Recession Changes the Math
The market has deteriorated over the past couple weeks. The S&P 500 fell into a bear market on June 13th. The combination of continuing high inflation and a more aggressive than previously expected Fed has led to widespread expectations of recession over the next year.
Recessions are bad for stocks for obvious reasons. But there is something worse than recession, looming recession. Stocks generally recover during a recession. Because the market anticipates, it tends to rebound before the economy. The worst environment for stocks tends to be prior to recession, upon expectation, to part of the way through it.
There is a growing expectation that we are in the stage just before recession. That’s not good. For that reason, several of the more cyclical or economically sensitive stock positions are being sold today including Global Ship Lease (GSL), Discover Financial Services (DFS), Chevron (CVX) and Valero Energy (VLO). Energy stocks had sold off during market panics all year, but then recovered again. But that was before a consensus expectation of a recession in the near term.
These stocks can be purchased again at a later date. But there is too great a chance for further downside in the weeks and months ahead given the “looming” status of recession.
It’s also worth noting that bear markets present fantastic buying opportunities for longer-term investors. After all, it’s better to buy cheap, and the market tends to trend higher over time. But there is too great a risk of further downside at this point. Things are likely to get worse before they get better, especially for cyclical stocks.
High Yield Tier
Enterprise Product Partners (EPD – yield 7.6%) – Even energy stocks were crushed last week as selling became more widespread. Future energy prices are a question at this point. While EPD tends to move in conjunction with the overall sector, the business itself is not commodity price sensitive. It relies on oil and gas volumes which should be at least steady in all but a severe recession. The high distribution is also rock solid. EPD should be a stock to weather the storm. (This security generates a K1 form at tax time). BUY
Rating change “HOLD” to “SELL”
Global Ship Lease, Inc (GSL – yield 8.2%) – 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 month when the World Bank and other organizations downgraded global growth projections for this year. It will be difficult for the stock to hold up amidst talk of looming recession.
I do believe that the shipping industry is likely in a secular bull market where shipping rates should average much higher in the years ahead than they did over the last decade. There are also strong reasons to favor container ships and Global in the industry. We can always buy the stock back when the coast is clear again. But there is simply too great a chance of further downside amid growing recession expectations. SELL
ONEOK Inc. (OKE – yield 6.7%) – OKE took a big hit last week despite having reliable and growing earnings and paying a high and safe dividend. That’s what happens when there is panic selling. Everything gets hit. But OKE has a lot going for it and it should be a worthwhile hold. Business is highly resilient and should remain strong even in a recession and the stock pays you well to hold it. BUY
Realty Income (O – yield 4.6%) – This legendary income REIT held up better than the overall market and its REIT peers over the past tumultuous week. It’s regarded as a more defensive-oriented income stock. And that area has been the best place to be recently. It should also recover in all but the worst markets as investors continue to gravitate towards income and safety. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 4.1%) – This biopharmaceutical giant has been impressive in the recent tumult. ABBV actually moved higher over the past week. That’s because healthcare is a very defensive and recession-resistant business. People seek medical care and take drugs regardless of the economy. It’s a phenomenal drug company with one of the best pipelines in the business, and it should be one of the better stocks to own as recession fears roil the market. HOLD
Broadcom Inc. (AVGO – yield 3.3%) – Technology has not been a good place to be this year, and AVGO has been hammered. But there is a strong change that the selling in the technology sector ends sooner than most other sectors. Many stocks have been oversold and technology is still where the strong growth is. It’s 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 six months to a year from now. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.8%) – 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.
After outperforming the market all year, BIP has been worse over the past month. It’s likely that the indiscriminate selling took everything down. But earnings are very defensive and dependable, and the dividend is safe. It also has built in inflation protections in its contracts. Just hold on and collect the dividend. It should serve you well over time. (This security generates a K1 form at tax time). HOLD
Rating change “HOLD” to “SELL”
Discover Financial Services (DFS – yield 2.5%) – It’s been an awful month for financial stocks, and DFS was not spared. It’s about 10% lower for the month, worse than the overall market. The story may be changing. The idea was that consumers would run out of cash and start changing more while continuing to buy about the same amount, and Discover would benefit from the high interest balances. But consumers will pull back purchases in a recession. Plus, credit card company stocks don’t tend to fare well in recessions. SELL
Rating change “HOLD” to “SELL”
Chevron Corp. (CVX – yield 3.8%) – This energy giant has had a great run. But the events of the past week have changed the math. The continuing high inflation and the more aggressive than previously expected Fed have prompted recession expectations over the next year. Energy stocks thrive in inflation but falter in recession as demand plummets.
