The Bull Market Gets Choppy
The market has gotten a little choppy and interest rates are to blame. At least, that’s what they say.
The market indexes fell last week and have been all over the place so far this week. The technology-stock heavy Nasdaq has been particularly concerning. That index had fallen over 7% from the highs at one point last week and is still down almost 6%. It’s about time. There’s no way technology stocks could keep up that pace.
Of course, if you listen to Wall Street pundits, it’s all about interest rates. The benchmark 10-year Treasury yield has been on the rise, and it’s all the way up to about 1.5%. Big whoop. Longer-term rates had to move higher as the full recovery the market is expecting gains traction. And the yield is still well below the 2% to 3% pre-pandemic average.
Interest rate concern is just a clever and insightful way of saying that stocks went up too much and are coming down now. Is this the beginning of a bigger pullback? We’ll see. While a steeper selloff is overdue, it would be just like this market to forge higher again after just a lame retreat.
But regardless of what happens in the days and weeks ahead, the rest of the year looks promising. A full recovery, trillions in stimulus and still low interest rates should drive stocks higher the rest of the year. A significant selloff would present a buying opportunity ahead of such splendor.
As an act of caution, we are taking profits in high flying positions Innovative Industrial Partners (IIPR) and Qualcomm (QCOM). It’s a good time to lock in some spectacular returns, and the full rationale is explained below.
Meanwhile, the current market is creating an opportunity to pick up alternative energy utilities NextEra Energy (NEE) and Xcel Energy (XEL) on the cheap. Even these market favorites are being jilted amidst the current cyclical stock bender.
As well, energy stocks Valero Energy (VLO) and Chevron (CVX) have been on fire and are still worth holding. U.S. Bancorp (USB) has also gotten hot.
High Yield Tier
Altria (MO – yield 7.7%) – I’m afraid to emotionally commit, but this tobacco company stock has been looking good of late. It may be breaking the downtrend that has been in place since 2017. First, it stopped going down more. Then, it recently made a new pandemic high. I’m still not sure MO is destined for higher prices. But this is what things would look like if it is. MO is a solid income stock in the near term. Longer term, the market has factored in zero chance of replacing slipping cigarette sales with other revenue. But the company has a lot of prospects to do just that. BUY
Enterprise Product Partners (EPD – yield 8.0%) – The midstream energy partnership hasn’t participated in the energy rally nearly as much as other stocks in the sector because business is rebounding more slowly than with the more commodity-oriented energy stocks. Of course, profits also took much less of a hit before. But things are going in the right direction. Meanwhile, EPD is still very cheaply priced, and that huge yield is rock solid. BUY
Realty Income (O – yield 4.6%) – REITs have performed poorly over the past year. But Realty Income has been worse than the index, much worse. Of course, it’s in the hard-hit retail properties subsector that took it on the chin during the pandemic. But Realty weathered the storm very well and actually grew earnings in 2020. But the market doesn’t like retail REITs, not even the post-vaccine market that has embraced energy and financial stocks. That said, O is still a good value that pays a solid yield while you wait for the market to change its stripes. BUY
STAG Industrial (STAG – yield 4.5%) – While STAG has vastly outperformed the REIT Index since the pandemic began, the sector has had a rough time. It lagged the market during the recovery and then didn’t get the bounce that cyclical stocks got after the vaccine announcement. But the poor performance is creating value at a time when investment income is hard to get. STAG is a more cyclical REIT and should be among the first to rebound. BUY
Verizon Communications (VZ – yield 4.4%) – This utility-like wireless company stock never seems to get anywhere. It just bounces around in the same ranges between the mid-50s and a little over 60. But it’s at the low end of that range right now. It should be poised to move back up in the months ahead. It’s also a good down-market performer at a time when the market is topsy. It’s a solid income stock for now but could be more as 5G becomes a bigger story in the post-pandemic market. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 4.8%) – This biopharmaceutical stock still sells at a dirt-cheap valuation of less than 8 times forward earnings, despite the fact that it isn’t that far from the 52-week high. The stock seems to be forming a base at the high point of the recent range. It hasn’t broken out yet, but it may be setting up for a move by forming a base at this higher level. It’s also a fantastic company with one of the best pipelines in the industry as the population ages at warp speed. HOLD
Broadcom Inc. (AVGO – yield 2.9%) – This technology company stock continues to trend consistently higher since last March with very few hiccups along the way. And 5G is coming. Technology continues to expand and proliferate. New technologies from 5G are also likely to boost profits. And 5G will likely become a bigger market story in the post-pandemic environment. In anticipation, the stock’s uptrend has significantly steepened over the past year. BUY
Brookfield Infrastructure Partners (BIP – yield 4.0%) – The stock has been bouncing around in the low 50s since November. It may have stalled out because of the market’s infatuation with open-up or cyclical stocks. Utilities, which BIP technically is, have been the worst performing stocks for the past three-month, YTD, and one-month periods. Investors have been dumping more defensive stocks.
