The Dark Side
It’s happened. The market’s flirtation with the bear market precipice is over. It’s now a full-blown tawdry affair. The S&P 500 officially crossed into a bear market at Monday’s close (down 20% or more from the high on a closing basis).
That means the bull market that began in March of 2020 has ended after 2 years and 3 months. The culprit is inflation, and the Fed’s likely reaction to it. It had been hoped that inflation was peaking and would recede all by itself without the Fed having to be as aggressive as feared. But those hopes were dashed when May inflation came in at a worse-than-expected 8.6%, the highest yet and the worst in more than forty years.
A bear market is an important psychological level. The crossing has implications. And there is good news and bad news from a historical perspective.
The bad news is that the market usually continues lower after crossing that level. The selling rarely stops at 20%. The good news is that the market is usually significantly higher a year after crossing into bear territory. Many stock’s prices are likely low compared to where they will be a year from now. But things will probably get worse before they get better.
A longer-term perspective is particularly important in markets like this. Opportunities arise and seizing them can provide the investments of a lifetime. But it can be tricky to determine where to pull the trigger. I stand by last week’s recommendation to buy the three technology stocks in the portfolio. These stocks may get cheaper still but should compensate for the short-term pain six months to a year from now.
The overall portfolio is vastly outperforming the market in this tough year. The stocks are also well positioned to benefit going forward. I did however reduce the rating on two very cyclical portfolio stocks, Global Ship Lease (GSL) and Innovative Industrial Partners (IIPR) until the market shows evidence of stabilization.
High Yield Tier
Enterprise Product Partners (EPD – yield 6.7%) – The market has been so bad that even energy stock took a big hit this past week. But the sector in bouncing back nicely already. Energy remains the only up-trending sector with still-positive momentum. Energy prices are unlikely to pull back in the near future. In fact, prices are likely to go higher over the summer, pulling stock prices higher as well. EPD still sells at a cheap valuation with steady revenues and safe distribution that’s huge. (This security generates a K1 form at tax time). BUY
Rating change “BUY” to “HOLD”
Global Ship Lease, Inc (GSL – yield 7.2%) – This is not a good market for cyclical international companies regardless of the fundamentals. There was also bad news in the shipping industry this past week. GSL took a big hit along with the rest of the sector. The catalyst for the selloff was the World Bank and other organizations downgraded global growth projects for this year. Anything cyclical exposed to the global economy got sold.
The thing is that slowing global growth was already a well-known fact. It’s been a sure bet that the global economy would slow from what was previously expected for months now. Last week’s news is after the fact and frankly didn’t reveal anything that wasn’t already known. But that’s the market for you in the near term. Although shipping rates have plunged this week, they are likely to trend well above the levels of past years even with a slowing global economy. But the market is likely to get worse before it gets better. The rating is reduced until the market stabilizes. HOLD
ONEOK Inc. (OKE – yield 6.2%) – OKE took a big hit this week despite being in the energy sector, having reliable and growing earnings, and paying a high and safe dividend. That’s what happens we there is panic selling. Everything gets hit. But OKE has a lot going for it and it should spring back as the market panic abates. Anything can happen in the near term, but this midstream energy stock should be higher six month to a year from now. BUY
Realty Income (O – yield 4.7%) – This legendary income REIT is one of the better places to be in the market right now. Sure, it has been dragged down by all the recent selling. But it’s down less than the market and it peers. It should also recover faster because O is a reliable and well-known, safe income generator. Reliable high income never goes out of style for too long, especially in an uncertain market like this. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 4.1%) – Even healthcare stocks took a beating over the last week. Although ABBV does tend to pull back after a surge, this latest pullback is particularly steep. It’s down over 20% from the high made in April. 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. Plus, it’s due for a move higher in the weeks and months ahead. HOLD
Broadcom Inc. (AVGO – yield 2.8%) – It’s been another ugly week for technology stocks and this time the selloff took AVGO down with it. The stock fell over 9% in just the last week. Although that is actually less than the sector decline, it usually holds up better. I still stand by last week’s claim that AVGO has gotten oversold and will likely be a lot higher priced in six months to a year from now. The selling may not be over but the eventual payoff should make the short-term pain worth it. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.6%) – The weird low price is not your imagination. And no, the stock didn’t crash. Shares underwent a 3:2 stock split on June 13th. That means shares priced at 60 per share before the split were price 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.
The stock fell over the last week, albeit far less that the overall market. But 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%) – It’s been an awful week for financial stocks, and DFS was not spared. It fell over 18% this past week. But I still like the stock. Selling has been indiscriminate, but Discover is still thriving operationally. 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. HOLD
Chevron Corp. (CVX – yield 3.4%) – Even CVX sold off this week, because it’s a stock. But the story that recently drove the stock to new highs is still very much intact. Energy prices are likely to move higher over the course of the summer for a host of good reasons. Of course, a recession would knock prices down, but that really isn’t in the cards quite yet.
