May 26, 2021

The Market Can’t Decide its Next Move
The market is in nowheresville. The S&P 500 is at the same level it was in early April. But the index isn’t really down. It’s only 1% below the all-time high. It’s not that the market is going down. It just stopped going up.

That’s okay. Stocks couldn’t keep up the recent pace of ascent. The market needed to take a breather. Usually, you get a 5% or 10% correction in the consolidation after a big run higher. This is nothing. The consolidation period is just as impressive the surge.

It seems like a market that can’t decide what to make of things. Sure, Wall Street expects the best GDP growth in decades over the rest of the year. And that growth will be complimented by trillions in stimulus and low interest rates. That’s incredibly positive for stocks. But how much of that good news is already priced into the market?

The market tends to anticipate. The big cyclical rally began after the vaccine announcement in early November, well before the economy actually started booming. Now, investors are starting to look beyond the pandemic recovery.

In six months or so, things will likely be back to normal after the pandemic. And economic growth will be slowing. We will move past the peak and to a time when earnings comparisons get tougher. What will drive the market then?

Investors can’t seem to decide yet. There will likely be continued solid economic growth and earnings, which is still great for stocks. But investors are starting to worry about inflation and supply issues, and the Fed taking its foot of the gas and raising interest rates.

There is a good chance that we are heading to more normalized returns. The money probably won’t be as easy anymore. It may be much more of a stock pickers market. But that’s fine. It’s just more normal and less stupendous.

High Yield Tier
AGNC Investment Corp. (AGNC – 7.8%) – These are good times for mortgage REITs. AGNC continues to move relentlessly higher at slow pace. That’s okay. Any kind of appreciation in combination with the huge monthly yield is a beautiful thing. The environment of booming growth and rising interest rates should continue to make AGNC an attractive investment and propel the stock higher. BUY

Enterprise Product Partners (EPD – yield 7.7%) – The midstream energy partnership is actually trending higher, but at such a slow pace it’s hard to notice. EPD still sells well below the pre-pandemic price as business improves in the economic rebound. It’s hard to see how the stock doesn’t continue moving higher over the rest of the year. And that monster yield is rock solid. BUY

ONEOK Inc. (OKE – yield 7.1%) – Just about everything I said about EPD is true of this midstream operator and newest addition to the portfolio, except it’s more volatile. OKE has returned over 45% YTD. I expect future months to very good to midstream energy companies which also benefit from the booming economy but haven’t moved up as much as the overall energy sector yet. This is a great energy stock that’s still cheap ahead of great environment with a fantastic yield. BUY

Realty Income (O – 4.1%) – After pulling back for a couple of weeks, O is back to a post-pandemic high. In a technically bullish move, O broke out of a long sideways trend. It’s also worth noting that the stock is still well below the pre-pandemic price while earnings are higher, and the economy is more booming. BUY

STAG Industrial (STAG – 4.1%) – Much of what is true about O is also true for STAG, except STAG is more cyclical because of its industrial properties. First quarter earnings came in above expectations. The industrial properties have a very favorable supply/demand dynamic and STAG also owns a lot of e-commerce warehouses that should have a bright future. The stock is still around the all-time high after a huge run. HOLD

Verizon Communications (VZ – 4.4%) – I’m disappointed in this stock. But I’ll give it more time because things should improve for the wireless giant. It’s advantage of being more focused on the core wireless business was made clear by AT&T’s issues from trying to do the same thing. Also, Verizon is shedding what’s left of its media companies and honing focus even more. Plus, 5G is really arriving and should be a bigger story in the market as we move past this pandemic stuff. HOLD

Dividend Growth Tier
AbbVie (ABBV – 4.5%) – Earnings were strong, and the company raised guidance for 2021. Adjusted earnings per share grew 22% over last year’s quarter and 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. But AbbVie is under some scrutiny as the lawmakers have requested a federal inquiry into its pricing practices for its blockbuster Humira drug. But things are net bullish for the stock as it is near the recent high while still selling at a dirt-cheap valuation. BUY

