The Prognosis Turns Sour
The big market rebound has petered. And ugliness might be resuming.
The waning of war panic and relief about the Fed’s March 0.25% rate hike have given way to new concerns. There may be a new round of economic fallout from the war as Europe proposes additional sanctions on Russia. There are also growing concerns about economic growth going forward because of inflation and a more aggressive Fed.
Sanctions concerns are likely overblown. Real economic impact would be had by Europe boycotting Russia’s oil and gas. But they can’t. Europe depends on Russia for 30% of it’s oil and 40% of its natural gas. Such sanctions would thrust the continent into recession or worse. The other sanctions are mostly for show.
But the economic concerns are serious. A growing chorus of analysts are now predicting lower economic growth than previously expected. That’s a problem. The pandemic recovery has always had the promise or reality of above-par economic growth to offset concerns. The absence of that expectation may tip the scales toward the bears.
These new developments do not bode well for the overall market in the months ahead. In this update, half positions in Blackrock Enhanced Capital and Income Fund (CII) and U.S. Bancorp (USB) are being sold as a precautionary measure.
But while it is an ugly market for the indices, certain sectors continue to thrive. Six portfolio position are currently making new all-time highs. Those stocks include Valero Energy (VLO), Enterprise Product Partners (EPD), ONEOK, Inc. (OKE), AbbVie, Inc. (ABBV), Eli Lilly (LLY), and Excel Energy (XEL). Several other positions are approaching highs as well.
High Yield Tier
Rating change “HOLD” to “SELL ½”
Blackrock Enhanced Capital and Income Fund (CII – yield 5.7%) – This covered call fund has really enjoyed the market revival since the middle of March as it tends to move along on relative par with the overall market. But I’m not very confident in this market over the rest of the year. The income can mitigate a price decline somewhat. But not enough. Plus, call premiums dry up in the absence of upside traction for stocks. It’s time to limit exposure after a rally in the near term. SELL 1/2
Enterprise Product Partners (EPD – yield 7.2%) – This slow-moving income juggernaut is having a good time of it lately. It has returned over 20% YTD and is at the 52-week high. Energy is hot. Business is good. The yield is glorious and safe. And the stock is still cheaply valued and selling well below the pre-pandemic high and miles below the all-time high. Plus, the stock is likely to stay in favor as a high income provider that is still reasonably valued in an industry that should have a great year. (This security generates a K1 form at tax time). BUY
Global Ship Lease, Inc (GSL – yield 5.2%) – The containership company had been a stellar performer, returning 88% over the past year and 374% over the last three years. Container shipping rates remain very high and are likely to stay that way for a while as demand exceeds supply. In fact, the company once again upgraded earnings guidance for the year and the upcoming quarter. But GSL has been crushed so far this week, down 11%.
There is no company-specific news that is available so far. The likely reason for the plunge is the renewed possibility of increased European sanctions on Russia. The possibility is hurting stocks levered to global trade. GSL had also taken a hit when the war began but recovered strongly after the initial panic waned. I believe the stock will recover quickly like last time as investors realize container shipping will remain strong. BUY
ONEOK Inc. (OKE – yield 5.4%) – OKE hit a new 52-week high last week. It continues trending higher this year amidst a strong energy sector and booming business for its gas assets. This is another great stock. It’s in the right place as energy production is likely to increase and regulations are being relaxed amidst soaring prices and strong demand. But it’s still cheap, still below the pre-pandemic high. The ride should have further to go for all the reasons I mentioned with EPD. BUY
