July 7, 2021

Here Comes the Fed
There is a Fed meeting today. The ultimate oracle of wisdom will bestow their current thinking upon anxious traders. The ground-breaking event may determine the market trend for the next couple of days.

Last time the central bankers met, they blind-sided traders with the shocking revelation that they might start raising rates in two years. Wall Street people are on the edge of their seats, waiting to see if there is another tectonic-plate-moving declaration this month. We’ll see.

Ahead of this meeting, the market had been trending, in a minor way, away from value and towards growth as inflation fears are subsiding and investors worry about life on the other side of this pandemic recovery. The ten-year Treasury rate has been telling an interesting story.

The benchmark rate has fallen all the way to 1.32% from a post-pandemic high of 1.75% at the end of March. The falling rate indicates both a lack of concern about longer-term inflation as well as skepticism about where growth will come from after the economy is done making up for lost time after the pandemic. Of course, it is possible that the Fed says something that changes these current perceptions.

The main issue is that investors are grappling with what to expect in the post-pandemic recovery environment. The market tends to anticipate about six months or so into the future. It sees an environment of slowing growth, tough earnings comparisons, a less accommodative Fed, and no more stimulus. Such a view is tempering the euphoria of the current booming economy.

I like to stick with companies that can continue to prosper in a normalized economy. And most of the current portfolio positions fit that description. In the near term, it’s tough to say what the market will do. Remember, lackadaisical summer markets can be very headline driven in the near term.

High Yield Tier
AGNC Investment Corp. (AGNC – yield 8.5%) – The benchmark 10-year Treasury rate continues to fall, and that’s bad for AGNC. It fell all the way to 1.37% Tuesday from a recent high of 1.75% at the end of March. Inflation fears are subsiding. However, the high dividend is safe, and the company will benefit from the booming economy. As well, interest rates could well trend higher from here. BUY

Enterprise Product Partners (EPD – yield 7.4%) – The midstream energy partnership looks to be back on track after a blip in the uptrend after last month’s Fed meeting and the consequential overreaction. Volumes of oil and gas should be very good amidst this booming economy. The price is still well below pre-pandemic levels while earnings are better. Midstream companies are still underappreciated by the market, but the yields are high, and the prices are trending in the right direction. This is a great stock for income investors. BUY

ONEOK Inc. (OKE – yield 6.5%) – This fellow midstream energy company is less than a dollar below the recent high and looks determined to break right through in the coming weeks. But OKE is also well below the pre-pandemic high with much higher earnings and stronger earnings growth as well. This natural gas and NGL infrastructure company should be a big winner over the rest of the year while paying you handsomely along the way. BUY

Realty Income (O – yield 4.1%) – The legendary income REIT has pulled back from the post-pandemic high made last month. But making new highs and then pulling back is a normal pattern for this stock. And it’s still well below the pre-pandemic high with higher earnings. The stock should be coveted by investors in the post-pandemic market while fundamentals improve in the full recovery. BUY

STAG Industrial (STAG – yield 3.8%) – This more cyclical industrial REIT has pulled back from the June high as well. But the stock is perking up over the last week as investors appear to be undoing the overreactions of last month. STAG is well situated in the industrial property space as the full recovery is reviving the sector while longer-term demand for its industrial properties and e-commerce warehouses remains very strong. HOLD

Verizon Communications (VZ – yield 4.5%) – I hope 5G and the likely boost this wireless giant gets in earnings will morph this stock into something better. Right now its like a utility. The dividend is decent, but the stock price doesn’t go anywhere. I’m continuing to hold it because it’s a good down-market stock that is nice to have in times of uncertainty. That’s enough for now while we wait for the 5G Great Pumpkin. HOLD

Dividend Growth Tier
AbbVie (ABBV – yield 4.5%) – The thing about ABBV is that it’s cheap, very cheap, despite the fact that it has already returned 70% since being added to the portfolio. To put the valuation in perspective, ABBV currently trades at just 9 times expected earnings, compared to 21 times for the S&P 500 and 16 times for the healthcare sector. It’s a huge bargain that should continue to pay off. BUY

