March 17, 2021

Will the Role Reversal Last?
What a difference a week makes. It’s been a reversal of fortunes. Technology stocks are soaring and energy stocks are pulling back.

Last week, the long dominant technology sector had just experienced a long overdue correction. A week ago Monday the technology stock-heavy Nasdaq Index closed down over 10% from the recent high. But, in the six trading days since, the index has soared about 8%.

It looks like after dipping their toe in the water of a technology correction, investors are resuming the torrid love affair with technology stocks, now that that’s over with. At the same time, the high-flying energy sector has been pulling back. Is this the new trend, or a one-off week? We’ll see.

The Energy Select Sector SPDR Fund (XLE) had a huge 35% move higher since the beginning of February as investors look ahead to a full economic recovery later this year. But the sector index has been moving down over the past few days. While the uptrend hasn’t been broken yet, the latest sector surge might be running out of gas. That wouldn’t be surprising.

The energy rally is probably due for a breather. But even if there is a consolidation, I’m still bullish on the sector the rest of the year. Most energy stocks are still trading below their pre-pandemic levels while the environment ahead is likely to be better. A pullback would be normal and healthy ahead of a promising rest of the year.

It could be that technology stocks will soar and energy stocks will pull back in the next phase of the market. Or it could be that both sectors move higher. We will see what the market has in store.

Technology positions Qualcomm (QCOM) and Broadcom (AVGO), as well as Altria (MO), are up for the week while Eli Lilly (LLY) is down.

Please make a note to log into to my annual webinar tomorrow, Thursday March 18 at 2:00 p.m. ET. The topic will be The Dividend Solution: How Dividend Stocks are Replacing the Bond Market. If you can’t join in live, you can listen to the recording later. I hope you attend, and I think you’ll get something out of it.

High Yield Tier
Altria (MO – yield 7.1%) – This beleaguered tobacco company stock is up 37% since November. I’m not sure why. Altria weathered the pandemic well and grew earnings with plenty of cashflow to maintain and raise the dividend. But that was evident well before November, when the stock was floundering. And MO isn’t a cyclical company that benefits from the open-up trade.

I have long believed that Altria has more potential to offset cigarette volume slippage with other revenue than the market was giving it credit for. But there hasn’t really been any strong new evidence to change the market’s mind. It seems to be breaking a downtrend that’s been in place since 2017. We’ll see how the stock behaves from here. BUY

Enterprise Product Partners (EPD – yield 7.7%) – The stock has had a nice 40% move since November but hasn’t gotten overextended like some energy stocks. Since the beginning of February, the Energy Select Sector SPDR Fund (XLE) has soared 35%. But EPD is only up 15% over the same period. The market has embraced the more cyclical energy stocks because profits are rebounding faster. But EPD never took a huge earnings hit and the rebound isn’t as dramatic. But it’s still miles below the old highs and things are going the right way. BUY

Realty Income (O – yield 4.5%) – REITs have been performing a little better of late, and O is a great one. This stock has gone sideways since last June. Even the market’s redheaded step-children, energy and finance, have seen redemption. But this conservative, legendary income REIT continues to suck wind. Realty grew earnings in 2020 and retail properties should rebound in the full recovery. It doesn’t deserve this. The market tends to reinvent itself every few months. Hopefully, it invents an environment that respects reliable income stocks in the near future. BUY

STAG Industrial (STAG – yield 4.3%) – This more cyclical industrial REIT has vastly outperformed its peers in every measurable period over the last five years. But STAG has gone sideways since last summer. Thankfully, it’s finally come alive, up 9% in March so far. It a great REIT in a great business with properties in high and growing demand. BUY

Verizon Communications (VZ – yield 4.5%) – This wireless giant tends to trade in a range that winds up nowhere. But the recent investor infatuation with cyclical stocks has caused VZ to hang around at the low end of the range for longer than usual. It should at least recover to the higher point of the range in the months ahead. At that point I’ll decide if it’s worth waiting for the Promise Land of 5G. 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’s trading within a whisker of the 52-week high. ABBV is breaking the pattern of moving up and down on an upward trend by hanging at this higher level for a long time. It looks like it might be forming a base and the higher level and is poised to break out soon. We’ll see. HOLD

Broadcom Inc. (AVGO – yield 3.2%) – The stock took a hit during the tech selloff but has come roaring back in the past week. It’s up 13.5% in the last six trading days and appears set to regain all the recent losses in short order. The company is rock solid with strong earnings and great prospects in the quarters ahead. It looks like the tech correction is over and there shouldn’t be anything standing in its way. BUY