Realty Income (O – yield 4.2%) – It’s been boring. O is about even YTD while the market and REIT sector is down. It chugs along in most any kind of market with no startling downside and tends to trend higher over time. This is a reliable income stock and is behaving true to form. It should be popular as an income generating legend in an uncertain market, and you’ll be bored all the way to the bank. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 3.5%) – WOW! ABBV was a turnaround story that was bleeding for over a year when it was added to the portfolio in the early days of 2019. Now, the stock is at an all-time high in a down market and has returned 22% YTD, 60% over the past year, and 128% over the last three years. The stellar research and drug pipeline is enabling AbbVie to overcome the expected revenue loss from the Humira patent expiration next year. Meanwhile, ABBV is still cheap at less than 12 times forward earnings. HOLD
Broadcom Inc. (AVGO – yield 2.6%) – This exceptional technology stalwart simply cannot overcome the beleaguered tech sector. Tech is in the market crosshairs because of inflation and slower growth projections. Despite the fact that Broadcom should continue to post outstanding results, it can’t swim upstream in a rapid. The stellar operational performance should prevail in the end and make it worth the wait. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.2%) – It’s cloudy on some market sectors and sunny others. BIP has a San Trope tan from basking in the rays. It recently broke out to a new all-time high and a whole new level. It had been ever-so-slowly trending higher forever. But it got the lead out over the last months and soared over 15%. Brookfield is a great defensive business and investors love that in a volatile and uncertain market. (This security generates a K1 form at tax time). HOLD
Discover Financial Services (DFS – yield 1.8%) – The timing has been unfortunate with this one. The market has been turning on financial stocks amidst the increased talk of slowing economic growth. But Discover is different. A slower economy means that consumers start charging more. And that’s good for Discover and their exorbitant interest rates. The rising profits should fix the stock over the course of the year. HOLD
Chevron Corp. (CVX – yield 3.5%) – This oil-price-levered global energy giant is still off the recent high but well above the recent lows. Things could have gone either way when half the position was sold last month. Since then, the market has seemed to determine that the likeliest direction of oil prices in the foreseeable future is to the upside. CVX could make a run back to the high and beyond if current trends continue. HOLD
Eli Lilly and Company (LLY – yield 1.3%) – While the world goes to Hell in a handbasket, LLY is making new all-time highs. Sure, defense is more popular in this market. But Lilly is one of the best at making drugs and treatments for ailments while the population ages at warp speed. That’s why LLY has returned 62% over the last year and has posted average annual returns of 33% of the last three years and 30% over the last five. But the stock is bouncy, and it would be normal for LLY to pull back after this run. But it might have further to go in this weird market. HOLD
Intel Corporation (INTC – yield 3.0%) – The technology icon is cheap and likely has much stronger growth years ahead. It was already beaten to a stub when it was added to the portfolio. The recent tech sector carnage only took the stock price back to where we bought it. The limited downside is a big part of the appeal in this sour market. It may not move for a while, but it will eventually. In the meantime, it should hold tough and pay a 3% yield. BUY
Qualcomm Inc. (QCOM – yield 1.7%) – The smartphone chipmaker stock has been very weak of late. QCOM has stopped holding up well amidst the tech sector selling. But I’m holding on to the remaining one-third position for now. The fact that two-thirds of the position was already sold does weigh into the decision. The company has guided to 39% earnings growth in 2022 and may have some technical support around this level.
