Good News Still Outruns Bad News
The bull market is back. But there seems to be a disconnect between recent stock performance and the headlines. What’s going on?
The short answer is that the good news is outrunning the gathering problems, for now. Earnings are killing it. Companies have not been negatively affected by inflation or supply shortages, at least not yet. Meanwhile, the economic news is terrific.
Retail sales numbers are great. Homebuilder sentiment is the highest in six months. Manufacturing output is the highest in over two years. Earnings are again blowing away expectations. The economy is booming. And interest rates are low. All that goodness is outweighing the fact that inflation is becoming a big problem, supply issues are getting worse, and the Fed is likely to start tightening sooner than previously expected.
But I’m cautious about 2022. The market may be outrunning the problems for now. But when earnings excitement fades and the market slows down, the problems may catch up. The economy is still making up for the slack left by the pandemic. When the slack is made up, the environment should normalize next year.
For now, the market still looks solid. It may continue moving still higher for the rest of the year. But is unlikely to deliver recent returns in 2022. Things are great for now, ahead of what is likely to be a much more sober environment next year.
High Yield Tier
AGNC Investment Corp. (AGNC – yield 8.9%) – Well, it’s not going anywhere. But the yield is spectacular and safe. There’s seems to be little downside from here. And there is still potential price upside in the months ahead. AGNC topped out in June near 19 per share and has leveled off around 16 for a while. The persistent inflation should force interest rates higher and that should help this stock. BUY
Blackrock Enhanced Capital and Income Fund (CII – yield 5.5%) – 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. The high market is a good environment for covered calls and CII is a safer and high-yielding way to play the market. BUY
Compass Diversified (CODI – yield 4.6%) – CODI is up about 6% so far this month. Earnings were strong and this holding company for small businesses has been trending higher since the report. Huge growth over the last year is because of new acquisitions as well as the economic recovery. Small businesses tend to thrive disproportionately in a recovering economy. I expect the uptrend to continue. BUY
Enterprise Product Partners (EPD – yield 7.8%) – The story for this midstream energy partnership is similar to that of AGNC in that the price doesn’t seem to go anywhere. But the distribution is rock solid. It also sells at a cheap valuation and the energy environment is very good for stocks in the sector. There should be another move to the upside in the months ahead and you can be patient with EPD because it pays you a huge income while you wait around. BUY
ONEOK Inc. (OKE – yield 5.9%) – This midstream energy company stock has also gotten a splash of the cold water after a spectacular run higher. The energy sector rally in late September and early October lit a fire under OKE’s keester. But it has been a downward-biased sideways slog for the last month. That’s okay because it pays a big fat yield no matter what the stock price is doing. I still like energy and I love ONEOK. We’ll see what happens in near term, but I think this stock still has more upside. HOLD
Realty Income (O – yield 4.0%) – This legendary income REIT completed a merger with similar company VEREIT. The deal also includes the receipt of shares of a spinoff company which includes all the office properties of Realty Income and VEREIT. The new company will be called Orion Office REIT and trade under the symbol ONL.
Shareholders of O on the record date November 1 received one share of ONL for every 10 shares of O on the spinoff date November 12. Office properties are not the best place to be, as the work-from-home trend is here to stay and the supply/demand dynamic of office properties is not in a healthy state, that’s why the properties are being spun off. But the shares are a freebee, and an extra and unexpected distribution. The position of this newsletter is to sell the shares upon receipt and consider the proceeds an extra cash distribution. HOLD
STAG Industrial (STAG – yield 3.4%) – This industrial REIT has leveled off since pulling back a little from the high set at the end of October. Earnings were great. STAG grew earnings per share by 15% over last year’s quarter as acquisitions and strong demand for industrial properties in the recovery powered results. We’ll see what it does from here, whether it goes back to new highs or pulls back further. HOLD
Verizon Communications (VZ – yield 4.9%) – The stock has dipped below the low point of the recent range. That’s a red flag. Unless VZ rallies from this level in the next week or so, I will likely sell at least part of the position. It had been assumed that the stock would at least gravitate back to the higher end of the range. Recent action puts that into question, and I will watch this closely. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 4.8%) – The biopharmaceutical giant has bounced around of late. It sold off in early September when the FDA announced a requirement for the company to put a nasty warning label on one of its most promising new drugs. Then a stellar earnings report in late October got most of the recent selloff back. It’s been floating around the same higher range for most of this month. I like it long term, and healthcare should be a good place to be as the market normalizes. BUY
Broadcom Inc. (AVGO – yield 2.5%) – After floundering since the high in February, AVGO has been moving higher. It doesn’t report earnings until next month, but the market seems to be expecting good things. Broadcom had a solid quarter reported in September. It’s also likely holding up better during the chip shortage as it’s a priority customer. It had been a good value. Now, it’s finally got some momentum too. BUY
Brookfield Infrastructure Partners (BIP – yield 3.5%) – This infrastructure partnership reported solid earnings and raised the dividend 5%. Then the infrastructure bill passing likely increased investor interest in the subsector. But Brookfield announced an equity offering and BIP pulled back over 6% from the recent high. New shares will dilute the existing share base. But the company has a proven ability to make up more than the difference in profitable investments. HOLD