That’s okay. The longer-term uptrend is very much intact and BIP is near the low point of the recent range. This year should be good as earnings in the transportation and energy sectors rebound and $2.5 billion in acquisitions from last year also boost earnings. BUY
Chevron Corp. (CVX – yield 5.2%) – It looks like this energy giant was added to the portfolio on the cusp of a breakout. The stock is less volatile on the downside and the upside than most energy stocks, but it’s been on fire. CVX is up almost 20% in just the past month. It’s also still well below pre-pandemic levels of around 120 per share. And the post-pandemic environment could be considerably better. BUY
Digital Realty Trust (DLR – yield 3.4%) – This data center REIT is still floundering and stinking up the place. It was a sensational performer through the pandemic. But the market has been giving this pandemic beneficiary the cold shoulder during this cyclical stock bender. Nevertheless, the positive story is still intact. The growing number of connected devices and demand for technology infrastructure is rising sharply. The recent weakness in the stock should be temporary, and a great buying opportunity. BUY
Digital Realty Trust (DLR – yield 3.4%) – This data center REIT is still floundering and stinking up the place. It was a sensational performer through the pandemic. But the market has been giving this pandemic beneficiary the cold shoulder during this cyclical stock bender. Nevertheless, the positive story is still intact. The growing number of connected devices and demand for technology infrastructure is rising sharply. The recent weakness in the stock should be temporary, and a great buying opportunity. BUY
Eli Lilly and Company (LLY – yield 1.7%) – After a huge 70% upside surge in two months on a plethora of good news, this big pharma stock has leveled off. But it hasn’t really pulled back in any significant way. That’s an encouraging sign after such a huge move. We took some profits near the high. And I’m encouraged by the performance after that. The stock had to take a breather, but there really hasn’t been much selling. It’s still priced a little on the high side now, but for good reason. I love the stock for the longer term. HOLD
Rating change: “HOLD” to “SELL”
Innovative Industrial Properties (IIPR – yield 2.5%) – This marijuana farm REIT finally had a bad week. Earnings disappointed. Revenue for the quarter was up 110% and adjusted funds from operations (FFOs) soared 127% versus last year’s quarter. But Innovative more than doubled outstanding shares over the past year to fund the acquisition that produced that growth. And per-share adjusted FFOs rose less than 10%. Investors hissed and shares tumbled 17% on the day.
That’s the problem with high-flying stocks—any kind of disappointment kills the stock. Shares rebounded slightly in the next few days but have fallen back below the close on earnings day. I don’t want to risk the huge profits with investors souring on a stock still priced at nosebleed levels. I was extra patient with the remaining shares because we already took profits on two thirds of the position. But it’s time to take the money and run with a 170% return in just over 15 months. SELL
Rating change: “HOLD” to “SELL A THIRD”
Qualcomm Inc. (QCOM – yield 1.9%) – This is a similar story to IIPR. The stock was soaring with seemingly no end in sight until earnings disappointed. Smartphone sales were less than expected as industry-wide supply constraints hampered sales and Qualcomm revealed that the problem would last through the first half of the year. They’ll get those sales eventually, but investors have little patience with a stock that soared 33% in the two and a half months since the vaccine announcement and 166% since the lows of last March.
The stock has floundered since the earnings announcement and is down almost 20% from the high. Technology stocks have been under selling pressure that could get worse. The story is still good and shares may recover. So we will still hold the remaining one third of the original position. But let’s take some of that 67% short-term profit off the table. SELL A THIRD
U.S. Bancorp (USB – yield 3.3%) – It is an increasingly friendly environment for banks. A full recovery looms in the months ahead and interest rates are on the rise. That makes for higher loan demand and increasing interest rate spreads and profits. That’s why the SPDR S&P Bank ETF (KBE) is up 21% since the end of January and 83% since late September. At the same time, many banks are still relatively cheap after having taken it on the chin during the pandemic. USB is still well below the pre-pandemic price with room to run. BUY
Valero Energy Corp. (VLO – yield 5.1%) – Refiners are very cyclical and high leverage plays on a full recovery. Lately, that’s been a great way to be. VLO is on fire. It’s up 37% just since the beginning of February and over 100% since the vaccine announcement in November. The stock may consolidate after such a surge. But the rest of the year looks great as demand for gasoline and diesel will skyrocket in the recovery. VLO is still 23% below the pre-pandemic high and the post-pandemic environment is shaping up to be a lot better than that one. HOLD
Safe Income Tier
Invesco Bullet Shares 2021 Corporate Bond ETF (BSCL – yield 2.1%) – Bonds have gotten roughed up lately as interest rates have risen sharply. But you wouldn’t know it owning BSCL. Short-term bonds are far less affected by changing interest rates and this ETF barely budged. This short-term bond fund is a safe port. It’s nice to have something in the portfolio that you don’t have to worry about. BUY
Invesco Preferred ETF (PGX – yield 5.0%) – This preferred stock ETF is much less volatile than the stock market while providing a big yield. It also adds diversification as preferred stock performance is historically not correlated to the stock and bond markets. It’s a great place to generate a solid yield while rounding out your portfolio. HOLD
NextEra Energy (NEE – yield 2.0%) – This bull market has not been kind to utility stocks so far. It is the worst-performing sector of the S&P 500 for the past one-year, YTD, three-month and one-month periods. But NEE is such a great stock that it had been immune to weakness in the sector and outperformed the market anyway, until this latest cyclical stock bender has taken down even this juggernaut. NEE pulled back more than 15% from the high in January. That’s rare.
But it means it’s a great time to buy. This temporary phase in the market won’t last forever. Meanwhile, NEE is one of the most highly desired large stocks on the market and alternative energy will likely be a bigger story going forward. NEE was upgraded to a BUY last week. BUY
Xcel Energy (XEL – yield 3.1%) – The same thing I said about NEE is true of this smaller alternative energy utility, except the stock has fallen further and longer from the high. It also has more upside potential in a short amount of time when things turn around. The company also just raised the dividend by 6.4%. BUY
