September 28, 2022

It’s a New Low

The market hit a new bear market low. That means that the summer rally was indeed just a bear market rally. And stocks may go lower.

Two things spooked investors, persistent inflation and a consequentially persistent Fed. After four Fed rate hikes, a bear market, and two straight quarters of negative GDP growth, inflation remains sky high and barely budging. The Fed will have to remain hawkish for longer.

The Fed insinuated that it is willing to drive the economy into recession, or deeper recession, to tame inflation. That makes it increasingly likely that only a hard landing can bring prices down. The economy is likely to weaken in the months ahead, dragging corporate earnings down with it.

That situation has been evident for a long time. But investors have only recently started to believe it. Stocks are being repriced accordingly.

Where do we go from here?

While the worst of the market decline is probably over, things could get worse before they get better. But even if the market stabilizes for the rest of the year, it is difficult to see how it will muster lasting upside traction staring into inflation, rising interest rates and recession. In the absence of unexpected good news on the main fronts, a mostly sideways market is probably the best scenario for a while.

The recent market tumult took just about every stock down with it, including defensive dividend stocks. But I still believe those stocks will be a good place to be going forward into continued inflation and recession. In particular, the midstream energy stocks got clobbered despite the fact they offer reasonable valuations, sky high dividends, and recession resilience.

Enterprise Product Partners (EPD), ONEOK (OKE), and The Williams Companies (WMB) present buying opportunities after the recent downturn. In addition, legendary income stock Realty Income (O) is upgraded to a BUY after hitting a 52-week low. High dividends from defensive businesses should come back into favor when the market stabilizes.

High Yield Tier

Enterprise Product Partners (EPD – yield 8.0%) – The recent market down leg took just about everything with it, including the otherwise solid midstream energy companies. EPD took a nasty and unexpected 13% hit despite the fact that the business and the stock are ideally suited for this environment. Demand for oil and gas will likely remain resilient even in a recession because of global supply pressures. The stock offers a high dividend from a company with favorable industry dynamics. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 7.1%) – OKE, which tends to be more volatile than the other midstream energy positions in the portfolio, took the biggest hit over the past couple weeks, down 20% at the low point from which it has recovered somewhat. But OKE has the same stock attributes as the others and natural gas demand tends to be more resilient in a recession. ONEOK earnings continue to grow through the pandemic. This is one of the few companies that can endure inflation or recession, or both. BUY

Rating change: “HOLD to “BUY”

Realty Income (O – yield 4.8%) – This legendary monthly income payer just hit the 52-week low and remains a long way from the pre-pandemic high, despite having higher earnings. REITs have been under pressure from rising rates at it raises costs for growth projects. But Realty just made a large acquisition and should get strong growth because of that over the next year. A great company with a fantastic track record is on sale. BUY

The Williams Companies, Inc. (WMB – yield 5.8%) – The timing turned out to be unfortunate for this August addition to the portfolio. The same things mentioned above about EPD and OKE apply to Williams. I continue to rate this and the other midstream companies a BUY because in the absence of indiscriminate selling, the stocks should resume trending higher because of the high dividend and resilient business. BUY

Medical Properties Trust, Inc. (MPW – yield 9.3%) – Although this hospital property REIT dipped along with just about everything else over the past couple of weeks, it still has the right stuff for this market. It is at fire sale value. The stratospheric dividend is safe. It’s in one of the most defensive businesses there is and it has automatic inflation adjustments build into its contracts. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.9%) – This biopharmaceutical company stock has been one of the very few stocks on the market to hold up and retain its price through the tumult of the past couple of weeks while just about everything else took a beating. Recession fears don’t seem to bother drug companies because it is one of the few businesses that doesn’t get hurt. Meanwhile, AbbVie is one of the best big pharma companies out there with one of the best pipelines and a population aging at warp speed. HOLD

Broadcom Inc. (AVGO – yield 3.5%) – The chip maker and infrastructure software provider once again delivered on earnings with 40% earnings growth and a 25% revenue increase versus last year’s quarter. It also raised guidance for the rest of the year. But the stock has been dragged down by the technology sector. It currently sells at a forward price/earnings ratio below that of the overall market and below its five-year average. Things may get worse before they get better for AVGO but it can make up for lost time quickly when it turns around. BUY

