August 28, 2024

A Strong Finish to the Summer

This market just continues to impress with the S&P within a whisker of the all-time high in these waning days of summer.

Why shouldn’t the market be strong? Everybody expects the Fed to start cutting the Fed Funds rate next month. The benchmark 10-year Treasury rate has fallen below 4%. And there’s no recession in sight. We’re getting the lower rates without the requisite economic pain.

While I believe it is likely that the market will be higher by the end of the year, it could be more volatile in the months ahead. Although a recession isn’t imminent, it’s on the radar. A lousy economic number could roil stocks again. There is also a lot of headline risk with the current wars and the election. Plus, we are coming up on the worst months of the year for the market.

There are two areas that look great right now and should continue to be strong no matter how things shake out in the months ahead: AI and defense. AI will continue to be a huge catalyst for growth in the technology sector going forward. At the same time, interest rate-sensitive and defensive stocks, which had been lackluster for a long time, have come on strong with the weakening economy and improved interest rate prognosis.

There are nine current portfolio positions that are at or near the 52-week high. Plus, all eyes are on Nvidia (NVDA). The semiconductor powerhouse that triggered the AI craze with an earnings report a year ago last May reports earnings after the closing bell on Wednesday. A positive report could reignite the AI rally and boost Broadcom (AVGO) and Qualcomm (QCOM).

Recent Activity

August 7

FS KKR Capital Corporation (FSK) – Rating change “BUY” to “HOLD”
Main Street Capital Corporation (MAIN) – Rating change “BUY” to “HOLD”
Eli Lilly and Company (LLY) – Rating change “HOLD” to “BUY”
Visa Inc. (V) – Rating change “HOLD” to “SELL”

August 14
Purchased Constellation Energy Corporation (CEG) - $182

August 28
Qualcomm (QCOM) – add 2/3rds to position

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 4.9%) – This recently very bouncy infrastructure company stock had a big move higher in July. It pulled back in the beginning of this month but has since recovered and just made a new 52-week high. It’s now up more than 30% since early April. BIP had been a stellar performer for many years prior to inflation and rising interest rates. But now interest rates are moving significantly lower, and the main threat is now a recession. That’s in Brookfield’s wheelhouse as its crucial assets are highly recession resistant. (This security generates a K-1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 7.2%) – This steady midstream energy partnership bent a little but didn’t break in the recent market turbulence. EPD has gone sideways since April but it has still returned over 16% YTD, after two stellar years in 2022 and 2023, and is back to within bad breath distance of the 52-week high. You can slow it down or temporarily interrupt EPD. But its consistent snail-like ascent endures and inches on. Enterprise reported earnings earlier that were solid, up 12% over last year’s quarter. The distribution is also 5% higher than a year ago and there is still an industry standout 1.6 times distribution coverage with cash flow. (This security generates a K-1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 13.9%) – This ultra-high-yielding Business Development Company is also recovering from the recession scare that caused it to be downgraded to a HOLD. FSK also goes ex-dividend in early September. Because the payout is so massive, the date will cause a drop in price. But it appears, at this point, that the recession worry is overblown. While recession is still on the radar, it might be a long way off and that huge payout from FSK should be highly desirable in a more sideways market over the next few months. HOLD

Main Street Capital Corporation (MAIN – yield 5.8%) – This BDC confirmed the monthly dividend of $0.245 per share for the rest of the year and announced an additional $0.30 per share supplemental dividend payable in September. The BDC also has a lot of small business exposure, which is problematic during recessions. The stock got knocked back with the recession scare early this month when it was downgraded to a HOLD. But it has been creeping back higher as recession worries wane. MAIN is now down less than 3% in August after having been in an uptrend since last fall. A recession would certainly change the dynamics. However, solid earnings and reduced recession expectation are resulting in the stock regaining lost ground. HOLD

ONEOK Inc. (OKE – yield 4.5%) – It’s another new high. You can’t keep this more volatile midstream energy company down for long. OKE is still in an uptrend that began in spring of 2023. The company reported earnings with revenues up 31% over last year’s quarter and earnings up nearly 30%. The huge jump is because of recent acquisitions coming online but the future looks solid also. ONEOK expected to grow annual earnings by 7.3% over the next three years compared to an industry average projection of 1.9%. OKE pulled back in late July and early August but has since regained its footing and made new all-time highs this week while most of its peers are still below the pre-pandemic high. BUY

The Williams Companies, Inc. (WMB – yield 4.2%) – This less volatile midstream company reported earnings that beat expectations and is strongly recovering from the recent weakness. WMB moves with the overall energy sector amid volatility in the near term like the other midstream stocks. But WMB has been quick to return to form and is now within pennies of the high and has returned 30% YTD. An escalation of tensions in the Middle East could send the energy sector higher and Williams guided to the upper half of 2024 estimates. WMB is still in an uptrend that began in the middle of February. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.1%) – The stock of this cutting-edge Pharma company has gotten hot and it just made a new high this week. It’s up 27% YTD. But this is a tough year with falling revenues from the Humira patent expiration. Newer drugs Rinvoq and Skyrizi are killing it with a combined $4 billion in revenue in the last quarter and Humira also did better than expected. AbbVie is well on track to replace the Humira revenues and return to robust profitability next year, an estimated 25.5% earnings growth rate. BUY

American Tower Corporation (AMT – yield 2.9%) – The cell tower REIT had a huge upside move from April until the beginning of August. It pulled back earlier this month but has since recovered most of those losses. Earnings were solid and the stock is now at the highest level since last January. The prognosis looks bright as customers are being added to existing towers and the properties continue to expand in the U.S. and overseas. It also raised guidance for 2024. BUY

