It’s Fed Day
To most people it’s May the fourth be with you day, and tomorrow is Cinco De Mayo. But to the market it’s Fed day. And that’s all that matters.
The Fed meets today and is widely expected to raise the Fed Funds rate by 0.50%. That would be the largest single-meeting rate hike in more than twenty years. It’s necessary because the Central Bank is a million miles behind the curve in countering this high and persistent inflation, currently running at more than 8%.
A 0.50% hike is already baked into stocks. Investors will be more interested in any indications the Fed gives about future rate hikes. Those indications will be what moves the market up or down after the meeting. But it will be short-term noise. The Fed will have to significantly slow the economy to combat inflation. And that bummer will linger for the rest of the year, making it difficult for stocks to generate any lasting upside traction.
The prognosis for the market indexes over the rest of the year is not great, but it is particularly precarious in the near term. Both the S&P 500 and the Nasdaq closed Friday at brand new YTD lows after having broken through the old low. Stocks have moved higher since, but the movement has been highly unconvincing. We may be in for a rough couple of weeks.
That said, certain sectors are performing well despite the ugly overall market and will likely continue to do so for the remainder of this year. Several portfolio positions including Chevron (CVX), Eli Lilly (LLY), Qualcomm (QCOM), Valero Energy (VLO), and Visa (V) reported fantastic quarters and rallied despite the turbulent market.
High Yield Tier
Rating change “HOLD” to “SELL”
Blackrock Enhanced Capital and Income Fund (CII – yield 6.1%) – This covered call fund is a great way to get a high income with few stocks paying high yields. The call strategy is a good one and has been very successful over time, and this fund has executed it well. But performance tends to closely track that of the overall market, at least in the near and intermediate term. Since I consider the market indexes to have more downside risk than upside potential over the remainder of the year, the remaining one-half position is being sold. SELL
Enterprise Product Partners (EPD – yield 7.0%) – This midstream energy partnership lives and breathes in the sweet spot of the 2022 conundrums. Energy is hot. Yield is hot. Safety is hot. Just collect that big fat safe distribution and we’ll see how long and how far it climbs. (This security generates a K1 form at tax time). BUY
Global Ship Lease, Inc (GSL – yield 6.3%) – These are great days for container shipping. And these good times should last a while. Demand is high and supply is limited. Even if shipping rates pull back, they will still be well above the average level of the past several years. This company was highly profitable in a much lesser environment. Now business is booming. Sure, it will get knocked around in the near term every time there is negative news about global growth. But it comes right back because conditions remain favorable. BUY
ONEOK Inc. (OKE – yield 5.9%) – The story here is like that of fellow midstream energy operator EPD, except OKE tends to be more volatile. OKE has lagged the energy sector this year. After returning 69% in 2021, it has only returned about 9% YTD. Earnings reported yesterday failed to excite the market and the stock is flat today. But it’s misleading. Business never took a big hit during the pandemic because natural gas and NGL demand is so durable. So, there aren’t the exciting growth rates this year that investors expect from energy stocks. But it still sells at a good value with a high and safe dividend. BUY
Realty Income (O – yield 4.3%) – This legendary income REIT had a rough week in the market volatility and is now down about 3% YTD. It tends to bounce around on a slow upward trend while providing a good yield and relative safety. That’s a good bet in this market. The company also reports earnings today after the close. Hopefully, it gets a boost. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 3.8%) – AbbVie reported earnings that disappointed last Friday, and the stock dropped over 10% for the day. The stock is currently down about 25 per share from the high from early April, or about 14%. Earnings grew about 26% from last year and revenue was up over 4%. But its cancer drug disappointed, and the company lowered guidance for the year because of higher costs. Investors had become accustomed to stellar news from AbbVie and this isn’t a good environment in which to let them down. The stock was due for a pullback, and everything is still on track. ABBV is still cheaply priced with a great dividend and a defensive business in an uncertain market. HOLD
