Down Again
The strong 17% market rally is over. The S&P 500 is down 7.4% in the second half of August. And here comes Labor Day.
Sobered-up investors start paying attention again after Labor Day. And they can be cranky. That’s why September is historically the worst-performing month. Refocused investors probably won’t like what they see this year.
The optimism of the two months after the June low has faded. Investors envisioned a Fed that would be all done hiking rates by early next year as inflation falls. But the Fed put a serious damper on that thinking when it suggested that it is willing to endure the pain of a recession in order to get inflation under control.
The Central Bank may continue to raise rates through most of next year. And investors no longer see a light at the end of the tunnel. Plus, the economy is getting worse. Even if this isn’t a recession yet, it is becoming more likely in the near future.
It’s possible that the rally was a classic “bear market rally,” meaning that the market will go on to make new lows. But it’s also possible that the market just flounders a bit without getting to new lows. We’ll see how things unfold.
But even if this market stabilizes, it’s hard to see how it can muster lasting upside traction in the face of inflation, a hawkish Fed, and recession. For that reason, this portfolio is taking a very defensive posture with nine of the 14 positions in defensive stocks after having sold several cyclical stocks.
High Yield Tier
Enterprise Product Partners (EPD – yield 7.1%) – Even this midstream energy partnership is getting bruised in this downturn. But the stock tends to bend and not break and has still returned over 25% in this down year for the market. It still sells at a cheap valuation with a high and safe yield, and business is strong. A defensive business with a cheap valuation and a fantastic payout should continue to be a favored security in this market. (This security generates a K1 form at tax time). BUY
ONEOK Inc. (OKE – yield 5.8%) – This more volatile and usually better-performing midstream energy company has returned less than EPD YTD (12%) because it had a spectacular year last year. But it has the same attributes as EPD. Plus, natural gas demand tends to be more resilient in a recession. This is one of the few companies that can endure inflation or recession or both. BUY
Realty Income (O – yield 4.2%) – This legendary monthly income REIT has cooled off after a 20% surge higher from the June low. But O tends to move up and down a lot on a slow longer-term trajectory higher. Earnings rose 10.2% and the company is navigating inflation and recession like a champ. The occupancy rate for its consumer staple tenants is the highest in 10 years and the company increased its guidance. HOLD
The Williams Companies, Inc. (WMB – yield 4.9%) – Although this newest addition to the portfolio has dipped a little bit lately in the turbulent market, the uptrend since the June low is still intact. WNB tends to trend higher in the absence of indiscriminate selling in the overall market. Operations are strong. The recently reported quarter featured a whopping 48% earnings per share spike over last year’s quarter. Williams also increased 2022 earnings guidance. BUY
Dividend Growth Tier
AbbVie (ABBV – yield 4.2%) – The biopharmaceutical company stock peaked in March and has been floundering ever since. It’s still higher YTD and ABBV typically pulls back after big moves higher. It’s still a defensive company in a recession with an excellent longer-term prognosis amid the aging population. It should pay to simply hold the stock and collect the dividend through rough patches en route to better things in the future. HOLD
Broadcom Inc. (AVGO – yield 3.2%) – It’s been a rough couple of weeks for the tech sector and AVGO is down about 10%. The specter of higher interest rates and inflation is taking a toll on growth stocks. But AVGO may be able to counter some of this short-term ugliness when it reports earnings tomorrow. Past earnings reports have been stellar and have driven the stock higher. We’ll see. BUY
Brookfield Infrastructure Partners (BIP – yield 3.3%) – The infrastructure partnership announced a joint venture with Intel to fund a $30 billion semiconductor fabrication plant in Arizona. It’s certainly a timely investment after the passage of the CHIPS Act and should get some generous government subsidies. Brookfield has been phenomenal at finding great investments over the years that are accretive and boost the stock price. BIP spiked higher on the news. It’s been on a torrid uptrend since mid-July and may be moving to a new high. (This security generates a K1 form at tax time). HOLD
Eli Lilly and Company (LLY – yield 1.3%) – LLY bounces around a lot. That’s okay because while bouncing the stock has returned over 12% YTD and averaged a return of over 41% per year for the past three years. This pharmaceutical giant has proven time and time again that it is worth simply holding through the dips as the longer-term trend is consistently higher. Lilly has a strong pipeline and pending approvals of important drugs that could give it a big boost. HOLD
Intel Corporation (INTC – yield 4.4%) – The chipmaker just made a massive investment in chip production. It partnered with BIP for a $30 billion investment in a semiconductor fabrication plant where Intel will maintain majority control by providing 51% of the capital. It’s a big and bold move that might be just what a floundering company needs. It’s a long-term endeavor that could pay off big down the road. But the stock has done nothing since the announcement. HOLD
Qualcomm Inc. (QCOM – yield 2.1%) – The chipmaker stock looks like it wants to recover. In a friendly market, it rallies nicely. In a bad market for technology, it tends to fall less. Although it reduced guidance for the rest of the year, the company still anticipated 23% revenue growth for the second half of the year. Meanwhile, QCOM sells at less than 11 times forward earnings, which is cheap for this level of growth. BUY
Visa Inc. (V – yield 0.7%) – V has been under pressure in this latest market selloff. It always takes a hit when the more cyclical stocks are under pressure. But it has consistently tended to have strong support around the 200 per share level, where it is now, and to be among the first such stocks to rally back when the selling abates. The company continues to thrive from increased global business from the ending of covid restrictions despite slower global growth. HOLD
Safe Income Tier
NextEra Energy (NEE – yield 1.9%) – This alternative energy utility has pulled back after a big run higher from the June low. But a defensive utility that will be a huge beneficiary of clean energy subsidies and growth should be an excellent place to be amid recession and inflation. This is a great utility and a phenomenal way for conservative investors to play the growth in clean energy. HOLD
Xcel Energy (XEL – yield 2.6%) – XEL has been a stellar performer this year, up 12% in a down market. It has cooled off after making a high in May, but it is still only 3% below the high. The passage of the CHIPs bill gave it new life and it made new highs earlier this month. Plus, it’s in two timely sectors, utilities, and clean energy, and should be well positioned for the longer term as well. HOLD
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on close 8/30/22 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 26 | 21% | 7.1% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 63 | 30% | 5.8% | BUY | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 69 | 21% | 4.20% | HOLD | 1 |
| The Williams Companies, Inc. | 08-10-22 | 33 | Qtr. | 1.70 | 5.3% | 34 | 4% | 4.80% | BUY | 1 |
| Current High Yield Tier Totals: | 6.0% | 19.0% | 5.5% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 136 | 109% | 4.20% | HOLD | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 506 | 17% | 3.2% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 14 | Qtr. | 2.04 | 3.6% | 42 | 99% | 3.3% | HOLD | 2/3 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 307 | 109% | 1.3% | HOLD | 2/3 |
| Intel Corporation (INTC) | 03-09-22 | 48 | Qtr. | 1.46 | 3.1% | 32 | -31% | 4.4% | HOLD | 1 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 134 | 69% | 2.1% | BUY | 1/3 |
| Visa Inc. (V) | 12-08-21 | 209 | Qtr. | 1.50 | 0.7% | 201 | -3% | 0.70% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 2.5% | 40.3% | 2.7% | |||||||
| Safe Income Tier | ||||||||||
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 86 | 111% | 1.9% | HOLD | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 75 | 211% | 2.6% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 2.3% | 161.0% | 2.3% | |||||||
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