Broadcom Inc. (AVGO – yield 1.3%) – All eyes are on Nvidia! The company that triggered the AI craze a year ago last May will report earnings after the close on Wednesday. A positive surprise could reignite the rally in AI stocks, including AVGO. After that, Broadcom reports during the first week of September. There has been a big price jump after earnings in several of the recent quarters. Despite the recent turbulence, AVGO is still up 47% YTD. The AI catalyst isn’t going away and the prognosis going forward is still spectacular. If the selling gets uglier, I’ll buy more as the longer-term prognosis is still spectacular. HOLD

Cheniere Energy, Inc. (LNG – yield 0.9%) – Earnings were solid but natural gas prices have fallen. The recent price decline mostly reflects the lower natural gas prices and the pressure that could add to margins. However, the price dip is likely to be temporary. The unpredictable weather and geopolitical tensions could ratchet prices higher in a hurry. The world still needs U.S. natural gas. Although the price can bounce around with gas prices in the near term, LNG exports continue to grow. BUY

Constellation Energy Corporation (CEG – yield 0.7%) – This new addition nuclear power generator is already delivering results amid the recent go-go market. It seems to have the right stuff going forward. More investors are becoming aware of the growth in electricity demand. Since August 2, CEG is up 17%. It’s also a possibility that the economy will continue to slow in the months ahead and this is a defensive business that should hold up very well. BUY

Digital Realty Trust, Inc. (DLR – yield 3.2%) – The data center REIT has pulled back from the high in July after a big surge. But it has leveled off and is still in an uptrend that began in April. DLR was going strong when other REITs were struggling and now the sector is in a much better position as interest rates are likely to move lower. But the main story is the data center properties that are a high-growth business. Tech companies are forecast to invest $1 trillion in data centers over the next five years to accommodate AI. BUY

Eli Lilly and Company (LLY – yield 0.5%) – This superstar Pharma company that has outperformed most “magnificent seven” stocks is on fire again. The earnings report absolutely killed it and guidance was raised by many billions as the weight loss drug continues to do incredible business while the other drugs aren’t too shabby either. LLY is up 23% since it was raised to a BUY three weeks ago. It’s up 56% YTD and is still below the 52-week high. It also has a likely blockbuster in the newly approved Alzheimer’s drug. It’s expensive from a valuation standpoint but the growth justifies it. BUY

McKesson Corporation (MCK – yield 0.5%) – The pharmaceutical supply chain powerhouse has certainly stumbled. It’s down 13% since the disappointing earnings report last month. Earnings were strong but revenues were less than expected as the weight loss drug couldn’t keep up with demand. The business is still strong and growing but when a company whose stock has performed so well disappoints the market is unforgiving. But MCK has leveled off and it is still up 16% YTD. I expect MCK to resume its uptrend in the weeks and months ahead and post solid returns between now and the end of the year. BUY

Add 2/3rds position

Qualcomm Inc. (QCOM – yield 2.0%) – This stock has bounced around in an upward trend. While it is up 22% YTD, it has fallen more than 26% from the high in June. This stock can bounce around with the short-term movement of technology stocks and the semiconductor subsector. Some of the recent weakness is because of expected lagging smartphone sales for the rest of the year.

But markets tend to anticipate. And Qualcomm is perfectly positioned ahead of the next wave of AI, in mobile devices. Some analysts are forecasting a major upgrade cycle for smartphones next year. Even if QCOM stumbles near term, it will make up for it easily when it gets moving. It’s a good time to add to the position after the recent weakness. BUY

UnitedHealth Group Inc. (UNH – yield 1.4%) – After a big move in July, UNH has been bouncing around but the new range is still near the high. UNH soared about 20% since early July and made a new 52-week high. Earnings drove the stock. UnitedHealth beat earnings forecasts as it added more patients and pharmaceutical customers despite a continuing negative effect on profits from the February cyber-attack. UnitedHealth also reaffirmed previous guidance for 2024. The market is apparently happy and reassured. It’s also well positioned in a slowing economy as a highly defensive stock. BUY

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.3%) – I was losing my patience with this niche innovation center property REIT but I’m encouraged by the recent behavior. After hitting a 52-week low, ARE leveled off and then had a nice move higher over the last week. While the other REITs were living it up in the falling interest rate environment, ARE foundered. Although earnings were basically solid and Alexandria reiterated previous guidance, it missed on revenue. However, earnings were only up 5.4% while revenues jumped 7.4%. The lease rates were solid, and Alexandria reported a healthy number of acquisitions. It stumbled after a big surge higher after the earnings report, but the defensive characteristics may serve ARE well going forward with the increased recession fears. BUY

NextEra Energy (NEE – yield 2.6%) – The regulated and alternative energy utility barely budged in the recent market. NEE is in an uptrend and near the 52-week high. It is a highly defensive utility, and the recession fears make NEE more desirable. NextEra forecasts revenue growth of 8.3% per year over the next three years, compared to average growth of 4.7% for the electric utility group. There is also growth anticipation due to a steep acceleration in electricity demand in the years ahead prompted by manufacturing, electric vehicle growth, and increasing data center electricity demand because of AI. Renewable demand is expected to grow the most. HOLD

USB Depository Shares (USB-PS – yield 5.4%) – Wow, falling interest rates and no recession. Everything looks good for this high-yielding fixed-income security. It’s been through the worst bond market ever and now interest rates are trending down and the price and total return is moving up. The position has returned more than 25%. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT - yield 4.9) – Ditto for VCLT. The long-term corporate bond ETF loves falling interest rates. There could be some default issues in the event of a recession, but the fund is highly diversified and will benefit greatly from lower rates as well. BUY

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