Broadcom Inc. (AVGO – yield 2.8%) – It continues to be a tough market for technology, and AVGO in now down over 14% from the 52-week high. This exceptional technology stalwart is a good company that is hanging out with the wrong crowd right now. The crummy tech sector market is obscuring the fact that Broadcom is growing earnings very strongly and will likely continue to do so for some time. It will have its day in the sun again and patience should be rewarded. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.6%) – You know the market is getting ugly when BIP sells off. Recent selling has taken everything down. Even a defensive company with bankable and growing earnings with a strong dividend hasn’t been safe. The stock is down about 13% form the recent high. BIP also reported earnings today that were solid, and the stock is flat for the day so far. Earnings were up 3% on a per-share basis but 22% excluding weather related effects for last year’s quarter. Everything is still solid. (This security generates a K1 form at tax time). HOLD
Discover Financial Services (DFS – yield 2.1%) – The credit card company reported earnings last week that beat expectation and the stock rose over 8% the same day. Discover also announced a 20% increase in the quarterly dividend to 0.60 per share. Even with a tentative consumer in this uncertain environment, Discover should have a good year as consumers are likely to increase credit purchases going forward as the high covid savings inevitably deplete. The stock has a positive YTD return in a down market. HOLD
Chevron Corp. (CVX – yield 3.6%) – The energy giant reported earnings last week that were slightly below consensus as covid in China somewhat reduced expected demand. But it still reported a nearly fourfold earnings increase over last year and 70% higher revenue. The risk to oil prices remains to the upside. Chevron is also expected to grow earnings more than 100% this year over last year as it is highly levered to oil prices. While CVX is still down from the high, it has been trending higher again over the last week. HOLD
Eli Lilly and Company (LLY – yield 1.4%) – Lilly killed it on earnings again last week. It beat expectations and raised guidance with earnings growth of 63%. There was also good news on its obesity drug in late-stage trials. The drug could be a blockbuster along with the Alzheimer’s drug which could be approved by the end of the year. LLY soared 4.3% the day of the report but is still down from the high.
The stock is notorious for surging and then pulling back for a while before the next surge. It doesn’t seem worth it trying to time the high and take profits because the stock remains on a longer-term uptrend. The population is aging at warp speed and Lilly is perhaps the best in the world at providing drugs and treatments. That’s a good formula. HOLD
Intel Corporation (INTC – yield 3.2%) – It’s been a lousy market for technology stocks. But Intel has a key downside buffer. It has been beaten to a pulp already. It has marvelous prospects for growth over the next few years. In the meantime, it pays a great dividend and has limited downside. Plus, technology stocks are getting oversold and could rally in the months ahead. I like INTC in this market. BUY
Qualcomm Inc. (QCOM – yield 2.1%) – QCOM had been wallowing along having a terrible year amidst the tough technology sector market. It has faith because the company has consistently exceeded expectations as it benefits mightily from the 5G phone rollout while making huge strides in other business with very promising prospects going forward. Qualcomm reported earnings last week that once again impressed and raised guidance for the rest of the year. The stock jumped 10% after the report.
Revenues and earnings continue to grow at a fever clip and will likely continue to do so for the rest of the year at least. The stock is being held back by China concerns, where Qualcomm does significant business, as covid spreads. But the company continues to deliver despite supply disruptions and other concerns and sells at a cheap valuation considering the growth rate. The good should outweigh the bad, especially considering the stock already got the stuffing kicked out of it. HOLD
Valero Energy Corp. (VLO – yield 3.5%) – Valero reported earnings last week that showed profit growth of better than 40% over last year’s quarter on rising throughput volumes and the highest refining margins since 2015. The company is also benefitting from cheap U.S. natural gas inputs which gives it a huge advantage over foreign competitors. The stock has soared a whopping 25% since the report to a brand new all-time high for the stock. We’ll see how high it goes. HOLD
Visa Inc. (V – yield 0.7%) – This global payments company stock had been floundering amidst global growth concerns precipitated by a tightening Fed and the spread of covid in China. But Visa reported earnings this week that impressed the market, and the stock rallied 8% on the day of the announcement. The stock blew away expectations with YOY revenue growth of 25% and 30% earnings growth.
