Inflation and the Fed Take Center Stage
After a good day yesterday, stocks have resumed the decline.
The Russia/Ukraine thing abated yesterday, and the market was thrilled. The thrill is already gone, and investors are back to worrying about inflation and a tightening Fed.
Although is has been a generally lousy year so far, stocks really aren’t off that much. The S&P 500 is down a little more than 6% YTD as of yesterday’s close. Strong earnings somewhat countered the negatives of inflation and Fed uncertainty. But earnings season is almost over. And that buffer is going away.
Inflation is bad and getting worse. And the Fed is way behind the curve. The Central Bank will have to raise rates much faster and higher than previously expected. But there is also a strong chance that the Fed will have to reverse course faster than currently expected. The market hates that uncertainty. And Wall Street is always obsessed with the Fed.
There is a good chance that inflation and Fed fears bludgeon the market in the weeks ahead with earnings no longer provided a positive counter narrative. Investors will find it harsher to face these problems without help. There is likely a downward bias over the next few weeks.
Of course, I don’t mean to be all gloom and doom. Don’t forget, the economy continues to grow well above trend, and will likely continue to do so for a while. And corporate profits are still strong. It’s hard for investors to get too sour with such things going for the market. Plus, this inflation could fade. And the Fed always errs toward dovishness when faced will a falling market.
I don’t expect disaster. But there is still some downside risk to stocks, especially in the near term. Under the circumstances, I am erring toward caution. There are two stocks sold in this week’s update and two more reduced from a “BUY” to a “HOLD.”
High Yield Tier
Blackrock Enhanced Capital and Income Fund (CII – yield 5.9%) – The covered call strategy is a great one. It provides a high income and stability over time. As an investment, it generally works like a traditional high-dividend stock. The price tends to be relatively stable with a high payout. It will generally underperform the market in good times and outperform it in sideways or down markets. It’s always good to have an investment like that in the portfolio. BUY
Enterprise Product Partners (EPD – yield 7.7%) – The midstream energy partnership may have been an underperformer in a past life. But this environment is lining up perfectly for EPD. Energy is hot. High-yield stocks are hot. EPD fits the mold perfectly. It’s also still very undervalued in an expensive market. Business is strong. And that huge yield is rock solid. (This security generates a K1 form at tax time). BUY
Global Ship Lease, Inc. (GSL – yield 3.8%) – The container ship company is a volatile stock with an upward bias. It made a brand new 52-week high last Friday. It has since pulled back, but I suspect it will be back there and beyond in the next few weeks. Containerships remain in very high demand and those stratospheric shipping rates are likely not going down anytime soon. I expect more good things out of the stock.
The dividend has been confusing. The company raised the quarterly dividend from 0.25 per share to 0.375. But the increase won’t take place until the next dividend. For now, the yield is just 3.77%. But it will be adjusted upward after this dividend to 5.65%. BUY
ONEOK Inc. (OKE – yield 5.9%) – The midstream company stock is also in the right place at the right time. But OKE has been going sort of sideways since the last energy rally in the fall. It is likely because the stock was such a highflyer last year. Nevertheless, OKE is still priced below the pre-pandemic high despite much higher earnings. It should continue to be a winner going forward and that huge yield is a great bonus. BUY
Realty Income (O – yield 4.4%) – REITs have been in the crapper all year. Real estate is the worst performing sector of the S&P 500 so far this year. Rates are rising and so is competition for yield. But O has held up better than the sector as a whole and is only down about half as much YTD. That’s because it’s a legendary and popular income stock. The yield is also sufficiently higher than fixed rate alternatives at this point. After the initial selloff, I expect REITs in general and O in particular to perform better. HOLD
Rating change “HOLD” to “SELL”
STAG Industrial (STAG – yield 3.6%) – This industrial REIT was a superstar performer last year. But this year is a different story. It’s down 17% for the year as it continues to trend steadily lower. It’s getting hit on two fronts. First, REITs are down because of rising interest rates. Two, growth stocks are taking it on the chin because inflation will reduce margins. We are in a much less forgiving market than we were over the past couple of years. Let’s sell the remaining one-half position and secure our profit before the stock gives back more of last year’s gains. SELL
