The Market Still Stinks, but the Tech Stocks Are Oversold
Things have gotten a little better in the market. The situation has gone from bad to crummy.
The S&P 500 rallied from the lows to move away from the bear market precipice. The index also closed the week in positive territory for the first time in eight weeks and actually managed to eke out a very slight gain for the month of May. It’s not much. But it beats spiraling downhill.
For the first time in ages, inflation numbers were better than expected. There were also some positive numbers for the economy today. There seems to be a feeling that stocks have priced in the current negative environment for now. And there is some faint hope that inflation will recede all by itself and therefore the Fed won’t have to drive the economy into recession.
Of course, more bad news could drive the market into the crapper again. And it’s tough for investors to sustain much positive sentiment amidst a newly hawkish Fed. The problem is that nobody really knows what will happen when the Fed raises rates aggressively. The Central Bank has supported the markets since the financial crisis. We’ll see what happens as they reverse course.
But dividend stocks are doing well. There are only four portfolio positions that have not outperformed the market this year. One is Innovative Industrial Properties (IIPR), which is up since being added to the portfolio three weeks ago. The other three are technology stocks Qualcomm (QCOM), Broadcom (AVGO), and Intel (INTC). The selling has been overdone in these stocks and they represent the best opportunities in the portfolio right now.
It may be early to back up the truck. But it is time to nibble. While there is still risk of further downside in the near term, it is likely that these stocks are a lot higher priced by the end of the year.
High Yield Tier
Enterprise Product Partners (EPD – yield 6.7%) – This midstream energy partnership is a great place to be right now. While the world is going to Hell in a handbasket, EPD is flirting with the 52-week high, up 25% YTD. It has solid earnings growth and energy production is likely to rise. Meanwhile, EPD still sells below the pre-pandemic high with much higher earnings and strong prospects. Plus, that huge distribution is safe. It’s solid in a down market and should trend higher for the rest of the year. (This security generates a K1 form at tax time). BUY
Global Ship Lease, Inc (GSL – yield 6.7%) – The market has soured on this formerly high-flying stock. It’s because of global growth fears going forward. Business is still booming at the company. But recent performance likely reflects an overreaction where everything international and cyclical has taken a hit. Profits will continue to rise because Global already locked in much higher rates for long-term contracts than have existed for many years and greatly expanded their fleet. Also, container shipping demand and rates should stay buoyant even as the global economy slows. BUY
ONEOK Inc. (OKE – yield 5.6%) – OKE has underperformed the energy sector this year after outperforming last year. There wasn’t as much ground to make up and earnings aren’t skyrocketing because they never went down much during the pandemic. But the company has a reliable and growing business with inflation adjustments build into its contracts. Plus, it’s an amazing dividend and the stock should trend higher over the course of the year. BUY
Realty Income (O – yield 4.3%) – The stock is doing okay in this market. Sure, it’s down about 3% for the year. But the market and the REIT sector are down a lot more. O is a legendary, safe income stock and investors seek it out in this market. It should continue to slowly edge higher while paying a great income in the next phase of this market. O should rise again over the course of the year as investors reevaluate. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 3.8%) – ABBV has leveled off after hitting a near-term bottom in April after pulling back from a surge that began in October. It’s normal for the stock to pull back after such a move. ABBV has returned over 13% YTD even after pulling back, but it might continue to go sideways for a while longer. It’s a phenomenal drug company with one of the best pipelines in the business and the defensive nature of the business should help the stock endure further market downside very well. HOLD
Broadcom Inc. (AVGO – yield 2.8%) – It’s official. Broadcom is acquiring cloud software company VMware (VMW) for $61 billion. The stock fell initially after the deal leaked but has moved nicely higher since as the market has warmed to the idea. The sheer size of the deal is startling. But Broadcom can pull it off. The tech giant has a long history of being a serial acquirer and it has served shareholders well. The stock returned almost 2,000% over the last ten years. It’s a big move away from the chip business which is notoriously volatile. It bolsters Broadcom’s superior positioning for the future of more cloud-based solutions. The company is also a buy on fundamentals outside of this acquisition. It’s solid for both the long and short terms. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.6%) – This infrastructure asset owner seems to trend higher at a snail’s pace no matter what the market does. It had spiked higher in April but then realized it’s BIP and pulled back to resume its torturously slow ascent. Business is solid. And BIP is ideally suited for this market. It’s a safe dividend payer with built-in inflation protections. Just hold on and collect the dividend. It should serve you well over time. (This security generates a K1 form at tax time). HOLD
Discover Financial Services (DFS – yield 2.1%) – This stock has been acting better lately. But it’s moved sideways to lower for over a year now. I’m not sure why. I think it’s just a victim of the crummy market. Operationally, the company is killing it. Profits are soaring and they just raised the dividend 20%. Plus, there’s a big bonus coming. As consumers run out of stored up cash they will inevitably start charging more. Discover will benefit from the higher balances at exorbitant interest rates. But I’m getting a little impatient waiting for investors to realize this. HOLD
Chevron Corp. (CVX – yield 3.3%) – Don’t you love it. It’s a beautiful thing when an old-fashioned, blue-chip stock doubles your money in a little over a year. But timing is everything, and time is still on our side with this one. There is nothing outside of a recession in the foreseeable future to drive energy prices lower.
