May 5, 2021

Weird but Still Good
Things are still great. The market indexes are either making new all-time highs or within a whisker of them. The uptrend continues ahead of what is sure to be a booming economy in the months ahead. But the market is also being a little weird.

Earnings have been spectacular. The first 25% of S&P 500 companies to report first-quarter results delivered and average of 33.8% earnings growth over last year’s quarter and have exceeded expectations by the most in history. That’s pretty good. But the market has been yawning it off.

Most companies’ stock prices are not getting a boost from great earnings. Many are even pulling back after the earnings announcement. The market seems spoiled. Great earnings are no big deal. Exceeding expectations isn’t exciting. Even blowing away expectations is to be expected and no longer a thrill.

What can possibly impress a market like this?

The stellar results vs. high expectations standoff is so far resulting in the market drifting higher. But the pace of the ascent is less than it was. And stocks are looking toppy in the near term. That said, I still believe that the smashing recovery should deliver a higher market between now and the end of the year.

The top performing sectors of the past months include cyclical sectors that have not yet gotten overextended, including financials and materials, as well as defensive sectors in real estate and health care.

High Yield Tier
AGNC Investment Corp. (AGNC – yield 8.1%) – This mortgage REIT has been in an uptrend for over a year that has steepened over the past couple of weeks. AGNC will benefit from a stronger economy (as demand for mortgages increases) as well as rising interest rates and has been moving higher in anticipation. In the past few weeks, a stronger economy and likely rising rates have become more of a reality, and the stock is reacting accordingly. I expect more of the same over the course of the year. BUY

Enterprise Product Partners (EPD – yield 7.8%) – The midstream energy partnership reported first-quarter earnings that beat estimates, but the market yawned it off. Despite the industry being more hindered by the pandemic in this first quarter than last year’s, earnings came in the same as in last year’s quarter and distributable cash flow rose. Enterprise was also hampered in the quarter by the winter storm in Texas. And yet its earnings showed amazing resilience. But much of the rest of the energy sector benefitted from rising commodity prices and got a bigger boost this quarter. Still, everything looks great for EPD ahead of the full recovery later this year. BUY

Realty Income (O – yield 4.1%) – Realty got a boost after it announced it’s acquiring VEREIT, Inc. (VER), a similar company that’s about 60% the size of Realty. Usually, the price of the acquiring company falls after such an announcement. But shares of O moved higher on the day. The market seems to like the deal. A big part of the market’s approval is the fact that the all-stock merger should be accretive to earnings immediately, to the tune of about 10%. It gives O a shot in the arm when it had solid momentum already. BUY

STAG Industrial (STAG – yield 4.0%) – First-quarter earnings were reported this morning and funds from operation grew 4.3% over last year’s first quarter and 13.1% over the first quarter of 2021. Earnings also came in above expectations. The stock is down today as the whole REIT sector is under pressure while technology stocks rally. But it’s just short-term noise. STAG looks good. HOLD

Verizon Communications (VZ – yield 4.4%) – There has been what both I and the market consider a very positive development for the stock this week. Verizon is selling its stake in Yahoo and AOL for $5 billion, although it will retain a 10% stake. Although the stakes were purchased for $8.9 billion, the loss was already written off.

These telecom company’s forays into content providers have never worked out. The main reason I chose VZ over its peers was because they were much less involved in the noncore businesses. Verizon was more of a pure wireless company, freer to focus on the 5G opportunity. Now they’re even more focused – and have more cash. I like it. HOLD

Dividend Growth Tier
Rating change “HOLD” to “BUY”
AbbVie (ABBV – yield 4.7%) – The biopharmaceutical company reported earnings that exceeded expectations last week, and the company raised guidance for 2021. Adjusted earnings per share of $2.95 represented 22% growth over last year’s quarter and bested estimates of $2.83. As well, the CEO said that the company is on the cusp of a dozen new approvals over the next two years, including five for this year.

