December 4, 2024

A Reinvigorated Bull Market

These are good times. The S&P 500 is up 6% since the election and 27% year to date. This adds to a 26% return for the index in 2023.

The market is seemingly making new highs every day as investors expect a higher level of economic growth going forward because of the election. We’ll see if the economic growth materializes. But this optimistic economy expectation comes while the Fed has begun a rate-cutting cycle that will likely last the next two years. Why wouldn’t the market be partying?

There has been a sector rotation since the election in favor of cyclical stocks. The best-performing S&P 500 sectors in November were consumer discretionary, finance, and energy. But it hasn’t exactly been a bummer for the other sectors either. Every S&P sector except healthcare is up over the past month. And healthcare is down less than 1%.

The cyclical stocks in the portfolio are killing it. Midstream energy companies Enterprise Product Partners (EPD), ONEOK (OKE), and The Williams Companies (WMB) have been on a tear for most of the last month. Natural gas exporter Cheniere Energy (LNG) is up 16% since the election. And homebuilder Toll Brothers (TOL) had a big move higher. In addition, Business Development Companies Main Street Capital (MAIN) and FS KKR Capital Corp. (FSK) are also climbing to new highs.

Of course, eventually, whether it’s in this final month of the year or early next year, stocks will have priced in the economic optimism. At that point, stocks will have to prove it to move higher. But we might not be at that point yet. Historically, a market that has been this strong this late usually finishes the year strong.

Nothing lasts forever. And investors may be overly optimistic at this point. We’ll see. In the meantime, be happy and enjoy the bounty while it lasts.

Recent Activity

November 13
Sold Alexandria Real Estate Equities, Inc. (ARE) - $108.62
FS KKR Capital Corp. (FSK) – Rating change – “HOLD” to “BUY”
Main Street Capital Corporation (MAIN) – Rating change – “HOLD” to “BUY”
NextEra Energy (NEE) – Rating change – “BUY” to “HOLD”
Purchased Cheniere Energy Partners, L.P. (CQP) - $51.94

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

High Yield Tier

AGNC Investment Corporation (AGNC – yield 15.0%) – This ultra-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 improved performance over the next year. AGNC has also come off the recent bottom and moved up 6.4% in November. AGNC also just went ex-dividend last week. BUY

Brookfield Infrastructure Partners (BIP – yield 4.6%) – As with just about all utilities and REITs, BIP has pulled back since the middle of October. It has, however, held up well since the election and another spike in interest rates. That’s a good sign going forward. After struggling mightily for what seemed like forever, BIP is up over 50% since the middle of April. This unique utility 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 K-1 form at tax time.) BUY

Cheniere Energy Partners, L.P. (CQP – yield 6.4%) – Look at CQP. This high-yielding MLP subsidiary of Cheniere Energy (LNG) is supposed to add just a little bit of appreciation to go with that yield. But it’s busting a move anyway. The price is up 20% since the election and 13% since being added to the portfolio just a few weeks ago. The reason for the price spike is the anticipated improvement in the regulatory environment. The 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 K-1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 6.2%) – Wow! This notoriously slow-moving stock has been on fire. Midstream energy companies as a group have been hot since the election because of the anticipation of more oil and gas activity and friendlier regulations. But EPD has been blowing away the group. It was up over 22% in November alone. True, Enterprise will benefit from more oil drilling and increasing natural gas exports, but the price spike is still unusual for a stock that was only up 15% YTD prior to November. EPD soared to 34 per share when it hadn’t been above 30 since 2015. (This security generates a K-1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 12.7%) – This Business Development Company (BDC) 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. FSK is mostly about the huge dividend, but the price has moved up over 8.3% since the election. When a security has a payout and yield of this size it usually pulls back after the quarterly dividend gets priced out of the stock. It held up nicely after the September dividend, but we’ll see about the December one this week. BUY

Main Street Capital Corporation (MAIN – yield 5.3%) – 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. But the improved economic outlook leaves room for further appreciation. As a cyclical play, MAIN has been hot and has moved up 10% since the election. BUY

ONEOK Inc. (OKE – yield 3.6%) – This more volatile midstream energy company stock kept moving higher into the stratosphere but has sobered up over the last couple of weeks. It has pulled back 6% from the high. But OKE is still up 12% since the election and 63% in 2024. The market loves the new acquisitions of Medallion Midstream and Enlink Midstream (ENLC), as the new additions will be accretive immediately, although OKE pulled back after announcing it will acquire the rest of ENLC with newly issued shares. The story remains strong as recent actions will enhance earnings growth going forward into a future that just got better with the election. HOLD

The Williams Companies, Inc. (WMB – yield 3.4%) – Ditto for WMB. It was on fire but has leveled off over the past couple of weeks. But it’s still up more than 6% since the election and 65% YTD. The 6.5% pullback from the high earlier this month 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

