HES is hot stuff again after a brief pullback following its strong July and early-August surge. Oil prices are spiking higher and have just hit the highest level since last November. As an exploration and production company, Hess is highly levered to energy prices. HES is now flirting very close to the 52-week high and may have further to go. Many are predicting further increases as global production has been cut and U.S. inventories are low amid high demand. BUY

Intel Corporation (INTC – yield 1.4%) – INTC has been a dog in this portfolio. But it has gotten hot lately. It’s up 40% YTD and over 10% in just the past week. The stock was driven higher by the fact that the company raised earnings guidance. Intel received a prepayment from a “large unnamed customer” to secure capacity at its foundry for producing semiconductors. It demonstrates the tangible viability of the company’s foundry plans and makes success and higher revenues for the business likely to come sooner, perhaps in the second half of this year. BUY

Qualcomm Inc. (QCOM – yield 2.8%) – This chipmaker company stock has been moving higher again after a steep August plunge. It’s up 6% over the last week. It’s a rough patch for Qualcomm. Revenue and earnings are expected to decline 19% and 34%, respectively, for fiscal 2023. But the market tends to look forward. Smartphone sales may be close to bottoming as they are expected to increase in 2024 and Qualcomm is expected to resume earnings and revenue growth. This slump was expected and that’s why QCOM has underperformed. But it is cheap now. BUY

Tractor Supply Company (TSCO – yield 1.9%) – The farm and ranch company is a serious retail player. The company has a proven ability to consistently grow earnings and deliver on stock performance. Few retailers have grown earnings every year for 31 straight years. Last quarter, the company delivered 8.5% EPS growth while average S&P 500 earnings were down over 7%, and down for the third straight quarter. TSCO should be solid in just about any environment with a low beta and many products that are considered staples. BUY

UnitedHealth Group Inc. (UNH – yield 1.5%) – The malaise in defensive stocks caught up to UNH. It has been falling over the past few weeks after catching a little bit of fire. Solid earnings growth and increased guidance assuaged the market’s negative attitude after UnitedHealth had earlier reported higher costs from more people getting elective surgeries because of pent-up pandemic demand. It’s still in the lagging defense arena but it could have a much better rest of the year. UNH has the tailwind of an aging population and a track record of superstar performance. BUY

Visa Inc. (V – yield 0.7%) – V is hot again and just made a new 52-week high. The stock remains in a slow uptrend that began way back in October. The company loves the strong consumer and the increasing expectation of a soft-landing. It seems like only a serious economic slowdown or recession can stop this stock. And that might not happen. Good economic news could propel the stock to another level. It is also capable of holding its own of the market flounders, as it did last year. HOLD

Safe Income Tier

Invesco Preferred ETF (PGX – yield 6.3%) – Longer-term rates have moved near the recent high again as a recession appears less likely in a still strong economy. Rates could be near the peak and it’s probably a good time to buy in terms of that dynamic. However, PGX has a lot of exposure to the banking sector and could be under pressure if the high interest rates trigger more bank troubles in the fall. HOLD

NextEra Energy (NEE – yield 2.8%) – The weakness continues. This combination regulated and clean energy utility stock just hit a new 52-week low. The utility sector remains under pressure both in the broadening rally and the August selloff. But the operational performance is solid. The utility grew earnings 8.6% in the second quarter and 11% in the first half versus the same periods last year. It also has predictably solid earnings going forward because of a considerable project backlog. NEE has historically not only blown away utility sector performance but the overall market as well. It’s selling near a multi-year low and is poised for a strong rebound. BUY

USB Depository Shares (USB-PS – yield 5.9%) – This preferred issue has bounced around since being added to the portfolio. It took an unjustifiable hit during the banking issues. But it has mostly moved conversely to interest rates. Still, this security has outperformed other investment-grade fixed rate investments. Interest rates are near the highest level since 2007. This is a good time to buy. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.6%) – There could be some near-term turbulence with the price on the way to solid longer-term returns and diversification. The fund is holding up well in the recent rising interest rate environment and should benefit if and when rates come back down. BUY

Xcel Energy (XEL – yield 3.7%) – This clean energy utility hasn’t fared any better than NEE in a very tough market for utilities. XEL has been trending lower since the beginning of April and is wallowing near the 52-week low. These are dark days for utilities. But things always change and XEL and NEE are selling at 52-week lows in an expensive market and ahead of a likely slowing economy. BUY