The stock price rose on the news and is at a new recent high, but still about 10 per share shy of the 2018 high. It’s a positive development with new drugs picking up the slack from Humira competition. The move is a breakout to a new level after the stock had been consolidating at a higher level. The positive technical development combined with the still cheap valuation, at just 9 times forward earnings, prompts a raise to a BUY. BUY

Broadcom Inc. (AVGO – yield 3.2%) – This tech titan has been a big disappointment so far in the portfolio. I think the issue is timing. It was added just ahead of the tech sector correction. But this is a stock that has returned 1,600% over the last 10 years. And the environment ahead with 5G and the likely proliferation of new technologies might be even better. It could bounce around for a while longer, but who cares? The longer-term performance should be great. BUY

Brookfield Infrastructure Partners (BIP – yield 3.8%) – The good news is that this infrastructure partnership continues to trend higher. The bad news is that the pace is painfully slow. BIP is at the same price it was in the beginning of February. It’s still not far from the all-time high and this year should be good to Brookfield. Earnings should get a nice boost from new assets coming online as well as a recovery in its transportation assets. Infrastructure should also be a popular subsector after the pandemic. BUY

Chevron Corp. (CVX – yield 5.1%) – The energy giant might be off to the races again. It had been consolidating since mid-March after a huge surge early in the year. But it picked up steam and has moved up 8% in the last couple weeks along with the rest of the energy sector. A big part of the reason for the rally is that oil prices hit the highest level since 2018 as demand increases in lockstep with the global economic recovery. I expect more of the same going forward. HOLD

Digital Realty Trust (DLR – yield 3.0%) – After going nowhere for a year, this data center REIT is finally getting some traction. It’s up over 15% since early March and isn’t that far from the high. The stock also got a bump from positive earnings last week. The specialty REIT grew year-over-year earnings (as reflected by core funds from operations) by 9%, and the REIT also raised guidance for the year. The market seems happy with the quarter. BUY

Eli Lilly and Company (LLY – yield 1.8%) – After pulling back following lower-than-expected earnings, LLY has been moving higher over the past week. I’m not sure what to expect in the near term. But longer term, LLY is one of the best health care stocks to own. It has one of the best pipelines in the business and has nine billion-dollar drugs, many of which have stellar growth rates. HOLD

KKR & Co. Inc. (KKR – yield 1.0%) – The alternative investment wealth manager announced earnings this week that were stellar. Distributable earnings soundly beat estimates and rose 63% over last year’s quarter as its capital markets revenue more than doubled. The earnings seem by all measures a home run, and the stock is back up to a new all-time high. The quarters ahead should continue to be strong as the environment gets even better. BUY

Rating change “HOLD” to “BUY”
Qualcomm Inc. (QCOM – yield 2.0%) – Last week, Qualcomm delivered a blowout earnings report for the most recent quarter. It trounced expectations and grew revenue 52% and adjusted earnings 116% over last year’s quarter. 5G handset sales were strong as the smartphones roll out despite chip shortages. But the chip maker also got a huge benefit from increased Internet applications. That’s the part of 5G that’s just beginning.

The stock was up over 3% after the announcement but has since pulled back. It follows the aforementioned pattern of the market yawning off great results, especially in technology. It don’t know about the near term for the tech sector or Qualcomm. But the report portends great things for the rest of the year and beyond. It’s cheap relative to where the price should be in the second half of the year. BUY

U.S. Bancorp (USB – yield 2.8%) – This best-in-class large regional bank has returned 35% since being added to the portfolio in December. The stock is all the way back up to the pre-pandemic high. It may run into some resistance at this level, but maybe not. We are headed into what will likely be a dream environment for banks. And the financial sector continues to look strong and trend higher. BUY

Valero Energy Corp. (VLO – yield 5.0%) – Like CVX, this refiner stock is back in business. After consolidating since March, it’s up 16% in the last couple of weeks and approaching the March high again. It’s a simple story. As evidence of increasing energy demand continues to unfold, the sector rallies. VLO is a particularly high leverage play on the sector and will exaggerate the moves. I expect more good things for VLO over the rest of the year as the economy booms. HOLD

Safe Income Tier
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 1.9%) – This short-term bond fund is a safe port. While the market is 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. That said, the bonds in this ETF mature at the end of this year. HOLD

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. Since falling sharply in the worst of the bear market, the fund price has recovered to pre-pandemic highs and then leveled off. It should continue to be a solid holding from here, even with interest rates rising. HOLD

NextEra Energy (NEE – yield 2.0%) – The stock has been bouncing around since early this year. And it has had rare subpar performance of late. But therein lies the opportunity. The stock is getting a little beaten up ahead of what should be a glorious time for renewable energy. According to the International Energy Agency (IEA), renewables will provide nearly one-third of the world’s electricity by 2025. NextEra is an established provider with a strong backlog of projects. NEE should again be loved by investors in the near future. BUY

Xcel Energy (XEL – yield 2.6%) – This smaller and lesser-known alternative energy utility seems to move before NEE. It floundered before NEE and has recovered sooner. Since early March the stock has had a huge move and is up over 20%. That’s a big move in a short time for a utility. Investors are seeing the value ahead of what should be a fantastic environment for alternative energy companies. BUY