In fact, the risk is heavily to the upside. Chevron is the most levered to oil prices of all the energy majors and will benefit from this inflation. Despite returning over 50% YTD, CVX still sells at a price/earnings ratio well below the overall market as well as its five-year average. The company expects to grow earnings by 100% this year and is well on track to do so. HOLD
Eli Lilly and Company (LLY – yield 1.2%) – After killing it on earnings, there is more great news from Lilly’s phenomenal pipeline. One of its existing Diabetes drugs (Mounjaro) posted impressive late-stage trial results for weight loss. That’s a huge market and another potential game-changer for the drug company. The stock soared to new highs after the news but has since pulled back because that’s what the stock usually does. But there will likely be more good news on the way. Lilly is the best in the business at developing drugs and treatments for illnesses at a time when the population is aging at warp speed. That’s a winning formula. That’s why this position has more than doubled in value in less than two years. HOLD
Innovative Industrial Properties, Inc. (IIPR – yield 5.4%) – It has been ugly indeed for the marijuana REIT. The market has been particularly unforgiving for the high-growth superstars of last year. But this stock can move higher very quickly when the market settles down. The company is projected to grow earnings 37% this year and it sells at a price/earnings ratio close to that of the overall market.
It also pays a large and rapidly growing dividend. With those attributes, IIPR doesn’t deserve to be down over 50% from the high. It’s already a little higher than it was when added to the portfolio two weeks ago. It could fall further if the market gets dicey again. But it should be a lot higher six months to a year from now. BUY
Intel Corporation (INTC – yield 3.3%) – It’s been an awful year for technology, but INTC is down less than the sector. That’s because the stock crashed before the sector selloff and didn’t have any excess to burn off. INTC is oversold and undervalued ahead of what is likely to be 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 2.1%) – This is just stupid. QCOM didn’t nearly deserve the drubbing it’s taken this year. All the things that thrilled investors and drove the stock to new heights at the end of last year are still intact. It’s just in the wrong sector this year. Even though earnings continue to grow at a fever clip, QCOM is down 20% YTD, and it is actually selling at a forward PE that is well below the overall market. Certain tech stocks have been way oversold, and QCOM is one of them. These things get straightened out over time. HOLD
Valero Energy Corp. (VLO – yield 3.2%) – High inflation? Rising interest rates? Phooey. VLO loves it. There are good times and bad times to own refiner stocks. This is one of those good times for sure. Gas prices are through the roof and projected to go much higher over the summer. That may be a bummer when you fill up your car, but it’s sweet music to Valero. Profit margins are sky-high and demand is strong. The stock should have more to go. HOLD
Visa Inc. (V – yield 0.7%) – V has been knocked around because of economic growth concerns. It has spent much of this year under the 200 per share level, although it has recovered well above that range recently. But the company itself is killing it. The tremendous earnings boost it gets globally from the removal of covid restrictions easily outweighs slower global growth or geopolitical uncertainty. Visa’s earnings blew away expectations with YOY revenue growth of 25% and 30% earnings growth. This stock is poised to move higher if the market selling pressure continues to abate. HOLD
Safe Income Tier
NextEra Energy (NEE – yield 2.1%) – NEE plunged after the earnings report revealed that delays from solar panels in Asia will slow solar projects. But the stock has picked it up again over the past couple of weeks. Earnings were solid, and the main story is intact. The stock also appears to have bottomed out earlier this month. This is a great utility and a phenomenal way for conservative investors to play the growth in clean energy. HOLD
Xcel Energy (XEL – yield 2.6%) – This stock has been terrific. It has outperformed both the overall market and the utility index this year and is up over 12% for the past month. The stock price had leveled off since making a high in early April. But it recently made a new all-time high. That’s a powerful statement for a non-energy stock in this market. XEL is a great stock for the future as clean energy should remain popular and it is also good in case of continuing market selling. HOLD
| High Yield Tier | |||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on close 5/31/22 | Total Return | Current Yield | CDI Opinion | Pos. Size | |
| EPD | Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 27 | 25% | 6.7% | BUY | 1 |
| GSL | Global Ship Lease. Inc. (GSL) | 01-12-22 | 23 | Qtr. | 1.50 | 6,41% | 22 | -5% | 6.7% | BUY | 1 |
| OKE | ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 66 | 33% | 5.7% | BUY | 1 |
| O | Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 68 | 19% | 4.30% | HOLD | 1 |
| Current High Yield Tier Totals: | 6.2% | 18.0% | 5.9% | ||||||||
| Dividend Growth Tier | |||||||||||
| ABBV | AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 147 | 125% | 3.80% | HOLD | 2/3 |
| AVGO | Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 580 | 33% | 2.8% | HOLD | 1 |
| BIP | Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 60 | 85% | 3.6% | HOLD | 2/3 |
| CVX | Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 4.7% | 175 | 103% | 3.2% | HOLD | 1/2 |
| DFS | Discover Financial Services (DFS) | 02-09-22 | 125 | Qtr. | 2.00 | 1.6% | 113 | -8% | 2.1% | HOLD | 1 |
| LLY | Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 313 | 112% | 1.2% | HOLD | 2/3 |
| IIPR | Innovative Industrial Props. (IIPR) | 05-11-22 | 123 | Qtr. | 7.00 | 5.4% | 133 | 8% | 5.4% | BUY | 1 |
| INTC | Intel Corporation (INTC) | 03-09-22 | 48 | Qtr. | 1.46 | 3.1% | 44 | -6% | 3.3% | BUY | 1 |
| QCOM | Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 143 | 79% | 2.1% | HOLD | 1/3 |
| VLO | Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 5.7% | 130 | 79% | 3.0% | HOLD | 1/2 |
| V | Visa Inc. (V) | 12-08-21 | 209 | Qtr. | 1.50 | 0.7% | 212 | 2% | 0.70% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 3.2% | 40.3% | 2.8% | ||||||||
| Safe Income Tier | |||||||||||
| NEE | NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 76 | 85% | 2.1% | HOLD | 1/2 |
| XEL | Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 75 | 212% | 2.6% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 2.3% | 148.5% | 2.4% | ||||||||
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