December 18, 2024

The Market Levels Off

It looks like the election euphoria has run out of gas. The market has digested the election and is now back to business as usual.

The Dow Jones Industrial Average has lost ground for nine consecutive sessions. Most of the S&P 500 sectors have been down over the past month. Of course, the S&P is still within a whisker of the high. It hasn’t pulled back. But it hasn’t gone up in a while either.

Investors are back to worrying about the Fed. A 0.25% rate cut is widely expected this week. But investors are fretting about when the next cut will be. November inflation came in stickier than expected and there is growing concern that the next rate cut could take quite a while.

But things still look pretty good for 2025. The Fed is in a rate-cutting cycle that should last for the next two years. The economy is solid and expected to get stronger. And bull markets usually last a lot longer than this one has so far.

That said, stocks are expensive with valuations well above the 20-year averages. Plus, the last two years have provided returns of better than 25%. It might be tough to keep that pace in 2025. It may be that the easy part of the rally is over. Stocks can still do well in the new year. But they might have to earn it.

Overall earnings on the S&P are expected to be the best in years with 12% average growth forecast for stocks on the index in the fourth quarter. Plus, AI is still a thing. We saw that with the huge spike in portfolio position Broadcom (AVGO). Management stated during the earnings report that they expect huge AI profit growth over the next couple of years. The stock soared 38% in the two days after the report and 46% in the last week.

There are several ratings changes in this week’s update outlined below in the exquisitely crafted write-ups. Also, the monthly Cabot Retirement Club Video will be this Thursday at 2:00 pm instead of the regular fourth Thursday of the month because next Thursday is the day after Christmas.

Have a Merry Christmas and a Happy Holiday!

Recent Activity

November 27
Digital Realty Trust, Inc. – Rating change – “BUY” to “HOLD”

December 11
Purchased Ally Financial Inc. (ALLY) - $38.42

December 18
AbbVie Inc. (ABBV) – Rating change “HOLD” to “BUY”
Broadcom Inc. (AVGO) – Rating change “BUY” to “HOLD”
SELL American Tower Corporation (AMT)

High Yield Tier

AGNC Investment Corporation (AGNC – yield 14.9%) – This high-yielding mortgage REIT has been slowly coming back after it got whacked with disappointing earnings and a pivot in interest rate expectations. Costs were higher and the net spread shrank from the prior quarter. Although interest rates are likely to trend lower over the next year, rates are still high. The deterioration of the interest rate story is more of a short-term issue. The stock is still on track for improving performance over the next year and that is likely to compel investor demand for the stock. AGNC has come off the recent bottom and was up 6.4% in November. BUY

Brookfield Infrastructure Partners (BIP – yield 5.0%) – This interest rate-sensitive utility had been hanging tough over the last months while industry peers have dipped but has fallen again over the past week. It does bounce around somewhat with the interest rate narrative but appears well positioned for the longer haul. After a tough couple of years of inflation and rising rates, BIP looks back on track. It’s up over 8% YTD and about 20% since June. This infrastructure powerhouse had been a stellar performer for many years prior to inflation and rising interest rates. But now interest rates have peaked and are highly likely to trend lower. (This security generates a K1 form at tax time.) BUY

Cheniere Energy Partners, L.P. (CQP – yield 6.2%) – The price of this liquid natural gas exporting partnership has been hot since the election, up over 13%. The energy sector has cooled off over the last few weeks, but CQP is still hanging tough. The reason for the price spike is the anticipated improvement in the regulatory environment. The new administration is highly encouraging of natural gas exports and Cheniere is the country’s largest exporter. The longer-term situation was always strong as the rest of the world desperately needs U.S. natural gas. Now, the short-term situation is improving. (This security generates a K1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 6.6%) – What a difference a couple of weeks can make. After riding high, EPD has fallen almost 9% from the high this month. But that’s after a big spike higher following the election. EPD was up 22% in November after being up only 15% all year before November. That’s OK. An upward move of that magnitude for this normally stodgy stock was never going to last. But the future is still bright. There should be more oil and gas sloshing around the country in the years ahead. And EPD can move higher. The stock is still well below the all-time high set in 2014. And now earnings are much higher. (This security generates a K1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 13.1%) – This Business Development Company (BDC), with an enormous yield and a quarterly payout, went ex-dividend last month and the price only went down a little. FSK normally pulls back after going ex-dividend, but the upside potential outweighs that. The stock continues to hang tough even though the post-election rally has faded. FSK is a strong beneficiary of the Trump victory. The perception of high economic growth going forward is exactly what FSK needed to make a new high. It has a portfolio of smaller companies that tend to be economically sensitive. The prognosis just got better going forward. BUY