Chevron is the most levered to oil prices of all the energy majors and will benefit from this inflation. Despite returning over 45% 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 1.3%) – Not you too LLY. Even this superstar drug major had a lousy week. Of course, LLY always pulls back after a surge, and it had a good one last month. It’s entirely normal for the very successful stock even if you factor out the ugly overall market. And I’m expecting more good things from the stock over the rest of the year.
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. Plus, there is the likely approval of its potential mega-blockbuster Alzheimer’s drug before the end of the year. HOLD
Rating change “BUY” to “HOLD”
Innovative Industrial Properties, Inc. (IIPR – yield 5.4%) – Just when I thought things couldn’t get any uglier for the marijuana farm REIT, they did. IIPR fell 16% this past week even though it had been beaten to a pulp already. It’s not a good stock to have in a panicky market despite the fact that fundamentals justify a much higher price. 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. But the rating will be reduced to “HOLD” until the market shows evidence of stabilization. HOLD
Intel Corporation (INTC – yield 3.8%) – The past week 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 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 2.3%) – QCOM also got some lashes over the week, but it fell less than the sector. In fact, it has outperformed its peers for the last three months. Of course, that’s a low bar because technology has been awful. But I stand by the estimation that QCOM should be a lot higher priced six months to a year from now. The stock sells well below what the fundamentals justify with a PE below that of the overall market and continued strong earnings growth ahead. HOLD
Valero Energy Corp. (VLO – yield 2.9%) – Cranky market aside, this is still a great time to be a refiner. VLO hit another 52-week high just a little over a week ago. It pulled back somewhat, but there is a good chance it runs to new highs again in the weeks and months ahead. Gas prices are through the roof and projected to go much higher over the summer. Profit margins are sky high, and demand is strong. The stock should have more to go. HOLD
Visa Inc. (V – yield 0.8%) – V is the poster child for a stock whose fortunes look bad now but great later. Everything related to global growth is getting clobbered. And the beatings probably aren’t over. 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 apart from a global recession. Visa’s 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 stabilizes. 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. The stock had been recovering nicely until the recent market selloff. Earnings were solid, and the main story is intact. The stock also appears to have bottomed out last 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 3.0%) – Even the mightiest have fallen in this selling. XEL had rallied to new highs last month despite the market malaise. It seemed unshakable and was one of the best-performing, non-energy dividend stocks. But last week took this stock down hard. It fell 13% this past week and the stock seldom has moves like that. The market took down everything and this stalwart was vulnerable. But XEL remains a conservative stock with exposure to the growth in clean energy. It should find its footing again. HOLD
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on close 6/14/22 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 26 | 18% | 6.7% | BUY | 1 |
| Global Ship Lease. Inc. (GSL) | 01-12-22 | 23 | Qtr. | 1.50 | 6,41% | 20 | -12% | 7.2% | HOLD | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 60 | 22% | 6.2% | BUY | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 63 | 9% | 4.70% | HOLD | 1 |
| Current High Yield Tier Totals: | 6.2% | 9.3% | 6.2% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 138 | 110% | 4.10% | HOLD | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 520 | 19% | 3.2% | HOLD | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 14 | Qtr. | 2.04 | 3.6% | 39 | 83% | 3.6% | HOLD | 2/3 |
| Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 4.7% | 168 | 94% | 3.4% | HOLD | 1/2 |
| Discover Financial Services (DFS) | 02-09-22 | 125 | Qtr. | 2.00 | 1.6% | 92 | -26% | 2.6% | HOLD | 1 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 291 | 97% | 1.3% | HOLD | 2/3 |
| Innovative Industrial Props. (IIPR) | 05-11-22 | 123 | Qtr. | 7.00 | 5.4% | 114 | -7% | 6.0% | HOLD | 1 |
| Intel Corporation (INTC) | 03-09-22 | 48 | Qtr. | 1.46 | 3.1% | 38 | -20% | 3.8% | BUY | 1 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 130 | 63% | 2.3% | HOLD | 1/3 |
| Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 5.7% | 134 | 85% | 2.9% | HOLD | 1/2 |
| Visa Inc. (V) | 12-08-21 | 209 | Qtr. | 1.50 | 0.7% | 194 | -7% | 0.80% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 3.2% | 40.3% | 3.1% | |||||||
| Safe Income Tier | ||||||||||
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 71 | 75% | 2.1% | HOLD | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 66 | 174% | 3.0% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 2.3% | 124.5% | 2.6% | |||||||
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