Limbo
The market has moved off the lows of last month. But stocks really aren’t going anywhere.
The problem is recession. An increasing number of economists are calling for a recession in the next year as the Fed aggressively raises rates and pulls back stimulus in an effort to tame this high and persistent inflation. Stocks are already at least partially pricing in a recession that may not even happen.
We are in a strange place. The market isn’t making new lows unless it sees more evidence of an imminent recession. But stocks can’t generate any lasting upside traction as long as a viable recession threat still looms. A sustainable and meaningful rally is unlikely to occur unless the near-term recession risk fades, or a recession arrives and the market bottoms out. But in the absence of either of those scenarios, stocks are in a state of limbo.
Even energy stocks sold off and are stuck in the mud. While the sector thrives with inflation, it doesn’t like recession. Even if a recession doesn’t arrive, the threat of it will keep energy and stock prices lower. Cyclical stocks that have been pummeled can’t recover yet as an actual recession will likely cause further selling. The current sorry state of the market will likely persist until a recession is either confirmed or denied.
After having sold several more cyclical positions, the portfolio is now mostly positioned in the more defensive sectors of utilities, healthcare, and midstream energy. But there is still upside leverage in case the market turns around in technology stocks Qualcomm (QCOM), Broadcom (AVGO), and Intel (INTC) as well as more cyclical stocks Innovative Industrial Partners (IIPR) and Visa (V).
High Yield Tier
Enterprise Product Partners (EPD – yield 7.6%) – After trending ever higher all year long, EPD sold off sharply in the down market, plunging over 17% from the high in early June. The energy sector sold off amidst renewed recession fears and took EPD with it. We’ll see if the recession worries continue to pressure the sector. But EPD should be solid as revenues rely on volumes rather than commodity prices and the distribution is rock solid. It also has inflation adjustments built into its contracts. (This security generates a K1 form at tax time). BUY
ONEOK Inc. (OKE – yield 6.8%) – This midstream energy company also got clobbered last month but has since bottomed and crept a little higher. OKE tends to be more volatile than EPD and has a lot going for it to make it a worthwhile stock to hold. It’s not cyclical like most energy stocks. Business is highly resilient and should remain strong even in a recession, and the stock pays you well to hold it. A defensive energy company with a high payout could be the ideal stock in the months ahead. BUY
Realty Income (O – yield 4.3%) – This well-known, legendary income REIT, along with utility stocks, has been a star performer in this recession-fearing environment. Although it deals in retail properties, most tenants are staples like supermarkets and drug stores. It is seen as a defensive income stock. O has already recovered all the June losses and then some. It’s higher than it was before the market’s bear market foray. It’s a trusted income generator and defensive play that investors are drawn toward in volatile markets like this. There’s no reason not to expect more market-beating performance over the rest of the year. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 4.8%) – Investors rediscover the defensive attributes of healthcare stocks in times like this. That’s why healthcare in the best-performing sector over the past month and the second-best-performing sector over the last three months. Healthcare will continue to thrive regardless of the state of the economy. Despite the strong performance, ABBV continue to sell at dirt-cheap valuations as it overcomes the looming loss of the Humira patent in the U.S. It’s a good stock to hold anytime, but the relative performance is especially good in markets like this. HOLD
Broadcom Inc. (AVGO – yield 3.4%) – Technology has not been a good place to be this year and AVGO has been hammered. But there is a strong chance that the selling in the technology sector ends sooner than in most other sectors. Many stocks have been oversold, and technology is still where the strong growth is. It worthy to note that in the recent panic selling, technology fared better than the overall market after leading it lower for most of this year. Things may get worse in the near term, but AVGO should be a lot higher a year from now. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.8%) – Shares underwent a 3:2 stock split on June 13th. That means shares priced at 60 per share before the split were priced at 40.20 immediately afterwards, but you have 50% more shares. If you had 500 shares before the split, you now have 750 shares. A lower price per share can make the stock attractive to more investors.