Broadcom Inc. (AVGO – yield 3.1%) – These are rough days for the technology sector as inflation worries are hurting growth stocks. And AVGO has been held back and dragged down by the overall sector. But a little temporary inflation while the economy booms isn’t going to end the technological revolution. Broadcom will benefit mightily from 5G and over 90% of internet traffic uses its products. It’s a good time to accumulate the stock. BUY

Brookfield Infrastructure Partners (BIP – yield 3.8%) – The infrastructure partnership trends very slowly higher. It’s up about 9% YTD, which is on par with the S&P. The returns haven’t been exciting, but the stock is stable and trending the right way. 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 stock, along with most other energy stocks, has been consolidating since mid-March after a huge move earlier in the year. Such a consolidation is necessary and healthy. I don’t think energy stocks are done yet. Business is about to boom for these companies that are still selling at very reasonable valuation despite the recent surge. I’ll bet CVX gets hot again in the next few months. HOLD

Digital Realty Trust (DLR – yield 3.0%) – Aside for the long-term advantage of being in a growth business (data center properties), there are couple things to like about DLR in the near term. One is that after going sideways for a long time the stock broke out to a new near-term high, which is positive from a technical perspective. The other is that it’s a fantastic stock to own in turbulent markets. It has a microscopic beta of just 0.11, meaning that it tends to move independently of the overall market. BUY

Eli Lilly and Company (LLY - yield 1.7%) – The stock moved higher in December and January on a plethora of good news about earnings and new drugs. Then it pulled back in March on some bad news. That’s life for a big pharma company. But Lilly has one the best drug pipelines in the business and is a very well-run company at a time when the aging population will require more drugs and healthcare than ever. The stock has also been moving higher recently and is over 200 per share. HOLD

KKR & Co. Inc. (KKR – yield 1.0%) – The alternative investment wealth manager stock still looks good. It finally pulled back a little bit after an impressive three-month run. But the environment for KKR continues to be terrific. The economy is booming, and interest rates are trending higher. Investors are also demanding diversification from the stock and bond market and the alternative investment business continue to grow at a fever clip. BUY

Qualcomm Inc. (QCOM – yield 2.1%) – Earnings were stupendous. The chip maker trounced expectations and grew revenue 52% and adjusted earnings 116% over last year’s quarter. But technology stocks have continued to be under pressure because of this inflation nonsense. But it’s short-term noise. Technology is where the long-term growth is and Qualcomm will also benefit greatly in the near term as 5G chip demand continues to be strong. When the current headlines give way to something else, QCOM will be right there. HOLD

U.S. Bancorp (USB – 2.8%) – Everything still looks good for this best-in-class regional bank. The prospects for the rest of the year look great ahead of a booming economy and likely rising interest rates. The stock got all the way back to the pre-pandemic high and may catch some resistance and consolidate around this level for a while. But it should move higher in the quarters ahead. BUY

Valero Energy Corp. (VLO yield 4.9%) – The refiner remains a high-leverage play on the recovery. It should basically exaggerate whatever the overall energy sector does. That’s been a good thing lately and the VLO has returned 44% YTD. I still expect energy demand to boom in the months ahead and a full recovery must include increased demand for gasoline and diesel. HOLD

Safe Income Tier
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 1.8%) – 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 levels and then leveled off. It should continue to be a solid holding from here, even with interest rates rising. HOLD

NextEra Energy (NEE – yield 2.1%) – This combination regulated and alternative energy utility had been adored by investors for years, until recently. NEE ran out of gas in late January and has been floundering since. Nothing has changed fundamentally. The company is killing it. And the environment ahead will likely be even better for NEE than before as the new Administration showers clean energy companies with subsidies and tax breaks and other goodies. It’s also a high-growth sector that should get more attention. BUY

Xcel Energy (XEL – yield 2.6%) – This smaller and lesser-known alternative energy utility has been doing much better than NEE lately. The stock surged over 25% from early March until two weeks ago. XEL is still below the highs of November but it has almost completely recovered from the selloff from November to March. BUY