June 2, 2021

Here Come the Laggards
The market continues to stumble sideways. On the one hand, the S&P 500 is within a whisker of the all-time high. On the other hand, stocks have been going sideways for about a month.

It looks like supply chain issues will hold back the pace of the economic recovery. The economy is still growing very strongly. And GDP may even still exceed expectations. But supply shortages, locally and mostly abroad, will limit U.S. economic growth below what it would otherwise have been.

That’s not the worst thing. The economy is so strong already that any more might have been overkill. The supply issues will likely work themselves out in the months ahead. And there will be strong economic growth for longer as supply chains improve and the economy makes up for lost time in future quarters.

The market looks ahead and can’t quite figure out what the situation will be by the end of the year. The recovery will have been long underway and economic growth will be slowing. But the environment should still be good for stocks, even though the pandemic recovery will be past its peak.

It has recently become more of a stock picker’s market. Many of the more defensive and value-oriented stocks in this portfolio, which had underperformed the euphoria, are moving to new post-pandemic highs. Investors appear to be rediscovering value and yield while searching for opportunities in this sideways market.

Meanwhile, energy may be on the cusp of another breakout as the economy heats up and oil and gas prices continue to rise.

High Yield Tier
AGNC Investment Corp. (AGNC – yield 7.7%) – This mortgage REIT continues to forge slowly higher, as it has for more than a year now. Yet, AGNC is still below the pre-pandemic high and a lot lower than the high of a few years ago, ahead of an environment that should be better. It still looks good with no signs of weakness. BUY

Enterprise Product Partners (EPD – yield 7.5%) – The midstream energy partnership just broke out to a new 52-week high. The energy environment is rapidly improving in the full recovery and EPD still has a long way to go to get to the pre-pandemic price. The yield is safe. The value is compelling. And you can now add momentum to the list. BUY

ONEOK Inc. (OKE – yield 7.0%) – This fellow midstream energy company, in the form of a regular corporation, is still below the recent high. But it has nearly double the year-to-date return of EPD. Business is improving and OKE is also a long way below the pre-pandemic high. There is great yield and great value here. You can collect the huge yield and very likely get some nice appreciation over the next several months. BUY

Realty Income (O – yield 4.1%) – This is another great income stock that just made another 52-week high. Like the last two stocks, O is also well below the pre-pandemic high. As we move beyond the pandemic recovery, a high yield on a cheap stock should be compelling to investors. I expect O to slowly forge higher the rest of the year. BUY

STAG Industrial (STAG – yield 4.0%) – 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 just made a new 52-week high also. HOLD

Verizon Communications (VZ – yield 4.4%) – I’ll give VZ more time because things might improve for the wireless giant. Its 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 sharpening its focus even more. Plus, 5G is really arriving and should be a bigger story in the market as we move past the pandemic. HOLD

Dividend Growth Tier
AbbVie (ABBV – yield 4.5%) – This biopharmaceutical giant sells at a very compelling value of just 9 times forward earnings with the highest yield of any big pharma stock. Those would be good reasons to buy a stodgy pharmaceutical company. But AbbVie also offers one of the very best drug pipelines in the business and cutting-edge drugs and treatments. Plus, the stock recently broke out to a higher range. That’s encouraging in the near term because ABBV tends to thrust higher and then go sideways for a long time. It may be on the cusp of another thrust. BUY

Broadcom Inc. (AVGO – yield 3.1%) – This technology powerhouse hasn’t done much since being added to the portfolio in January because of unfortunate timing. The tech sector has sputtered temporarily as cyclical stocks have taken off. But it’s short-term stuff. Broadcom is an elite technology company with over 90% of internet traffic using its products. We’re in the midst of a technological revolution and 5G is coming. BUY

Brookfield Infrastructure Partners (BIP – yield 3.8%) – This infrastructure partnership stock is within pennies of the 52-week high after trending slowly high for many months. It’s a good value and a good dividend ahead of improving earnings. The sobering market should continue to embrace defensive companies like this and Brookfield has the added advantage that the infrastructure subsector in becoming increasingly popular with investors. BUY

Chevron Corp. (CVX – yield 5.0%) – 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 valuations despite the recent surge. CVX might get hot again in the next few months as oil and gas prices continue to move higher. HOLD

Digital Realty Trust (DLR – yield 3.0%) – This data center, niche REIT is an odd bird. It was a superstar performer during the pandemic. But it peaked last summer and had been floundering until March. It appears to be on the move again and may well run up to the high of last summer and beyond. It’s a familiar story in this portfolio. It’s a defensive company that has recently started to get a lot more traction. BUY

Eli Lilly and Company (LLY – yield 1.7%) – The pharmaceutical stock has bounced around a lot since being added to the portfolio last August. But the stock has moved more than 30% higher through all the ups and downs and outperformed the market. I expect more of the same going forward. This is the best run big pharma companies with one of the best pipelines at a time when the population is aging at warp speed. You should be well rewarded for just hanging on. 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%) – Most of what I said about AVGO is true for QCOM. It’s been held back by the recent sector stumbles. But great things are still happening for the company. Earnings were stupendous. The chip maker trounced expectations and grew revenue 52% and adjusted earnings 116% over last year’s quarter. Qualcomm should continue to benefit mightily from the 5G rollout in the near term, as it earns royalties on phone sales. When 5G becomes a bigger story in the market, QCOM could have another big run higher. HOLD

U.S. Bancorp (USB – yield 2.8%) – This best-in-class bank is a more conservative play on the financial sector resurgence. It didn’t move up quite as fast as some financial stocks earlier in the year. But it isn’t pulling back like most of those stocks. It’s been sideways since the beginning of May but USB isn’t giving up previous gains. It should forge higher in the quarters ahead as the environment continues to be excellent for banks. BUY

Valero Energy Corp. (VLO – yield 4.9%) – This refiner has just broken out to a new post-pandemic high. After a huge move earlier in the year, followed by a consolidation, VLO appears to be on the move once again. And it should be. Gasoline and diesel demand is soaring in the full recovery. VLO remains priced well below the pre-pandemic high into an environment that should be much better. Energy stocks aren’t done by a darn sight. 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 level 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 may be moving ahead of NEE. The stock pulled back sooner and by more than NEE. But XEL is already recovering from its lull. The stock surged over 25% from early March until last month and has been going sideways since. But XEL is near the all-time high and should trend slowly higher from here. BUY