The reason for the great quarter is the reason V was purchased in the portfolio. Global business is booming as covid restrictions have come down and travel has returned. U.S. business has already recovered, and the global side was the missing piece of the puzzle. The global business is so strong it overwhelmed higher costs and geopolitical uncertainty from the war. Of course, the stock has pulled back since as this is still a fearful market. The company raised this year’s guidance and should have good days ahead. HOLD
Safe Income Tier
NextEra Energy (NEE – yield 2.2%) – This alternative energy utility stock took a big hit after the earnings announcement last week, falling over 10%. The first quarter was terrific as the company reported 10.4% year over year growth, which was higher than the historical average and soundly beat expectations. The problem was that the Commerce Department is imposing tariffs and restrictions on solar panels coming from Southeast Asian countries, where NextEra gets theirs. The move could delay the company’s planned expansions in the solar area over the next year.
The market didn’t like that. NextEra maintained previous guidance for the year, but investors were disappointed that it wasn’t raised after such a strong quarter. The likely reason is possible project delays. But the company says it won’t affect planned expansions through 2024. And NextEra is also well on track to raise the dividend 10% per year through 2024. This doesn’t change the basic story with the stock. And it might not be affected as it’s still unclear if NextEra’s non-China distributors are affected. HOLD
Xcel Energy (XEL – yield 2.7%) – The market has been so crummy it even stopped XEL from making new highs. The stock has leveled off since early this month and even pulled back a little in the volatility of recent days. I do like the stock longer term as safety is unlikely to go out of style in this tumultuous year. It’s also a great way for conservative investors to play the growth of alternative energy. HOLD
| High Yield Tier | |||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on close 5/3/22 | Total Return | Current Yield | CDI Opinion | Pos. Size | |
| CII | Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.6% | 20 | -2% | 6.1% | HOLD | 1/2 |
| EPD | Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 26 | 19% | 7.2% | BUY | 1 |
| GSL | Global Ship Lease. Inc. (GSL) | 01-12-22 | 23 | Qtr. | 1.50 | 6,41% | 24 | 2% | 6.3% | BUY | 1 |
| OKE | ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 65 | 32% | 5.9% | BUY | 1 |
| O | Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 68 | 17% | 4.30% | HOLD | 1 |
| Current High Yield Tier Totals: | 6.2% | 17.5% | 5.9% | ||||||||
| Dividend Growth Tier | |||||||||||
| ABBV | AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 150 | 128% | 3.8% | HOLD | 2/3 |
| AVGO | Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 581 | 33% | 2.8% | HOLD | 1 |
| BIP | Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 61 | 87% | 3.6% | HOLD | 2/3 |
| CVX | Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 4.7% | 163 | 87% | 3.6% | HOLD | 1/2 |
| DFS | Discover Financial Services (DFS) | 02-09-22 | 125 | Qtr. | 2.00 | 1.6% | 116 | -7% | 2.1% | HOLD | 1 |
| LLY | Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 288 | 94% | 1.4% | HOLD | 2/3 |
| INTC | Intel Corporation (INTC) | 03-09-22 | 48 | Qtr. | 1.46 | 3.1% | 45 | -5% | 3.3% | BUY | 1 |
| QCOM | Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 144 | 80% | 2.2% | HOLD | 1/3 |
| VLO | Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 5.7% | 121 | 66% | 3.5% | HOLD | 1/2 |
| V | Visa Inc. (V) | 12-08-21 | 209 | Qtr. | 1.50 | 0.7% | 209 | 0% | 0.70% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 3.0% | 40.3% | 2.7% | ||||||||
| Safe Income Tier | |||||||||||
| NEE | NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 71 | 71% | 2.3% | HOLD | 1/2 |
| XEL | Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 72 | 198% | 2.7% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 2.3% | 134.5% | 2.5% | ||||||||
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