Main Street Capital Corporation (MAIN – yield 7.5%) – As a BDC, this story is very similar to that of FSK. Main’s portfolio of companies not only makes high-interest loans, but it also takes equity stakes. The equity stakes are the primary reason the total returns have been better than just about every other BDC. MAIN broke out to new all-time highs this year and just made a new one. It’s hanging tough near the high despite the pullback in many cyclical stocks. The improved economic outlook leaves room for further appreciation. BUY

ONEOK Inc. (OKE – yield 3.9%) – There had to be a reckoning. OKE shot up very fast and was bound to come back to earth. That’s why it was downgraded to a HOLD. The midstream energy company stock soared about 20% between the election and late November and had returned 73% YTD. But it has pulled back more than 13% in the last couple of weeks. I’m still bullish though. The market loves the new acquisitions of Medallion Midstream and Enlink Midstream (ENLC), as the new additions will be accretive immediately. The story remains strong as recent actions will enhance earnings into a future that just got better with the election. HOLD

The Williams Companies, Inc. (WMB – yield 3.5%) – Ditto for WMB. It was on fire but has pulled back over the past couple of weeks. But it’s still up 59% YTD. The more than 10% pullback from the November high is just a cool-off from the recent torrid pace in not only WMB but the midstream energy group. But the future is bright. Williams guided to the upper half of 2024 estimates and is still in an uptrend that began in the middle of February. BUY

Dividend Growth Tier

Rating change – “HOLD” to “BUY”

AbbVie (ABBV – yield 3.8%) – Although ABBV is down 17% from the October high, I really like the way the stock is setting up for next year. The downside catalyst was news that its Schizophrenia drug flopped in phase II trials. But that’s life with big pharma. ABBV is still up 12% YTD. That’s not bad considering this was supposed to be a tough year with shrinking revenues from the Humira patent expiration.

New immunology drugs Skyrizi and Rinvoq are expected to replace Humira’s peak revenues in a short period of time. In fact, management estimates that the combined revenue of these two drugs will be over $16 billion this year and $27 billion by 2027, far exceeding Humira’s peak sales. Management expects the company to return to “robust” earnings growth next year. ABBV is getting through this tough year with flying colors ahead of greener pastures. Imagine how the stock will perform without a patent cliff and with strongly growing sales. BUY

Ally Financial Inc. (ALLY – yield 3.2%) – Financial stocks have cooled off this month after a big November following the election. But next year looks very good for the sector. Short-term interest rates will move lower, the economy is expected to be strong, and the regulatory environment will be much better. Other financial companies made huge moves in recent months but ALLY was held back because of a temporary situation. It is the nation’s leading online bank, and it is well positioned in the high-growth area of a hot sector. Analysts are expecting earnings growth of 40% in 2025. ALLY’s spike may still be ahead. BUY

Rating change – “HOLD” to “SELL”

American Tower Corporation (AMT – yield 3.1%) – Unlike DLR, this cell tower REIT trades like a REIT and is a slave to the interest rate narrative, which took a turn for the worse after the election. DLR trades more like a tech stock because of the growing data center properties, but AMT doesn’t, despite its cell tower properties. The growth in cell tower demand was supposed to make AMT perform better than most REITs. But it’s done the opposite. AMT has returned -9% YTD while the sector benchmark Vanguard Real Estate Index Find ETF (VNQ) is up 8% for the year. That’s a 17% difference. There must be too much competition. The market is saying there’s something wrong. There are too many other solid-performing dividend stocks to continue to hold an underperformer. SELL

Rating change – “BUY” to “HOLD”

Broadcom Inc. (AVGO – yield 1.2%) – Holy cow! This semiconductor and software company and artificial intelligence juggernaut really got a boost from earnings last Friday. As of Monday’s close, AVGO was up 38% in the two days since the report and 46% over the past week. It’s also returned 133% YTD and 507% since being added to the portfolio a little less than four years ago.

The company soundly beat expectations. But it was the positive AI comments by management that really juiced the stock. The company said demand for its AI chip (XPU) is booming and expects it to generate revenues between $60 billion and $90 billion by 2027. Revenue was $12.2 billion in fiscal 2024. There appears to be a shift in the AI market in Broadcom’s favor and revenues could be even higher. AVGO has now joined the “magnificent seven” stocks as the only stocks with market capitalizations over $1 trillion.

After such a huge move in just a few days, the stock probably got ahead of itself in the near term and is beyond the ideal BUY price. In fact, AVGO is already pulling back significantly as of midday on Tuesday. The longer-term prognosis is still excellent but the short-term is more challenging at this point. It is downgraded to a HOLD on price alone. HOLD

Cheniere Energy, Inc. (LNG – yield 1.0%) – This liquid natural gas (LNG) exporter is a definite beneficiary of the Trump election. It stands to benefit from a friendlier regulatory environment, more natural gas production and cheaper domestic prices, and encouragement of natural gas exports. LNG was flying high after the election, but it has been pulling back over the past couple of weeks. The longer-term trajectory should be strong as the world will continue to demand U.S. natural gas and Cheniere is the largest exporter. The short-term situation just got better too. BUY

Constellation Energy Corporation (CEG – yield 0.6%) – CEG has been pulling back like most stocks that got hot after the election. But it’s still up 109% YTD and 29% since being added to the portfolio four months ago. Earnings have been strong, but the stock is really being powered by future growth prospects in terms of large energy deals with technology companies. Constellation made a huge deal with Microsoft (MSFT) to provide power to a new data center with a reopening of the Three Mile Island generator.