There are still forces that can drive energy prices higher in the near term, but markets tend to look past that. Even if a recession doesn’t occur, the expectation of it can drive the stock a lot lower. The portfolio already took a profit on half of the position at a higher price. It’s a good time to secure the profit and raise cash for a market rebound down the road. SELL
Eli Lilly and Company (LLY – yield 1.3%) – This healthcare giant is still a good place to be in this market. Healthcare is defensive yet growing. Lilly is also a superstar with a phenomenal pipeline. One of its existing Diabetes drugs 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
Innovative Industrial Properties, Inc. (IIPR – yield 6.4%) – Just when I thought things couldn’t get any uglier for the marijuana farm REIT, they did. IIPR fell 16% this past month 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. IIPR was purchased in the portfolio at a very cheap price and therefore the stock should have less downside than most going forward. HOLD
Intel Corporation (INTC – yield 3.9%) – 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 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%) – As I mentioned with AVGO, technology sold off first and may well recover sooner than the overall market. 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. Analysts were slobbering all over this stock a few months ago. Sure, smartphone sales will decrease in a recession. But that is already more than priced in. HOLD
Rating change “HOLD” to “SELL”
Valero Energy Corp. (VLO – yield 3.4%) – There are a lot of things to like about the operational performance of this company right now. Gasoline and diesel volumes are strong in the summer driving season. The crack spreads have been the highest in many years. But a recession would change all that down the road as demand and prices would likely fall off a cliff. Just the expectation of recession can drive the stock lower. There is still a strong profit on the remain one-half position in the stock. But a looming recession is not a good time to own a refiner. SELL
Visa Inc. (V – yield 0.8%) – We’ll hold this one for now. Remember, Visa is not a credit card company. It’s a payment processing company. Of course, a recession is bad for transaction volumes as consumers tighten their wallets. But as bad as a recession is, covid was probably worse. Visa continues to get a huge benefit from the removal of covid restrictions globally. 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 recovers. 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 the past two weeks took this stock down hard. It fell 13% 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 6/21/22 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 24 | 11% | 7.6% | BUY | 1 |
| Global Ship Lease. Inc. (GSL) | 01-12-22 | 23 | Qtr. | 1.50 | 6,41% | 18 | -19% | 8.1% | SELL | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 56 | 13% | 6.7% | BUY | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 65 | 14% | 4.60% | HOLD | 1 |
| Current High Yield Tier Totals: | 6.2% | 4.8% | 6.8% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 143 | 119% | 4.10% | HOLD | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 504 | 16% | 3.3% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 14 | Qtr. | 2.04 | 3.6% | 37 | 70% | 3.8% | HOLD | 2/3 |
| Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 4.7% | 155 | 79% | 3.8% | SELL | 1/2 |
| Discover Financial Services (DFS) | 02-09-22 | 125 | Qtr. | 2.00 | 1.6% | 94 | -24% | 2.5% | SELL | 1 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 297 | 101% | 1.3% | HOLD | 2/3 |
| Innovative Industrial Props. (IIPR) | 05-11-22 | 123 | Qtr. | 7.00 | 5.4% | 109 | -12% | 6.5% | HOLD | 1 |
| Intel Corporation (INTC) | 03-09-22 | 48 | Qtr. | 1.46 | 3.1% | 38 | -20% | 4.0% | BUY | 1 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 124 | 56% | 2.5% | BUY | 1/3 |
| Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 5.7% | 116 | 61% | 3.5% | SELL | 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% | 3.3% | |||||||
| Safe Income Tier | ||||||||||
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 73 | 78% | 2.3% | HOLD | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 65 | 170% | 3.0% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 2.3% | 124.0% | 2.7% | |||||||
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