Dividend Growth Tier
AbbVie (ABBV – yield 3.9%) – It’s yet another new high. The market stinks so far this year but nobody told ABBV. The biopharmaceutical company stock has been marching to its own drum and continues making new highs. It’s up about 10% this year. The fantastic pipeline is coming to fruition. Its new drugs are getting approved for more indications. And investors are realizing that AbbVie has the firepower to overcome the Humira competition in 2023. Meanwhile, ABBV is still very cheaply priced with a forward price/earnings ratio of less than 10 and one of the highest yields in the industry. HOLD
Broadcom Inc. (AVGO – yield 2.8%) – This legendary technology company stock has been all over the place in recent months. It had a big surge in December and then gave it all back and then some during the tech selloff in January. But it has since regained about half of the recent loss. We’ll see where it settles in the near term. But the prospects are strong for the year as Broadcom continues to benefit from the 5G rollout. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.5%) – This defensive infrastructure partnership just continues to do its thing regardless of the market trends. It remains near the high and on a long-term, slow and bouncy uptrend. Reliable and growing income and solid dividends never really go out of style. The stock probably would have performed about the same if the market was up 20% so far this year. I expect more of the same going forward, slow and reliable appreciation and income. (This security generates a K1 form at tax time). HOLD
Chevron Corp. (CVX – yield 4.2%) – The energy powerhouse stock returned 62% in 2021. It’s up over 16% so far this year. It just pulled back a little bit from the recent high. This is a great time for energy as the sector is up over 23% YTD. The sector is benefiting from strong demand and high prices, the price per barrel of oil hit the highest level since 2014 and appears poised to move still higher. Chevron is highly levered to oil prices. Meanwhile, CVX still sells at a cheap valuation, even by energy sector standards. I expect the good times to roll. HOLD
Eli Lilly and Company (LLY – yield 1.6%) – The big pharma company stock has been very bouncy. The latest bounce has been down. LLY is down 10% YTD. Earning soundly beat expectations, but its covid treatment drug, which is not approved for Omicron, will take a little off future earnings quarters. But the long-term situation is still strong. It still has the likely approval of its potential mega-blockbuster Alzheimer’s drug later this year. Even after the recent downside move, LLY has still returned 79% over the past two years. HOLD
Rating change “HOLD” to “SELL”
KKR & Co. Inc. (KKR – yield 0.8%) – This alternative asset investment manager stock was an absolute superstar last year. It provided an 85.75% return for 2021. But this year’s market likes to take back the big gains of 2021 in some cases. KKR has been trending steadily and undeniably downhill since the high in early November with no end in sight. KKR is a growth stock that has basked in glory, and the market doesn’t like such stocks this year, despite the outperformance of the financial sector.
KKR is down 16% so far this year and has given back all of the fall surge. This newsletter took profits on half of the position when KKR was very near the high. There is still a 34% return on the remaining position, and I don’t want to give any more back. SELL
Qualcomm Inc. (QCOM – yield 1.6%) – The chipmaker stock mostly hangs around near the top of the recent range after the big surge in November. But it also tends to dip lower when the market gets particularly ugly for tech stocks. It’s coming off one of those dips now. QCOM is a tough call from here. Technology stock don’t like inflation and rising rates and that is a situation that should last throughout the year. But QCOM is in an exceptional growth period and should continue to outperform the sector. HOLD
Spectrum Brands Holdings, Inc. (SPB – yield 1.8%) – We sold half of this position last week as shares had been very weak in this unforgiving market. But SPB has since moved about 4% higher. Spectrum is a standout consumer stock because of its high-growth, home-centric focus. But it has had some difficulty maintaining margins in this inflation. I like the stock and will give the remaining one half position a chance to recover. But it’s still on a short leash. HOLD
U.S. Bancorp (USB – yield 3.2%) – This regional bank stock has been indecisively bouncing around. It took a hit in the recent down market and is attempting a recovery from there. But I think the environment should be very supportive this year as the economy still grows above trend and interest rates likely rise. There is no good reason for USB to be lower priced now than it was in the fall. It’s tough to say what the stock will do in the near term, but I expect it to be higher six months from now. HOLD