Other energy and tech companies have since inked similar deals. Tech companies have to secure power sources for the massive energy demand of AI. Constellation is a prime candidate with dependable carbon-free power. The new administration will likely bring a more friendly regulatory environment, making more deals likely. HOLD

Digital Realty Trust, Inc. (DLR – yield 2.6%) – This data center REIT made a huge jump after the company stated that demand for data center AI space is booming in the last earnings report. DLR was downgraded to a HOLD last month on price alone. The stock has pulled back since but it’s still up 42% YTD and 65% since being added to the portfolio in July of 2023. DLR doesn’t trade with the ebb and flow of the interest rate narrative like most REITs. It trades more like a tech stock because of the AI growth catalyst. The future still looks bright as data centers are booming. HOLD

Eli Lilly and Company (LLY – yield 0.8%) – The superstar drug company stock has been in a funk since the summer. It’s down about 20% from the high made in early September. LLY is still up over 32% for the year and consolidation is probably healthy. The company also announced a $15 billion stock repurchase program and a 15% dividend hike on Monday. The repurchase program replaces the $5 billion one that was just completed. It is also the seventh consecutive year of a 15% dividend hike. There is still some trepidation in the sector regarding the nomination of RFK Jr. for HHS Secretary. But LLY is unlikely to stay down for long. It is on track to grow earnings by around 70% per year in the years ahead. BUY

McKesson Corporation (MCK – yield 0.5%) – McKesson recovered all the summer and fall dip in a very short time, although the stock is down 8% in December. The pharmaceutical distributor took a plunge after second-quarter earnings missed because of supply disruptions. But the third-quarter earnings alleviated that concern, and the stock took off again. The healthcare sector is reeling somewhat from the RFK nomination right now. But hopefully, MCK will get back to slowly trending ever higher in the year ahead as its customer base grows all by itself because of the aging population. BUY

Qualcomm Inc. (QCOM – yield 2.1%) – This semiconductor giant reported earnings that surpassed expectations with year-over-year revenue growth of 19% and earnings growth of 80%. But the performance has been a bummer for a while. QCOM plunged over 30% from the June high in the following two months and has been going sideways ever since. The market wants to see strong U.S. smartphone sales from an AI upgrade cycle. But that doesn’t appear to be happening yet, although analysts think it is a possibility next year. But when this stock moves it easily makes up for lost time. And it will take off at some point. Look at AVGO. BUY

Toll Brothers, Inc. (TOL – yield 0.6%) – The luxury homebuilder stock has fallen 14% since reporting earnings last Monday. Earnings beat expectations with revenues up 10.3% and earnings up 12.6% over last year’s quarter. Toll Brothers also reported that unit sales were up a whopping 25% for the full year versus 2023. But the stock is being hurt by industry-wide affordability concerns. The median age of first-time homebuyers reached 38 years old, an all-time high. New homebuyers comprised 24% of the market over the last year, an all-time low. But luxury homes aren’t as impacted by that. Plus, lower mortgage rates should improve things. BUY

UnitedHealth Group Inc. (UNH – yield 1.7%) – After soaring to a new high in early November, it’s been one thing after another for this health insurer. The stock is down 20% in the last month. UNH initially fell because of trepidation over the RFK nomination. Then the CEO was assassinated. And this week, President-elect Trump made comments about “eliminating the middleman” in the healthcare industry. We’ll have to see if the regulatory environment changes for the worse. The stock can overcome everything else. BUY

Safe Income Tier

NextEra Energy (NEE – yield 2.8%) – This once stellar performing combination regulated and alternative energy utility has been bouncing around with the interest rate narrative over the past few years. Things were bad for NEE. Then they got very good. Then things turned rotten again. Now, NEE is leveling off and appears to have found a new-term bottom. Of course, the volatility is from the macro environment and not the internal operations of the company. The regulated and clean energy utility is doing great. NextEra expects to deliver 10% average earnings growth over the next several years, and it has a long track record of successfully delivering. The utility also stands to benefit from the increased electricity demand from AI and data centers. HOLD

USB Depository Shares (USB-PS – yield 5.4%) – The environment is still good for fixed income despite the recent change in interest rate expectations. These securities love falling interest rates. And interest rates are at least not likely to trend higher and may even move lower in the quarters ahead. 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. 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. The long-term bond ETF doesn’t have the upside leverage that USB-PS does. But the trend is likely to serve this security well over the next year. BUY

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