October Doesn’t Look Like the Promised Land
September was ugly. The S&P 500 fell 4.8% for the month. But that month is over. Now we are in what is only the second worst month of the year historically.
So far, October has been volatile. There have been strong rallies that quickly become undone in the following days. The market is still even for the month, but it looks very unsteady. It’s not inspiring a lot of confidence. It can’t take another bad headline.
There are still looming concerns about the virus, impending Fed tightening, and the slowdown in China. Now, inflation is proving to be much stickier than originally thought, at least by the central bankers. These issues are weighing against the strong economy.
But now its earnings season.
Earnings could save or sink the market. It’s still a great earnings environment. S&P 500 earnings are expected to grow 28% on average over last year’s quarter. It’s not the 88% growth of last quarter but it’s still light-years better than average. And earnings have continually exceeded expectations. Earnings could deliver a reignited bull market.
But there’s a problem. Supply constraints are getting worse. Containers are stacked up in California. There aren’t enough truck drivers. Retailers can’t get the products to meet the high demand. Companies are already whining that supplies could reduce earnings. Plus, inflation is eating into margins. Disappointing earnings could tip the market toward the ugly side.
We’ll see what happens. But we might not be out of the woods yet in terms of further downside in the market. I’m still cautious in the near term. That said, I still believe a more serious selloff will be short lived. When fear inevitably wanes, investors will come back to stocks because that’s the only place to get a decent return.
In the meantime, some stocks actually like inflation and rising interest rates. Energy stocks are rallying as oil prices are hitting the highest levels since 2014. The yield curve positions, AGNC Investment Corp. (AGNC) and U.S. Bancorp (USB), benefit from higher rates and a steepening yield curve.
High Yield Tier
AGNC Investment Corp. (AGNC – yield 9.0%) – It’s been disappointing. AGNC pulled back from about 19 per share to the current 16 because of a flattening yield curve. Now that the situation is reversing and the yield curve is steeping, AGNC is doing nothing. It just sits there. I expect the benchmark 10-year Treasury rate to continue trending higher amidst a strong economy, inflation, Fed tightening and bad government. Hopefully, the rate will soar to the point that AGNC’s stock price can’t ignore it. BUY
Blackrock Enhanced Capital and Income Fund (CII – yield 5.9%) – This covered call ETF is a great way to generate a high yield in a market that is unlikely to reap the same gains going forward as it has over the last year and a half. But the market has been down and likely still has more downside left. That’s okay. CII will continue to pay a high yield and likely rebound quickly when the selling is done. HOLD
Enterprise Product Partners (EPD – yield 8.0%) – The energy rally has even been strong enough to get EPD moving. The stock is up 5% in October already. It’s been a great value with a high and safe distribution. Now that energy is swinging back into favor EPD can add momentum to its list of attributes. This is a phenomenal income opportunity right now. BUY
ONEOK Inc. (OKE – yield 6.2%) – This midstream energy powerhouse is all that I said EPD is, but to the third power. After floundering for months as the market dissed energy stocks, OKE has soared over 20% since late August. It’s at a new post-pandemic high, yet still far away from the pre-pandemic price despite higher earnings and more growth. This stock should be a big winner over the rest of the year. BUY
Realty Income (O – yield 4.3%) – The recent pullback in defensive REIT stocks appears to be over. After an ugly September, REIT stocks, and especially O, are holding strong so far in October. I’m still high on this REIT’s prospects over the rest of the year and I’m confident holding it through the rest of the market turbulence. HOLD
STAG Industrial (STAG – yield 3.6%) – Even this industrial REIT juggernaut had a lousy September. But like O, it is faring very well in an increasingly ugly looking October for the market. Sure, the market will bounce around in the near term. Sectors will go in and out of favor. But STAG still has a lot going for it and the market should reward that after its done sputtering. HOLD
Verizon Communications (VZ – yield 4.7%) – Markets like this are when it’s great to own VZ. The stock does nothing. But it does nothing regardless of circumstances. It’s a bummer when stocks are flying amidst a rally for the ages. But it’s a beautiful thing when the market gets ugly and just about all stocks are falling. VZ is a super down-market stock. It’s a great holding for now. We’ll decide what to do with it when the selling is done. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 4.8%) – This biopharmaceutical stock fell all by itself before the market got ugly. Now, it is holding strong with great support at the low point of the recent range. It’s a solid performer in the down market and should gravitate back to at least the high point of the recent range before long. It’s a dirt-cheap stock with a growing business and high yield that offers both defense and growth. BUY
Broadcom Inc. (AVGO – yield 3.0%) – The market seems to think that inflation is bad for technology stocks. I guess it is. It’s bad for most companies. But I don’t really get why the market picks on technology especially during inflation. We’re in a technological revolution that is in the middle of a spurt as 5G rolls out. Technology is where all the longer-term growth is. We’ll hang on to this perfectly positioned industry giant while the market goes through its stages of grief. Eventually, AVGO should get moving and make up for lost time. BUY
Brookfield Infrastructure Partners (BIP – yield 3.6%) – This infrastructure partnership doesn’t move fast but it’s clearly trending the right way. It characteristically pulled back after making a new high in early September. It seems to be slowly climbing back towards that high recently. However, further weakness in the market could delay the recovery over the next couple of weeks. HOLD
Chevron Corp. (CVX – yield 5.1%) – This could be the Promised Land at long last. Oil prices are soaring and just hit the highest level since 2014. For many months I’ve been expecting another rally in energy. It has finally arrived. CVX ignited to the highest level since June, and not far from the 52-week high. Sure, even CVX will pull back in a market selloff. But it should hold up relatively well and the rally should resume when the selling is done. HOLD
Eli Lilly and Company (LLY – yield 1.5%) – This is a great company and a fantastic stock for the longer term. It tends to move up and down on an upward trend.
