Don’t Believe the Rally
This market has recovered nicely after plunging into bear market territory and beyond the week before last. Unfortunately, the good times probably won’t last.
All year long the market has bounced to some sort of recovery after plunging to new lows. But stocks can’t seem to muster any lasting traction with rising interest rates, high inflation, and a souring economy. Those things are simply too much of a bummer to whistle past.
Of course, there is a chance that the low is in and stocks trend higher from here. Anything is possible. But a sustainable recovery will require evidence of receding inflation that makes the Fed less aggressive and a strong possibility of a soft landing that avoids recession. Unfortunately, even if that positive scenario does unfold, it will probably not be realized until later in the year.
The greater risk is to the downside at this point. There is still a strong chance that the market makes new lows, whether it’s next week or not until the fall. That’s why this portfolio sold positions last week.
It’s not all gloom and doom though. Bear markets create fantastic opportunities for longer-term investors to make the investments of a lifetime. The market trends higher over time and bear markets create the chance to get into the very best stocks at cheap prices. Stay tuned. This newsletter will surely take advantage of the opportunity in the months ahead.
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 more than 17% from the high earlier this month. But the stock is recovering and moving sharply higher this week. 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 K-1 form at tax time). BUY
ONEOK Inc. (OKE – yield 6.7%) – The same EPD story applies to this midstream energy company in the form of a regular corporation. OKE sold down more than 22% over the same time frame and has also been recovering this week. It tends to be more volatile than EPD and has a lot going for it to make it a worthwhile stock to hold. 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 has held up very well in the market tumult. The total return is actually positive over the last one-month and three-month periods while the market and the REIT sector are down sharply. 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 4.1%) – This biopharmaceutical giant has been strong in a terrible market. It has returned 15% YTD and has also been positive over the past month. Health care is a very defensive industry that will continue to thrive regardless of the state of the economy. Despite the strong performance, ABBV continues 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 3.3%) – 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’s worth nothing 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 3.9%) – The weird low price is not your imagination. And no, the stock didn’t crash. Shares underwent a 3:2 stock split on June 13. 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 K-1 form at tax time). HOLD
Eli Lilly and Company (LLY – yield 1.3%) – After pulling back following a surge in May, LLY again soared to a new high this past week. The stock tends to be bouncy on an upward longer-term trend but 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 and amid increasing recession worries. HOLD
Innovative Industrial Properties, Inc. (IIPR - yield 6.5%) – 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 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 are 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
Visa Inc. (V – yield 0.8%) – V got knocked back down to the under-200 per share range amidst all this recession talk and the downgrading of global growth projections. But every time the selling pressure abates, V moves higher again. 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 2.1%) – NEE plunged after the latest earnings report revealed that delays from solar panels in Asia will slow solar projects. But the stock 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. It’s also in two timely sectors, utilities and clean energy. NEE might be getting its mojo back. 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 stock has been rising sharply again this past week. 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 6/28/22 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 25 | 13% | 7.6% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 57 | 15% | 6.7% | BUY | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 69 | 20% | 4.30% | HOLD | 1 |
| Current High Yield Tier Totals: | 6.2% | 16.0% | 6.2% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 152 | 132% | 4.10% | HOLD | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 498 | 15% | 3.3% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 14 | Qtr. | 2.04 | 3.6% | 37 | 73% | 3.9% | HOLD | 2/3 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 318 | 115% | 1.3% | HOLD | 2/3 |
| Innovative Industrial Props. (IIPR) | 05-11-22 | 123 | Qtr. | 7.00 | 5.4% | 114 | -7% | 6.5% | HOLD | 1 |
| Intel Corporation (INTC) | 03-09-22 | 48 | Qtr. | 1.46 | 3.1% | 38 | -20% | 3.9% | BUY | 1 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 132 | 65% | 2.3% | BUY | 1/3 |
| Visa Inc. (V) | 12-08-21 | 209 | Qtr. | 1.50 | 0.7% | 198 | -5% | 0.80% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 2.9% | 40.3% | 3.3% | |||||||
| Safe Income Tier | ||||||||||
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 76 | 87% | 2.2% | HOLD | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 70 | 192% | 3.0% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 2.3% | 139.5% | 2.6% | |||||||
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