The big cause for concern is slowing smartphone sales in 2023. That will slow the growth rate, and the market anticipates. Inflation could also further hurt growth levels next year. But the company still has huge anticipated growth and it still sells at just 12 times earnings. The good should outweigh the bad and we will hold for now. HOLD
Rating change “HOLD” to “SELL ½”
U.S. Bancorp (USB – yield 3.5%) – Financials have turned ugly and so has USB. Rates are moving higher but there is growing concern for future economic growth amidst inflation and the Fed. The rate story is playing out, but we are losing the assumption of above-par growth for several more quarters. This may be a short-term overreaction. But it could be a new trend that lasts. In a prudent act of caution, let’s take half of the position off the table and secure some of the profits. The portfolio is selling half. SELL 1/2
Valero Energy Corp. (VLO – yield 4.1%) – On the other side of the tracks, VLO is kicking butt and taking names. The stock is making a series of new 52-week highs amidst strong gasoline and diesel spreads and high demand. VLO is up 23% in the last three weeks alone. Yet, the stock is still well below the all-time high. It should have further to run. Let’s ride this horse. HOLD
Visa Inc. (V – yield 0.7%) – Visa is hanging tough amidst financial sector woes. It got clobbered after the initial war news but has been moving higher recently as investors recognize V as a good place to bottom fish. I expect business to remain strongly growing this year and the stock should trend higher in the absence of more panic or a steep market selloff. It’s up sharply off the bottom. HOLD
Safe Income Tier
Invesco Preferred ETF (PGX – yield 4.9%) – The ETF has fallen a bit in price over the past several month as rising interest rates and inflation have affected it. Preferred stocks tend to hold up relatively well in those conditions, but they are not immune. We will watch PGX for further weakness going forward. Only half of the position remains but any further weakness from here will likely prompt selling the shares. HOLD
NextEra Energy (NEE – yield 1.8%) – It looks like this alternative energy utility stock is moving back toward the high after an awful start to the year. Utility stocks are hot, and clean energy is getting hotter as oil prices climb. It’s still a great stock longer term. The stock could be poised to make a run at the 52-week high. We’ll see how the next few weeks unfold. HOLD
Xcel Energy (XEL – yield 2.7%) – This smaller alternative energy utility stock has already soared to new highs. XEL is up about 13% since the Russian invasion. The reasons are similar to NEE’s, a strong utility and clean energy performance. But XEL was on a different schedule and technically stronger leading into the market changes. Let’s see how far it climbs. HOLD
| High Yield Tier | |||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on close 4/05/22 | Total Return | Current Yield | CDI Opinion | Pos. Size | |
| CII | Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.6% | 21 | 4% | 5.7% | SELL 1/2 | 1 |
| EPD | Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 26 | 16% | 7.1% | BUY | 1 |
| GSL | Global Ship Lease. Inc. (GSL) | 01-12-22 | 23 | Qtr. | 1.50 | 6,41% | 26 | 11% | 3.8% | BUY | 1 |
| OKE | ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 70 | 40% | 5.3% | BUY | 1 |
| O | Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 71 | 22% | 4.2% | HOLD | 1 |
| Current High Yield Tier Totals: | 6.2% | 22.3% | 5.1% | ||||||||
| Dividend Growth Tier | |||||||||||
| ABBV | AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 163 | 147% | 3.5% | HOLD | 2/3 |
| AVGO | Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 614 | 41% | 2.6% | HOLD | 1 |
| BIP | Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 68 | 109% | 3.2% | HOLD | 2/3 |
| CVX | Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 4.7% | 163 | 88% | 3.5% | HOLD | 1/2 |
| DFS | Discover Financial Services (DFS) | 02-09-22 | 125 | Qtr. | 2.00 | 1.6% | 111 | -11% | 1.8% | HOLD | 1 |
| LLY | Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 293 | 97% | 1.3% | HOLD | 2/3 |
| INTC | Intel Corporation (INTC) | 03-09-22 | 48 | Qtr. | 1.46 | 3.1% | 48 | 1% | 3.0% | BUY | 1 |
| QCOM | Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 145 | 82% | 1.8% | HOLD | 1/3 |
| USB | U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.2% | 53 | 21% | 3.5% | SELL 1/2 | 1 |
| VLO | Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 5.7% | 102 | 39% | 3.9% | HOLD | 1/2 |
| V | Visa Inc. (V) | 12-08-21 | 209 | Qtr. | 1.50 | 0.7% | 226 | 7% | 0.70% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 3.0% | 40.3% | 2.6% | ||||||||
| Safe Income Tier | |||||||||||
| PGX | Invesco Preferred (PGX) | 04-01-14 | 14 | Monthly | 0.74 | 4.9% | 13 | 42% | 4.9% | HOLD | 1/2 |
| NEE | NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 86 | 110% | 1.8% | HOLD | 1/2 |
| XEL | Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 73 | 202% | 2.7% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 3.1% | 118.0% | 3.1% | ||||||||
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