Valero Energy Corp. (VLO – yield 4.4%) – In a rotten market, this refiner stock is up 20% YTD and made a new 52-week high on Friday. The company killed it on earnings as it beat estimates by a lot. As anticipated, Valero is benefitting from much higher volumes and margins, and demand and pricing is strong. Refining crack spreads, the difference between the cost and price of refined products, recently hit multi-year highs. Yet the stock is still below the-pre pandemic highs. HOLD
Visa Inc. (V – yield 0.7%) – The card company stock has leveled off since getting a big bump on earnings. The stock jumped over 10% on the day of the report and 14% for the week. As anticipated, international business is picking up as are the very profitable cross-border transaction as travel returns. The stock should continue to have a good year as the company benefits from a fuller recovery in 2022. BUY
Safe Income Tier
Invesco Preferred ETF (PGX – yield 4.9%) – The ETF has fallen a bit in price over the past several weeks as rising interest rates and inflation have affected it. Preferred stocks tend to hold up relatively well in those conditions, but they are not immune. We will watch PGX for further weakness going forward. HOLD
Rating change “BUY” to “HOLD”
NextEra Energy (NEE – yield 2.0%) – This alternative energy utility stock is having a rotten year. It fell over 22% in January, but it has bounced back somewhat since. The fall was amplified by the earnings report. Earnings were stellar but the company announced management changes that the market didn’t like. This market has also shunned low-yielding stocks in this rising interest rate environment. The rating will be reduced to HOLD until NEE shows more evidence of reversing the downside trend. HOLD
Rating change “BUY” to “HOLD”
Xcel Energy (XEL – yield 2.8%) – This alternative energy utility had been solid and barely budged during the market turmoil of the last week. But it has since begun to mimic similar stocks that are lower yielding. The down move over the past week could be a blip. But this is not a market to trifle with. The rating will be reduced to HOLD until XEL resumes the upward trend. HOLD
| High Yield Tier | |||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on 2/15/22 | Total Return | Current Yield | CDI Opinion | Pos. Size | |
| CII | Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.6% | 21 | 1% | 5.9% | BUY | 1 |
| EPD | Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 24 | 7% | 7.7% | BUY | 1 |
| GSL | Global Ship Lease. Inc. (GSL) | 01-12-22 | 23 | Qtr. | 1.50 | 6,41% | 23 | 13% | 3.7% | BUY | 1 |
| OKE | ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 63 | 25% | 5.9% | BUY | 1 |
| O | Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 67 | 15% | 4.4% | HOLD | 1 |
| STAG | STAG Industrial (STAG) | 03-21-18 | 24 | Monthly | 1.45 | 3.3% | 40 | 102% | 3.6% | SELL | 1/2 |
| Current High Yield Tier Totals: | 5.5% | 32.4% | 5.1% | ||||||||
| Dividend Growth Tier | |||||||||||
| ABBV | AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 147 | 119% | 3.9% | HOLD | 2/3 |
| AVGO | Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 590 | 37% | 2.8% | HOLD | 1 |
| BIP | Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 60 | 83% | 3.6% | HOLD | 2/3 |
| CVX | Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 4.7% | 135 | 54% | 4.2% | HOLD | 1 |
| DFS | Discover Financial Services (DFS) | 02-09-22 | 125 | Qtr. | 2.00 | 1.6% | 128 | 2% | 1.6% | BUY | 1 |
| LLY | Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 266 | 65% | 1.6% | HOLD | 2/3 |
| KKR | KKR & Co. Inc. (KKR) | 03-09-21 | 48 | Qtr. | 0.58 | 0.8% | 62 | 34% | 1.0% | SELL | 1/2 |
| QCOM | Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 184 | 115% | 1.6% | HOLD | 1/3 |
| SPB | Spectrum Brands Holdings, Inc. (SPB) | 08-11-21 | 81 | Qtr. | 1.68 | 1.6% | 87 | 18% | 1.8% | HOLD | 1/2 |
| USB | U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.2% | 59 | 33% | 3.2% | HOLD | 1 |
| VLO | Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 5.7% | 89 | 21% | 4.4% | HOLD | 1/2 |
| V | Visa Inc. (V) | 12-08-21 | 209 | Qtr. | 1.50 | 0.7% | 232 | 9% | 0.70% | BUY | 1 |
| Current Dividend Growth Tier Totals: | 2.7% | 40.3% | 2.5% | ||||||||
| Safe Income Tier | |||||||||||
| PGX | Invesco Preferred (PGX) | 04-01-14 | 14 | Monthly | 0.74 | 4.9% | 14 | 44% | 4.9% | HOLD | 1/2 |
| NEE | NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 75 | 82% | 2.0% | HOLD | 1/2 |
| XEL | Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 66 | 171% | 2.8% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 3.1% | 99.0% | 3.2% | ||||||||
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