February 26, 2025

The Market Turns Ugly

Stocks are taking a hit. It was an ugly day last Friday and there was more of the same on Tuesday. Should we expect more?

Apparently, economic growth is a rising concern. The market had anticipated stronger growth since the election because of the prospect of lower taxes and less regulation. That optimism got priced into stocks. But even if those things come to fruition and the economy does thrive, it will take a while. I’m not sure investors understand that.

Last week there was a weak manufacturing report. This week, February consumer confidence numbers came out and were lousy. It seems that the dreary consumer is also concerned about inflation, which has been sticky and could get worse with tariffs. It’s a problematic combination. A slower economy in and of itself isn’t all bad because it may lead to lower interest rates. But with inflation, that benefit gets muted.

We’ll have to wait and see if these newfound economic worries have lasting traction. It’s also true that the market had been sideways for a while and was bound to break one way or another. A selloff is to be expected after two straight years of 20%-plus returns and a 74% move up from October 2022. Although consumer confidence did take a big plunge from January, the overall number was lower at two points in 2024. This could be an overblown concern for a market that was looking for an excuse to blow off steam.

The two portfolio stocks that took the biggest hit after the DeepSeek news last month, Broadcom (AVGO) and Constellation Energy (CEG), have given back all the gains since then and have moved lower. But I still have confidence in the stocks over the course of the year.

Meanwhile, healthcare stocks Eli Lilly (LLY), AbbVie (ABBV), and McKesson (MCK) are rising despite the down market. That’s the beautiful thing about healthcare stocks. They don’t care about the mood of the consumer or the anticipated growth in GDP.

Recent Activity

January 29th
Broadcom Inc. (AVGO) – Rating change “HOLD” to “BUY”

February 26^th
UnitedHealth Group Inc. (UNH) – Rating change “BUY” to “HOLD”

High Yield Tier

AGNC Investment Corporation (AGNC – yield 13.7%) – After a rough couple of years with rising inflation and interest rates, this mortgage REIT has returned about 15% YTD and is back near the 52-week high. Hopefully, it can keep going. The narrative and stock performance have been improving this year. The REIT reported solid earnings this quarter. Numbers were better for the full year but a little worse for the quarter as the environment took a slight step back. Spreads are still higher as the Fed Funds rate has already been cut 1% and longer rates are higher. AGNC had a bad run the last couple of years and it’s due for a significant turnaround. It should be set up for solid performance over the rest of 2025. BUY

Brookfield Infrastructure Partners (BIP – yield 5.2%) – The infrastructure partnership reported earnings last month that beat expectations with 8% FFO (funds from operations) growth for 2024 over the prior year and 10% growth minus exchange rates. Brookfield also announced a 6% distribution increase, marking the 16^th consecutive year of payout increases. The business is delivering but the stock price isn’t. BIP returned 10% over the last year while the market was up 17%. It continues to be a slave to the interest rate narrative and likely won’t break out until interest rates do. But it does deliver a solid income in the meantime and provides an element of defense to the portfolio. (This security generates a K1 form at tax time). BUY

Cheniere Energy Partners, L.P. (CQP – yield 5.1%) Earnings – The partnership reported mixed earnings last week that the market seems happy with. It missed on earnings but beat on revenue. Although earnings decreased from last year because that was a record year, the numbers are historically high, and Cheniere has more production coming online in 2025. It exported a record amount of liquid natural gas (LNG) and now accounts for 10% of the global supply. The partnership also raised the distribution 15% over the past year and bought back $4 billion in units. Although CQP pulled back from the recent high this month, it’s still up 16% YTD and 32% since the election. (This security generates a K1 form at tax time). BUY

Enterprise Product Partners (EPD – yield 6.4%) – The partnership reported solid earnings with 7% earnings growth for the year and a 5% distribution hike, marking the 26^th consecutive year of an increase. Natural gas demand is booming, and Enterprise will continue to benefit. While most midstream energy companies took a hit last month on fears that AI energy demand will be less than anticipated, those fears are waning, and the midstream stocks are coming right back. It looks like EPD might be moving back to the high. EPD is still below the all-time high set in 2014 and can certainly move beyond that, especially with much higher earnings now. (This security generates a K1 form at tax time). BUY

FS KKR Capital Corp. (FSK – yield 11.9%) – This Business Development Company (BDC) seemed like it would crawl slowly higher forever. But last week the specter of lower-than-expected economic growth gripped the market and cyclical companies pulled back. FSK has benefited from the increased economic optimism that followed the election as it has a portfolio of small businesses that tend to be economically sensitive. The BDC is still in an uptrend that began last fall and continues to look solid. But it could pull back if these slower economic growth fears gain lasting traction. BUY