Brookfield Infrastructure Partners (BIP – yield 3.6%) – The performance of this defensive dividend stalwart has been surprising crappy in the recent selloff. It’s crucial infrastructure assets continue to generate reliable revenues in a recession, but BIP sold down by more than 15% over the past two weeks anyway. There is no company-specific news but the retreat is likely because of the sharp rise in interest rates and fixed rate investments become more competitive and MLPs’ borrowing costs rise. But I expect the stock to get its mojo back as defensive stocks should be in high demand. (This security generates a K-1 form at tax time). HOLD

Eli Lilly and Company (LLY – yield 1.3%) – After being one of the two stocks that held value through the recent tumult, LLY is rocketing today, up about 10% for the day so far. Biogen’s Alzheimer’s drug reported very positive phase III tests. The news is seen to increase the likelihood of approval for other similar drugs, including Eli Lilly’s drug on the fast track for approval this year. The stock was also upgraded by UBS for another diabetes drug that has proved effective for weight loss, saying it could be one of the most successful drugs ever if approved. HOLD

Intel Corporation (INTC – yield 5.3%) – Once again, technology stocks have taken the brunt of the market selling. Growth stocks are under pressure amid rising interest rates and inflation as growth rates and market multiples are adjusted. INTC was already cheap and reflective of the lower margin days ahead in the upcoming quarters, but the stock sold off again anyway.

The chip maker recently made a massive investment in chip production. It partnered with Brookfield for a $30 billion investment in a semiconductor fabrication plant where Intel will maintain majority control by providing 51% of the capital. It’s a big and bold move that could add fuel to future growth. The longer-term story gets better as the short-term story gets worse. The stock is dirt cheap with an encouraging longer-term prognosis. HOLD

Qualcomm Inc. (QCOM – yield 2.5%) – After a strong summer rally, QCOM has hit the skids again. It got hit as technology sold off again amid fears of higher rates and continuing inflation. Then it took another hit as semiconductor stocks sold off on recession worries. Even though QCOM is performing will individually on an operational basis, it just can’t overcome a market that is souring on the sector. The selling is overdone as earnings continue to be strong and the stock already sells at a cheap valuation. It can move higher fast and make up for lost time when the going gets good again. BUY

Visa Inc. (V – yield 0.8%) – Recent selling has taken V down to a new 52-week low. The stock had held firm around the 200 per share range during previous selloffs but the increasing likelihood of a recession moved the stock to a lower level. Recession is obviously bad for the transaction business, but the lower stock price already reflects some pain. It’s also worth noting that Visa is still recovering from the pandemic internationally and the increased global transaction resulting from the removal of Covid restrictions offsets much of the economic weakness. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 1.9%) – This alternative energy utility also took a plunge over the past couple of weeks after soaring to within a whisker of the high earlier this month. It’s interest rate angst. Because of inflation and the aggressive Fed, the benchmark 10-year Treasury yield soared from 2.6% in the beginning of August to 4% at the close yesterday. It has a negative effect on dividend stocks as competing investments offer higher yields. But NextEra still has a defensive and growing business that is ideal in a recession. HOLD

Xcel Energy (XEL – yield 2.7%) – Ditto everything mentioned above about NEE for this smaller alternative energy utility. XEL was soaring to new highs before it got rudely interrupted by rising interest rates. XEL still has a positive return YTD in this horrible market that’s down nearly 24% in 2022. In addition to being in timely sectors, utilities and clean energy, Xcel should also benefit from the passage of the CHIPs bill as it should get some generous subsidies and favorable treatment. HOLD

1) Please tell me about a time you made money on one of my trades – how much? How fast? What did you do with your profits?

2) How would you describe Cabot Dividend Investor to a friend?
You can simply send your response by email to CDI@cabotwealth.com. We’ll share interesting responses, anonymously, with you on the website.