AbbVie (ABBV – yield 3.6%) – After a big pullback, ABBV is moving sharply higher again. ABBV crashed by more than 12% last month after it reported that its Schizophrenia drug flopped in phase II trials. But that’s life with big pharma. ABBV is up 11% in less than three weeks. The bigger picture is still excellent. New drugs Skyrizi and Rinvoq are killing it and well on track to replace the Humira revenue. Management expects the company to return to “robust” earnings growth next year. It’s still up 18% YTD and is getting through this tough year with flying colors ahead of greener pastures next year. HOLD

American Tower Corporation (AMT – yield 3.1%) – Unlike DLR, this cell tower REIT trades like a REIT and is beholden 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. But it has been trending higher again over the past few weeks. It’s a growth business as cell tower demand will increase in the future. Hopefully, another leg higher has begun. HOLD

Broadcom Inc. (AVGO – yield 1.3%) – The earnings report from artificial intelligence bellwether Nvidia (NVDA) failed to deliver an upside catalyst for AVGO. The earnings were stellar, to be sure. And AI growth is alive and still super strong. But the market has come to expect that, and booming AI growth is largely built into these stocks. However, Broadcom reports earnings next week, and that report should have a more direct effect on AVGO. The stock has leveled off and the price is still the same as it was back in June. But AVGO is still up over 55% YTD. BUY

Cheniere Energy, Inc. (LNG – yield 0.9%) – This liquid natural gas (LNG) exporter is benefiting immensely from the Trump election. LNG is up 16% since the election. Energy stocks have rallied. Cheniere also reported strong earnings. Consensus expectation is for Cheniere to grow revenue at an average of 11% over the next three years compared to forecasted revenue growth of 3% for the oil and gas industry over the same period. The longer-term trajectory should be higher 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 as the new administration is encouraging LNG exports. BUY

Constellation Energy Corporation (CEG – yield 0.6%) – This nuclear energy provider has returned 118% YTD and 34% in the three and a half months since being added to the portfolio. It’s been a bit of a ride. CEG soared 60% between early September and early October after the company announced a deal with Microsoft (MFST) to provide energy from a reopened Three Mile Island nuclear plant. Then it pulled back over 20% the following month after the Federal Regulatory Commission shot down Amazon’s (AMZN) recently announced nuclear deal with Talen Energy (TLN). But the stock has been trending higher again since the election, which ushers in a far more regulatory-friendly administration and provides renewed hope of more deals. HOLD

Digital Realty Trust, Inc. (DLR – yield 2.5%) – 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 week on price alone. It soared to a new high and is up 46% YTD, which is a huge move for a REIT. DLR has pulled back a little from the high over the last week, but that was to be expected. The future still looks bright as AI is adding another growth catalyst to data centers. HOLD

Eli Lilly and Company (LLY – yield 0.6%) – The superstar drug company stock is recovering from a big dip. LLY had been down as much as 25% since the late-summer high and nearly 20% since the earnings report fell short in late October. The stock fell after earnings as sales of the heralded weight loss drug fell short of lofty expectations and the selling accelerated as the nomination of RFK Jr. for HHS Secretary spooked the sector. 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. The stock has already moved up 11.5% in the last two weeks. BUY

McKesson Corporation (MCK – yield 0.5%) – McKesson has recovered all of its summer and fall dip. 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. It never took a hit with the rest of the healthcare sector over concerns about the RFK nomination because it won’t be affected. MCK looks to be back on track to continue 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%. The strong quarter was fueled by a wave of launches of flagship Chinese smartphones. The new quarter is off to a strong start as well with automotive sales expected to rise 50%. Despite the good news, QCOM has fallen back to near the low point of the recent range. The market wants to see strong U.S. smartphone sales from an AI upgrade cycle. That doesn’t appear to be happening yet, although analysts think it is a strong possibility next year. BUY

Toll Brothers, Inc. (TOL – yield 0.6%) – The homebuilder company stock has been hot on the heels of higher economic growth expectations after the election and a positive October report on new home sales. TOL is currently near the 52-week high after rising more than 50% since early July. Despite the strong recent performance, the stock should have a good year in 2025. There is still a home shortage and demand will remain strong. Meanwhile, interest rates should trend lower, and the economy is expected to get stronger. BUY

UnitedHealth Group Inc. (UNH – yield 1.4%) – UNH and other healthcare stocks are recovering from the initial trepidation over the nomination of RFK Jr. UNH has had a nice spike higher over the past few weeks. He could bring the hammer down on pharma prices and certainly change the regulatory environment for health insurers like UnitedHealth. But the potential policy changes are not clear, and investors are seeing initial selling as an overreaction. We will have to wait and see how UnitedHealth will be affected by changes in policy. But so far, investors are somewhat concerned. BUY

Safe Income Tier

NextEra Energy (NEE – yield 2.7%) – Things were bad for NEE. Then they got very good. Now, things have turned rotten again. 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, which will opt for clean energy whenever possible. The longer-term situation is great but NEE will get knocked around with the interest rate narrative in the near term. HOLD

USB Depository Shares (USB-PS – yield 5.3%) – 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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