After outperforming the market all year, BIP was not immune to the heavy selling in the market last month. It’s likely that the indiscriminate selling took everything down. But BIP has bottomed and recovered somewhat since. It should do well going forward as earnings are very defensive and dependable, and the dividend is safe. It also has built-in inflation protections in its contracts. The reliable payout and defensive characteristics should make this a solid holding in a recession. (This security generates a K1 form at tax time). HOLD
Eli Lilly and Company (LLY – yield 1.2%) – While the world goes to Hell in a handbag, LLY is making new highs. The stock is benefiting from investors’ newfound love of healthcare stocks. There was also more good news. There is a strengthening outlook in its immunology drugs and more covid treatments were ordered by the government. It’s just more positive news from the terrific pipeline that keeps investors interested in the stock. LLY is also a good stock to have in a weak market with increasing recession worries. It’s a superstar of a great sector to be in these days. HOLD
Innovative Industrial Properties, Inc. (IIPR – yield 6.2%) – IIPR fell again in the recent tumult even though it had been beaten to a pulp already. But fundamentals justify a much higher price. The company is projected to grow earnings 37% this year and it sells at a price/earnings ratio below that of the overall market. It also pays a large and rapidly growing dividend. IIPR was purchased in the portfolio at a very cheap price and therefore the stock should have less downside than most going forward. Plus, it could rocket a lot higher in a better market. HOLD
Intel Corporation (INTC – yield 4.0%) – The past month didn’t spare INTC either, despite the already low valuations and the fact that it has outperformed the tech sector YTD. It’s been ugly, and it could be rough sledding for a while longer. But INTC is oversold and undervalued ahead of what is likely to a strong several years for earnings growth. Things could get a little worse in the near term, but I like the stock very much as a longer-term play. BUY
Qualcomm Inc. (QCOM – yield 2.4%) – Qualcomm is in a strong earnings growth cycle that should last a while. It is also so well positioned for the future. But the rollover in the technology sector took everything with it. Analysts were slobbering all over this company a few months ago when it was blowing away earnings expectations and raising guidance. Sure, smartphone sales will decrease in a recession. But that is already more than priced in. The stock sells well below what the fundamentals justify. And such things win the day eventually. HOLD
Visa Inc. (V – yield 0.8%) – V got knocked back amidst all this recession talk and the downgrading of global growth projections. But is always seems to bottom in the just under 200 per share range and quickly recovers while market selling eases. Visa continues to get a huge benefit from the removal of covid restrictions globally despite slowing global growth. Earnings blew away expectations with YOY revenue growth of 25% and 30% earnings growth. This stock should be one of the first to reverse course and move higher when the market recovers. HOLD
Safe Income Tier
NextEra Energy (NEE – yield 2.0%) – NEE struggled for a while despite the solid performance of the utility sector after the earnings report revealed that delays from solar panels in Asia will slow solar projects. But the stock bottomed and has been solid in the recent market environment, having recovered all the June losses and then some. NEE is now at a higher price than before the market fell into bear territory. This is a great utility and a phenomenal way for conservative investors to play the growth in clean energy. It’s also in two timely sectors, utilities and clean energy. NEE is looking good again. HOLD
Xcel Energy (XEL – yield 2.8%) – After superior performance all year long where the stock was hovering near the high in a tanking market, the recent tumult finally took XEL down a peg or two. But the weakness isn’t lasting. XEL has come right back over the last several weeks. In the absence of panic, XEL is gravitating back to where it belongs. Plus, like NEE, it’s in two timely sectors and the future should be solid too. HOLD
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on close 7/05/22 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 24 | 9% | 7.6% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 55 | 12% | 6.8% | BUY | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 69 | 21% | 4.30% | HOLD | 1 |
| Current High Yield Tier Totals: | 6.2% | 14.0% | 6.2% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 154 | 135% | 3.70% | HOLD | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 476 | 10% | 3.4% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 14 | Qtr. | 2.04 | 3.6% | 38 | 76% | 3.8% | HOLD | 2/3 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 327 | 122% | 1.2% | HOLD | 2/3 |
| Innovative Industrial Props. (IIPR) | 05-11-22 | 123 | Qtr. | 7.00 | 5.4% | 113 | -6% | 6.2% | HOLD | 1 |
| Intel Corporation (INTC) | 03-09-22 | 48 | Qtr. | 1.46 | 3.1% | 37 | -22% | 4.0% | BUY | 1 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 126 | 58% | 2.4% | BUY | 1/3 |
| Visa Inc. (V) | 12-08-21 | 209 | Qtr. | 1.50 | 0.7% | 201 | -4% | 0.80% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 2.9% | 40.3% | 3.2% | |||||||
| Safe Income Tier | ||||||||||
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 79 | 94% | 2.0% | HOLD | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 70 | 191% | 2.8% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 2.3% | 142.5% | 2.4% | |||||||
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