Main Street Capital Corporation (MAIN – yield 6.8%) – As a BDC, this story is very similar to that of FSK. MAIN is in an uptrend and returned 44% over the past year but pulled back sharply last week. 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. If the economy hangs on the BDC should continue to deliver, but if a slowing economy becomes a lasting market story it could have problems. BUY

ONEOK Inc. (OKE – yield 4.2%) Earnings – The midstream energy company reported earnings this week that solidly beat estimates with revenue and per-share earnings growth of 33% for the quarter. The results reflected the recent acquisitions, but the company disappointed expectations on 2025 guidance and the stock fell more than 4% by mid-day on Tuesday. ONEOK expects 8% earnings growth in 2025, somewhat muted from the costs of the acquisitions, but 15% growth in 2026. Volume across the board is solid and getting stronger. But it has been an unforgiving market the past few days. I expect this stock to recover quickly. BUY

The Williams Companies, Inc. (WMB – yield 3.5%) – This midstream energy company was riding high as a natural gas company as electricity demand expectations soared. But it took a big hit last month after the DeepSeek news. Although it recovered much of the loss, WMB is right back down to where it was in last month’s selloff. Several energy stocks have been getting slapped around the past few days as economic growth concerns are reeling the market. Energy prices are down and the sector is taking a hit. Midstream companies are falling too even though they are not commodity price sensitive in terms of earnings. I still like energy over the rest of this year, and this should be a good entry point if you don’t own the stock already. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.2%) – The biotech company stock has been trending higher since the earnings report last month and is now within just a couple bucks of the high. It tends to keep going higher when it does this. The main driver from the earnings was the performance of its immunology drugs Skyrizi and Rinvoq, which collectively delivered $5.61 billion in revenue for the quarter. Those drugs alone have replaced the Humira revenue which peaked at a little over $20 billion annually. The company also raised revenue forecasts on the two drugs by $4 billion to $31 billion a year by 2027. The earnings report showed AbbVie has replaced the Humira revenue. The patent cliff had been holding the stock back but that’s gone now. BUY

Ally Financial Inc. (ALLY – yield 3.2%) – Ally is having a solid year, even though it pulled back last week along with just about everything else. It’s still up about 6% YTD. The online bank reported better-than-expected earnings last month and lower loan loss provisions in the quarter after loan loss worries had held the stock back. ALLY was floundering late last year but has had a strong move off the bottom. It started to rally after big bank earnings were stellar and the interest rate narrative improved. The good earnings report added fuel. Analysts are expecting earnings growth of 40% in 2025. ALLY is due to move higher like its peers have. BUY

Broadcom Inc. (AVGO – yield 1.1%) – This technology and AI powerhouse had a strong bounce after the January selloff when it was upgraded to a BUY. But it’s been floundering lately and has given back all of that bounce and then some. Technology stocks, which had driven the market higher for years, are having a comeuppance this year. There was the DeepSeek news last month and there is more pressure this week. But AVGO is being dragged down by the sector. Most of the issues don’t apply to Broadcom. Broadcom has a unique infrastructure niche that is not easily duplicated, and the stock has been successful for a very good reason: skyrocketing profits. It’s usually a good thing to be a tech stock. The sector and AVGO will come roaring back again. BUY

Cheniere Energy, Inc. (LNG – yield 0.9%) Earnings – Finally some good news. This natural gas exporter crushed earnings expectations last week. The company earned $4.33 per share, destroying expectations of $2.69 by 61% on record LNG production. The company will also have expanded operations to add to results this year. The stock did get a boost after the report but has since given back all the gains. The energy sector is taking a huge hit this week on lower consumer confidence and everything is getting dragged down. But LNG should persevere beyond the current selloff as the fundamentals are very strong. BUY

Constellation Energy Corporation (CEG – yield 0.6%) Earnings – There’s news this week that is further eroding the share price, besides the overall market dip. It was reported that Microsoft (MSFT) is canceling some leases for U.S. data centers, raising broader concerns that spending on AI data centers will be less than previously anticipated. The issue became a concern last month when Chinese company DeepSeek reported that its popular AI application ran on cheaper chips and used less energy. This week’s news feeds the already existing concern that electricity demand growth will be less than expected.