Chevron Corp. (CVX – yield 4.6%) – Energy has cooled off. But it will be back. The strong demand and limited supply dynamic for oil isn’t going away soon. Chevron is highly levered to the price of oil. The next earnings report in January should reflect a huge profit boost as volumes are strong and prices are at the highest level since 2014. The stock is still close to the high and I expect another surge at some point in the near future. BUY
Eli Lilly and Company (LLY – yield 1.4%) – The biopharmaceutical giant bounces around a lot. It had a huge surge over the summer on the likelihood of an approval of its Alzheimer’s drug next year. It then pulled back 25% for no good reason. But it has since shot back up about 20% since the beginning of October. It looks like it might be back on its way to the high. HOLD
KKR & Co. Inc. (KKR – yield 0.7%) – This alternative investment asset manager has really cooled off. That was to be expected, which is why half the position was sold last week. KKR had run up 40% in a month on blow-out earnings and the fading of Chinese contagion fears. It has since pulled back more than10% from the high. The stock has returned almost 70% since being added to the portfolio in March. Prospects still look bright for the stock, but it may have gotten ahead of itself in the near term. HOLD
Qualcomm Inc. (QCOM – yield 1.6%) – The good news keeps coming and good times continue to roll for this stock. First, it announced blowout earnings. Then it got a slew of analyst upgrades and price target raises. Early this week, the company issued a presentation showing ambitious growth targets for the future. The stock was up 8% yesterday on the report and is up almost 50% since the middle of October. The stock is still cheaply valued and could continue this run. BUY
Spectrum Brands Holdings, Inc. (SPB – yield 1.6%) – This seller of home-centric products had been downgraded to a HOLD ahead of earnings. Last quarter’s earnings had been impacted by inflation and supply-chain issues, which have gotten worse. But the earnings report indicated that Spectrum is handling those issues well and have improving margins that should benefit the next year. The stock got a bunch of upgrades and price target raises and SPB is up over 10% since the report and about 30% since being added to the portfolio in August. HOLD
U.S. Bancorp (USB – yield 3.0%) – The regional bank stock had a nice move between the middle of September and mid-October. But it has since been bouncing around near the high point of the recent range. Earnings disappointed the market as the bank didn’t realize higher net interest income in the quarter because rates didn’t move higher until the very end. It may go sideways for a while, but I like the bank’s prospects over the intermediate term. HOLD
Valero Energy Corp. (VLO – yield 5.0%) – The refining giant reported earnings that soundly beat estimates and turned last year’s quarter’s $1.16 loss into a positive $1.22. It was helped by higher volumes and higher margins as the massive recovery in gasoline demand helped the company. But VLO is a high-leverage play on the energy sector, which had been consolidating over the past month after a big surge in October. Demand for gasoline and diesel is soaring and margins are increasing. That should get reflected in the stock soon, and VLO is still trading below pre-pandemic levels. BUY
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 1.8%) – This large and well-known alternative energy utility had a rough year as investors looked away from alternative energy and safe stocks as conventional energy and cyclical stocks got hot. But NEE is a great value and a safe play on the growth in alternative energy that should come back into favor. It has quietly recovered and is at a new all-time high. It should make up for lost time when things get back closer to normal after the pandemic recovery. BUY
Xcel Energy (XEL – yield 2.8%) – This alternative energy utility has been a dog with fleas of late. It’s still busy wallowing near the low point of its recent crummy range. But I’m still a big believer. This is one of the best utilities out there. Defensive stocks should have their day in the sun as the market and economic environment normalizes into next year with stock prices at very high levels. And Xcel should also be a huge beneficiary of the growth in alternative energy beyond that. Patience should pay off before too long. BUY
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on 11/17/21 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| AGNC Investment Corp. (AGNC) | 04-14-21 | 17 | Monthly | 1.44 | 9.00% | 16 | -3% | 9.0% | BUY | 1 |
| Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.2% | 21 | 6% | 5.5% | BUY | 1 |
| Compass Diversified (CODI) | 10-13-21 | 31 | Qtr. | 1.44 | 4.6% | 30 | 3% | 4.6% | BUY | 1 |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.10% | 22 | 1% | 7.8% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 7.00% | 64 | 24% | 5.9% | HOLD | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.1% | 72 | 21% | 4.0% | HOLD | 1 |
| STAG Industrial (STAG) | 03-21-18 | 24 | Monthly | 1.45 | 3.5% | 43 | 115% | 3.4% | HOLD | 1/2 |
| Verizon Communications (VZ) | 02-12-20 | 58 | Qtr. | 2.51 | 4.7% | 52 | -4% | 4.9% | HOLD | 1 |
| Current High Yield Tier Totals: | 5.5% | 31.4% | 5.2% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 117 | 74% | 4.8% | BUY | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.9% | 570 | 29% | 2.5% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 58 | 76% | 3.5% | HOLD | 2/3 |
| Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 5.5% | 115 | 32% | 4.6% | BUY | 1 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 261 | 73% | 1.3% | HOLD | 2/3 |
| KKR & Co. Inc. (KKR) | 03-09-21 | 48 | Qtr. | 0.58 | 0.9% | 79 | 67% | 0.7% | HOLD | 1/2 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.9% | 184 | 125% | 1.6% | BUY | 1/3 |
| Spectrum Brands Holdings, Inc. (SPB) | 08-11-21 | 81 | Qtr. | 1.68 | 2.1% | 104 | 28% | 1.6% | HOLD | 1 |
| U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.3% | 59 | 36% | 3.0% | HOLD | 1 |
| Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 6.0% | 73 | 4% | 5.1% | BUY | 1/2 |
| Current Dividend Growth Tier Totals: | 3.2% | 54.4% | 2.9% | |||||||
| Safe Income Tier | ||||||||||
| Invesco Preferred (PGX) | 04-01-14 | 14 | Monthly | 0.74 | 4.9% | 15 | 56% | 4.9% | HOLD | 1/2 |
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.8% | 88 | 110% | 1.8% | BUY | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 65 | 161% | 2.9% | BUY | 2/3 |
| Current Safe Income Tier Totals: | 3.2% | 109.0% | 3.2% | |||||||
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