Brookfield Infrastructure Partners (BIP – yield 3.8%) – Yeah, this infrastructure partnership hasn’t really gone anywhere for several months. But some context is needed. It has held its own in this cyclical stock run-up while defensive stocks have been out of style and floundering. The market will likely change stripes in a way that is friendlier to BIP. It should have a great year, with growing earnings as infrastructure becomes a more popular investment. BUY

Chevron Corp. (CVX – yield 4.6%) – The last several months have been good times indeed for this energy giant. It’s up 27% since the beginning of February and 61% since late October. The full recovery promises to revive energy demand and prices and CVX is making up for lost time. It’s pulled back in the last few days and the recent surge may have run out of gas. But I still like the prospects for the rest of the year as CVX is still below the pre-pandemic price ahead of an environment that is likely to be more profitable than that one. HOLD

Digital Realty Trust (DLR – yield 3.5%) – This normally steady data center REIT has been pounded from two directions. It was seen as a pandemic beneficiary as technology thrived and the stock excelled. After the vaccines, investors turned on many such stocks. Then, the REIT sector got further shunned in the cyclical rally.

As a result of these near-term trends, DLR is still wallowing at a low price while the positive story is still intact. The growing number of connected devices and demand for technology infrastructure is rising steeply. Consider that energy and financial stocks were wallowing in oblivion a few months ago. Look what’s happening to them now. BUY

Eli Lilly and Company (LLY – yield 1.6%) – This big pharmaceutical company got creamed this week. The market was not happy with the reported Alzheimer’s drug trial results and the stock fell 9% on Monday. The trial achieved the end points but failed to achieve a higher end point. The company’s previous Alzheimer’s drug candidate failed that same end point and investors didn’t like the reminder. But the drug is still on track. It could be a mega blockbuster if approved and investors are apprehensive. I like Lilly regardless of what happens with this drug because of the stellar pipeline. But we’ll see what happens. HOLD

KKR & Co. Inc. (KKR – yield 1.2%) – The alternative asset manager is in the right place at the right time. The rest of the year should continue to be favorable for financial stocks as the economy regains traction and interest rates rise. Alternative investing is a fast-growing trend within the sector. BUY

Qualcomm Inc. (QCOM – yield 2.0%) – The current story is similar to AVGO. The stock is up 8% over the past few weeks after taking a hit during the tech selloff. But QCOM went down more and came back up less. The problem is the delay in smartphone royalties because of industry-wide supply chain delays. Qualcomm should improve revenues in the second half of the year. But investors have backed away in the meantime. We already took profits on two thirds of the position and we’ll see what happens with the rest. HOLD

U.S. Bancorp (USB – yield 3.1%) – Bank stocks are loving the current environment. The post-vaccine rally has reignited since late January. The specter of inflation and rising interest rates may spook the overall market, but such things are great for banks. A booming economy increases loan demand and higher rates increase spreads and profits. USB has moved up over 25% in the past month and a half. But it is still well below pre-pandemic levels. USB should have a very good year. BUY

Valero Energy Corp. (VLO – yield 4.8%) – This refiner and high leverage play on a full recovery has seen some good times in the past few months. It’s up more than 40% since February and over 100% since November. It’s been a star even among the resurgent energy stocks. It has pulled back over the past several days, and the recent surge may have run out of gas. But I still like the stock for the rest of the year. HOLD

Safe Income Tier
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.0%) – This short-term bond fund is a safe port. While the market looks promising for the rest of the year, there are still a lot of uncertainties out there. It’s nice to have something in the portfolio that you don’t have to worry about. Plus, considering the 10-year treasury still yields a mere 1.62%, the yield isn’t bad for safe money by today’s standards. BUY

Invesco Preferred ETF (PGX – yield 5.1%) – 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%) – The recent market bias toward cyclical stocks has been so extreme that not only did the utility sector get beaten up, but the mania even took down NEE, which had previously been immune to struggles in the sector. The natural state of this alternative energy utility is to be an up-trending juggernaut. This recent diversion from the mean should be temporary. That’s why NEE was upgraded to a BUY three weeks ago. The stock bounced back from the recent lows quickly in past weeks. The market could undo this latest aberration quickly at some point. A little patience should pay off. BUY

Xcel Energy (XEL – yield 3.0%) – XEL is a mirror situation of NEE. But the stock fell more and for longer, as a smaller and lesser-known alternative energy utility. But XEL has been moving higher over the past couple of weeks. It’s still a great buy point for this stock ahead of a market that is likely to be friendlier to its ilk, especially as alternative energy becomes a bigger story under the new administration in Washington. BUY