CEG stock soared last year after a deal was announced whereby Constellation will provide Microsoft with electricity later this decade from a reopened Three Mile Island reactor for a planned data center. Microsoft didn’t mention killing that deal. And the company is still planning on spending $80 billion on data centers. But CEG has flown higher in anticipation of more such deals and this news throws cold water on that. Meanwhile, Constellation reported better-than-expected earnings last week and raised revenue projections for 2025. But bad news in a market that is selling off anyway is tough for a stock that has been flying high. I still believe CEG will come back and soar again. HOLD

Digital Realty Trust, Inc. (DLR – yield 3.1%) – This data center REIT has been a great investment since it was added to the portfolio. But it has certainly been floundering of late. DLR spent December and January falling 16%. It was doing OK last month until it got clobbered by the DeepSeek news and possible negative repercussions on data center demand. DLR had benefitted mightily from the data center expansion prospects. The stock probably got a little too high too fast. But the future still looks extremely bright, and DLR should recover going forward. Data center growth will continue to be a trend this year as the recent troubles probably fade into memory. HOLD

Eli Lilly and Company (LLY – yield 0.7%) – This is what I love about healthcare. The world could be going to Hell in a handbag, and it doesn’t bother these stocks. While the rest of the market is getting clobbered, LLY just rose to the highest level since October, back over 900 per share. Lilly did announce that it is offering higher doses of obesity drug Zepbound at lower prices. Plus, it doesn’t really matter to drug companies if the consumer is depressed. This is also a company that grew earnings over 100% this past year and is expected to grow 90% in 2025. BUY

McKesson Corporation (MCK – yield 0.5%) – McKesson guided higher for 2025. The stock had been knocked down last summer and fall after the company reported supply chain issues with weight-loss drugs. But those problems are behind the company, as reflected in the recent earnings report. It should resume its old habit of slowly going higher and higher as it deals in a market that grows all by itself because of the aging population. MCK had been in an uptrend since the middle of December and has spiked higher as the rest of the market languishes. BUY

Qualcomm Inc. (QCOM – yield 2.1%) – The mobile device chip company delivered earnings with strong quarterly results and raised guidance for 2025. Revenue rose 17% for the quarter and EPS rose 24%. Both easily exceeded expectations. There was solid growth in just about every segment including iPhone demand. And guidance was raised for this year. But there wasn’t evidence of a strong AI smartphone upgrade cycle. And that’s really what the market is looking for. Several analysts expect an upgrade cycle to ignite sometime this year. And that could really move the stock higher. But a breakout is unlikely until that event is within sight. Meanwhile, QCOM has been wallowing with the rest of the tech sector. BUY

Toll Brothers, Inc. (TOL – yield 0.8%) – Mortgage rates moved back up again. There have been a growing number of negative stories regarding housing demand. The luxury homebuilder reported earnings last week that missed expectations. As a result, TOL has plunged 30% from the high in late November. Although the price is down to about 113 per share, analysts still have a price target of 150 per share for this year. Earnings only missed slightly and there is a lot of variation in possible outcomes over the next year. We will continue to hold for now on the possibility of a bounce back after the plethora of bad news. HOLD

Rating change – “BUY” to “HOLD”

UnitedHealth Group Inc. (UNH – yield 1.6%) – UNH took another hit last month when the market wasn’t thrilled with the earnings report and the FTC accused the company, along with others, of overcharging for life-saving drugs. Earnings were mixed as revenue missed, and earnings beat. However, the company also reiterated 2025 guidance. It’s been one thing after another with this one. The strong track record of outperformance leads me to believe this stock can make a move at some point. But the bad news keeps coming. It will be downgraded to a HOLD until UNH shows evidence of bottoming out. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 3.2%) – The regulated and clean energy utility stock continues to languish near the lowest levels of the recent range. But it moved higher in last week’s selloff. That’s encouraging. Operational results have been good with earning growth of 8.2% and a reiterated outlook through 2027. The utility also announced plans to restart its Duane Arnold nuclear plant and a collaboration with GE Vernova to develop natural gas-fired projects across the U.S. The utility is taking advantage of the soaring electricity demand, and the projects are likely to deliver more revenue and stronger growth going forward. But this stock needs to generate more lasting upside traction. BUY

USB Depository Shares (USB-PS – yield 5.6%) – Longer-term interest rates had been soaring and pressuring the price in past months. But better news has since reversed the trend. The ten-year fell from 4.8% to about 4.5% and fixed income rallied. This preferred stock has endured a tough bond market very well and should likely continue to hold its own. Plus, rates are more likely to trend lower from here in the year ahead. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.2%) – Ditto for VCLT. The long-term corporate bond ETF loves falling interest rates and hates rising ones. There will be more price pressure if rates continue to rise and vice versa. But the situation over the course of the year should be good. BUY

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