Recently, we are seeing the downside of that behavior. We did take profits in LLY when it was a lot higher last month. But after a huge surge higher, LLY pulled back nearly 20% from the high. Things are still solid at the company, and I still consider recent weakness a mere typical downdraft in the upward trend. It’s also a great down-market performer. When the stock starts to reverse course I will likely raise it to a BUY. HOLD
KKR & Co. Inc. (KKR – yield 1.0%) – The Chinese problems with Evergrande interrupted the rally in KKR and continues to hold it down. Contagion from the default would hurt some of KKR’s investments. But aside from those concerns, everything is going gangbusters at the company. When this issue subsides, it should be off to the races again for KKR. HOLD
Qualcomm Inc. (QCOM – yield 2.1%) – Ditto what I said about AVGO. This chipmaker has been taking it from two directions. Not only is the overall tech sector weak, but Qualcomm was already reeling because of problems in China, where it does a fair amount of business. I don’t know when things will get better for the stock, but I’m still confident it will shine again. Earnings have been spectacular and will likely remain excellent for the next several quarters. Things also look solid further down the road. I believe in the stock and it’s in oversold territory. BUY
Spectrum Brands Holdings, Inc. (SPB – yield 1.7%) – Sure, the market is ugly. And a selloff will drag just about all stocks down to some degree. But Spectrum is still in the right place at the right time. The home-centric consumer isn’t going away, and Spectrum will benefit. Also, the recent $4.3 billion sale of its Home Improvement unit fixes the financial issues that had been holding the stock back. BUY
U.S. Bancorp (USB – yield 3.0%) – Like AGNC, USB benefits from the steepening yield curve. Unlike AGNC, the stock price has been moving higher already. USB jumped 10% higher in just a few weeks to the highest level since the spring. Rising rates should have this regional bank firing on all cylinders. Although the current market could drag everything down in the near term, USB should move higher from here over the rest of the year. BUY
Valero Energy Corp. (VLO – yield 5.3%) – This refiner and high-leverage play on the energy sector has been on fire. It soared 20% in just weeks as the energy sector sprung back into favor amidst soaring oil prices. Demand for refined product is high and now prices are aligning in a way that supports higher margins. VLO is still way below the pre-pandemic levels with a long way to go. When the current market selling abates, I will likely raise it to a BUY. HOLD
Safe Income Tier
Invesco Preferred ETF (PGX – yield 4.9%) – 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 1.9%) – This regulated/alternative utility used to be a superstar stock that investors loved to buy as a conservative way to play the growth in clean energy. But it’s just been a utility stock this year. It rallies when cyclical stocks struggle and falls when cyclical stocks go higher. It has moved lower over the past couple of weeks during the cyclical rally. That’s okay. A defensive cyclical alternative rounds out the portfolio. But NEE is much more than this. Eventually, alternative energy will come back in favor and NEE will benefit. BUY
Xcel Energy (XEL – yield 2.9%) – XEL has been bouncing around all year long. It’s now near the low point of a downward move. The cyclical rally and market’s move away from defense is responsible for the latest down leg. But that’s all short-term noise. Xcel is a solid utility and a fantastic way for conservative investors to play the growth in clean energy. It’s worth holding through the recent muck. BUY
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on 10/5/21 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| AGNC Investment Corp. (AGNC) | 04-14-21 | 17 | Monthly | 1.44 | 9.00% | 16 | -4% | 9.0% | BUY | 1 |
| Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.2% | 21 | -2% | 5.5% | HOLD | 1 |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.10% | 23 | -1% | 8.0% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 7.00% | 60 | 17% | 6.2% | BUY | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.1% | 67 | 9% | 4.3% | HOLD | 1 |
| STAG Industrial (STAG) | 03-21-18 | 24 | Monthly | 1.45 | 3.5% | 40 | 101% | 3.6% | HOLD | 1/2 |
| Verizon Communications (VZ) | 02-12-20 | 58 | Qtr. | 2.51 | 4.7% | 54 | 0% | 4.7% | HOLD | 1 |
| Current High Yield Tier Totals: | 5.5% | 25.2% | 5.4% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 109 | 62% | 4.8% | BUY | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.9% | 486 | 10% | 3.0% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 56 | 70% | 3.6% | HOLD | 2/3 |
| Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 5.5% | 105 | 19% | 5.1% | HOLD | 1 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 228 | 55% | 1.5% | HOLD | 1/3 |
| KKR & Co. Inc. (KKR) | 03-09-21 | 48 | Qtr. | 0.58 | 0.9% | 62 | 32% | 1.0% | HOLD | 1 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.9% | 127 | 58% | 2.1% | BUY | 1/3 |
| Spectrum Brands Holdings, Inc. (SPB) | 08-11-21 | 81 | Qtr. | 1.68 | 2.1% | 95 | 20% | 1.7% | BUY | 1 |
| U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.3% | 61 | 38% | 3.0% | BUY | 1 |
| Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 6.0% | 74 | -1% | 5.3% | HOLD | 1/2 |
| Current Dividend Growth Tier Totals: | 3.2% | 36.3% | 3.1% | |||||||
| Safe Income Tier | ||||||||||
| Invesco Preferred (PGX) | 04-01-14 | 14 | Monthly | 0.74 | 4.9% | 15 | 55% | 4.9% | HOLD | 1/2 |
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.8% | 80 | 92% | 1.9% | BUY | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 64 | 158% | 2.9% | BUY | 2/3 |
| Current Safe Income Tier Totals: | 3.2% | 101.7% | 3.2% | |||||||
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