Broadcom Inc. (AVGO – yield 3.0%) – The huge rally in the year following the bear market lows has petered out. AVGO is still at the same price it was in January. But I don’t think the fun is over. It’s a necessary consolidation the entire tech sector is enduring. I see it as resting up for the next big run. Even if that run doesn’t get going for several months, it will be well worth the wait. This is a company whose systems 90% of internet traffic uses and it will get an extra benefit from the 5G rollout. It won’t stay down for long. BUY

Brookfield Infrastructure Partners (BIP – yield 3.7%) – New all-time highs come hither. The stock is back to within bad-breath distance of the high. A safe distribution from a defensive business with growing earnings is just what the doctor ordered in this slower-moving and uncertain market. It also might help that infrastructure is in the news and the subsector is gaining popularity with investors. BUY

Chevron Corp. (CVX – yield 5.0%) – This best-in-class energy major has been bouncing around since the recent peak in March. But I don’t think it’s done by a darn sight. Profits are very levered to the price of oil, which just hit the highest level since 2014. Combine the strong pricing with high demand and you have a profit bonanza. Meanwhile, the stock is still priced below the level right before the pandemic when business wasn’t nearly this good. HOLD

Digital Realty Trust (DLR – yield 3.0%) – This data center REIT is down about 6% from the high of about a month ago. But it’s a bouncy stock and such behavior is normal for an uptrend. It’s a major player in the strongly growing but highly competitive business of technology infrastructure properties. There’s a good chance it crawls back to those highs in the coming weeks and months. We’ll see. BUY

Eli Lilly and Company (LLY - yield 1.5%) – LLY has a fantastic pipeline. The recent Biogen (BIIB) approval stoked optimism about Lilly’s pending Alzheimer’s treatment. Lilly has a better drug that could be a potential mega blockbuster. Consider that about one in nine people over 65 are affected. And the number of people that age is exploding. The stock has reacted very positively to the news. While the sector has floundered, LLY is up 35% YTD. I normally don’t put much stock in any one drug, but the odds seem to be very good on approval for this drug. HOLD

KKR & Co. Inc. (KKR – yield 1.0%) – The souring of the yield curve trade after the Fed announcement didn’t bother this alternative investment wealth manager stock at all. It is near the all-time high and has returned 48% YTD. The wealth management business is booming, and alternative investments are the fastest growing part, and KKR is the best. Let’s see how far it goes. BUY

Qualcomm Inc. (QCOM – yield 1.9%) – The long consolidation period since the February high should end soon as investors realize technology is one of the few places to find reliable growth when things normalize after the pandemic recovery. Maybe earnings will get QCOM going again. The company reports at the end of this month. Last quarter was spectacular and there is no reason why this quarter won’t be even better. Meanwhile the stock is cheap at 16 times forward earnings. BUY

U.S. Bancorp (USB – yield 3.3%) – This best-in-class regional bank stock got knocked back by the recent yield curve trade. But it’s not out by any means. Profitability will surely benefit from higher loan volume in a booming economy. Business is much better than the recent stock action indicates. And long-term rates may trend higher going forward as well. The bank should have some very strong quarters ahead. BUY

Valero Energy Corp. (VLO – yield 5.0%) – This refiner should be killing it. Prices of gasoline and diesel are through the roof as demand is booming in the full recovery. But the stock has been floundering for almost a couple months now after a huge run higher early in the year. The price is still well below pre-pandemic levels while profits should be higher and growing faster. Valero reports earnings at the end of the month. We’ll see if that gets the stock going again. 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%) – After falling during the pandemic, this preferred stock ETF has recovered and is back near the-pre pandemic high. 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. HOLD

NextEra Energy (NEE – yield 2.1%) – The move towards cyclical stocks over the last six months or so ahead of the anticipated full recovery has hurt this normally up-trending juggernaut. It’s still down 12% from the January high. But it is still one of the best regulated utilities in the country with the added benefit of growth from being the world’s largest producer of wind and solar. The high-growth clean energy business (which also gets more profitable every year) will have its day in the spotlight again, and probably in the near future. BUY

Xcel Energy (XEL – yield 2.7%) – This smaller and lesser-known alternative energy utility stock is retreating from the recent high it made last month, down almost 10%. That’s not unusual behavior for XEL. It bounces around a lot on a longer-term uptrend. Alternative energy has been out of favor. But that shouldn’t last long. It’s in the spotlight in the new Administration. When the sector gets moving again it should be a big tailwind for XEL. BUY