July 17, 2024

Let the Good Times Roll

There isn’t much not to like about this market. After a strong first half of the year, the market is having a great July. And the rally is broadening out. It’s not just technology anymore.

The latest leg of this rally has been sparked by a better-than-expected June CPI report. Interest rate optimism abounds. Consensus now expects a Fed rate cut in September and another cut before the end of the year. There is an increasing belief that overall interest rates have peaked and are likely to trend lower for the rest of the year.

The better interest rate news prompted a big rally in the worst-performing dividend stocks. REITs in particular have come on strong in the last week-plus. Now, the market is firing on all cylinders. What’s not to like? Inflation seems to be fading. Interest rates are likely to move lower. And the economy is still solid. Meanwhile, the artificial intelligence catalyst will likely continue to drive the technology sector higher.

I was skeptical, but the market is forcing me to be bullish. I thought that interest rates hovering near the highest levels in two decades would spoil the party. But it hasn’t. However, some skepticism lives on. Over several decades I’ve learned a central truth about markets. When things seem bad, they’re not that bad. And when things seem great, they are not that great. Markets seem more volatile than they truly are.

Even raging bull markets slow and have a crummy month. It’s hard to imagine the market staying this good. But I’m sure enjoying it while it does. The overall portfolio had been doing very well and significantly outperforming the market. But there were laggard stocks in REITs and utilities. Now those stocks have gotten hot.

Recent Activity

July 10
Purchased Cheniere Energy. Inc. (LNG) - $174.92
SOLD Marathon Petroleum Corporation (MPC) - $162.18

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.3%) – This great infrastructure company has also been hot stuff lately, up over 9% since July 9. BIPC had been a stellar performer for many years prior to inflation and rising interest rates. Higher interest rates increase borrowing costs and limit the company’s ability to profitably fund growth projects. But there is pent-up upside in BIPC when interest rates significantly decline. The operational performance has been sound. Brookfield reported strong earnings and raised the quarterly dividend by 6%. I expect BIPC to continue to be bouncy until rates make a sustained mover lower. (This security generates a K1 form at tax time). BUY

Enterprise Product Partners (EPD – yield 7.1%) – Although this midstream energy partnership is within pennies of the 52-week high, it hasn’t had the big move in the past couple of weeks that the REITs had because it hadn’t been beaten up like those stocks. It just continues to trend higher at a snail’s pace. It has been trending higher for nearly four years. As this rally broadens out, the high yield and inflation protection make midstream energy companies an excellent choice. Earnings again showed Enterprise is solid operationally and that huge distribution yield is safe. (This security generates a K1 form at tax time). BUY

FS KKR Capital Corp. (FSK – yield 13.8%) – The massive-yielding BDC pulled back last month after the quarterly payout went ex-dividend. When a yield is this high and this important to the stock, the ex-date has a noticeable impact. But after the BDC absorbed the ex-dividend, it has been crawling back toward the high and is now within pennies. So far, FSK is delivering as advertised. It’s continued to pay the massive dividend and the price has appreciated since it was added to the portfolio. BUY

Main Street Capital Corporation (MAIN – yield 5.6%) – Some of the best income stocks are rallying again in the broadening rally. This Business Development Company pulled back somewhat after making a high in early May, but it moved higher again in June and made a new 52-week high this week. It’s still in an uptrend that began last fall and has been steady for weeks. MAIN paid the regular monthly dividend of $0.72 per share in the second quarter, marking a 6.7% increase year over year, as well as a $0.30 supplemental dividend. The current yield is reflected above as 5.6% because I only include the regularly scheduled dividend. Including the supplemental dividends, the yield is 8.0%. BUY

ONEOK Inc. (OKE – yield 4.7%) –This is an amazing midstream energy company. Earnings are rock solid with inflation protection and recession resilience. After a rare period of weakness between the middle of May and the middle of June, as investors focused on AI, OKE appears to be on its way back to the high. The high yield should be at a premium in a likely more sideways market going forward. It is a more volatile stock than the other midstream companies that have been in the portfolio. That has been a good thing in this market rally. BUY

The Williams Companies, Inc. (WMB – yield 4.5%) – This midstream company stock made a new 52-week high this week. WMB tends to be the least volatile of those in the portfolio. It didn’t fall in price as much during the earlier months and, as the environment for the subsector improved, it moved back to new highs before the other midstream energy stocks caught up. Williams reported excellent earnings. The midstream company soundly beat estimates on both net income and earnings per share and guided to the upper half of 2024 guidance. WMB is still in an uptrend that began in the middle of February. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.7%) – This stock continues to be very bouncy, but the trend is higher. It’s up slightly YTD. But that’s not bad considering this should be the last tough year in a while. The company is struggling with shrinking revenues as it lost the Humira patent in the U.S. But after this year, things should improve dramatically. Management says it expects the company to return to revenue growth later this year and robust growth next year. The company has one of the best pipelines and new drugs in the industry that will be the key driver of the stock before long. BUY

American Tower Corporation (AMT – yield 3.1%) – The improvement in the interest rate outlook is really boosting the previously underperforming REITs. This niche REIT soared 7.6% this month amid the improving interest rate outlook. But AMT is still far from the 52-week high. American Tower rallied strongly after the REIT beat estimates on both revenue and earnings with 9.8% adjusted funds from operations per share growth over last year’s quarter. The REIT also raised guidance for 2024. It’s a solid REIT with stronger growth than most of its peers, but interest rates will be the biggest determinant of performance in the near term. BUY

Broadcom Inc. (AVGO – yield 1.3%) – No, your stock hasn’t lost 90% of its value. The 10-for-1 stock split became effective on Monday. You now own ten times as many shares at one-tenth the old price. The AI stock had a torrid run after the company reported strong earnings and announced the stock split. AVGO spiked about 40% in the first half of June. Then it gave back about 14% later in the month. But it has since gained back most of the decline. The recent volatility is a small price to pay for a stock that is up a staggering 59% YTD. This stock is a big-time winner. But it’s still not that expensive from a valuation standpoint. HOLD

Cheniere Energy, Inc. (LNG – yield 1.0%) – There isn’t much to say about this newest portfolio addition in the week since it was added to the portfolio. It’s up for the week along with the rest of the market. The LNG export market has a very promising future as Europe and Asia will have a huge demand for the stuff for many years to come. In the near term, LNG is up 14% in the last month and appears to be on its way back to the 52-week high. BUY

Digital Realty Trust, Inc. (DLR – yield 3.1%) – After doing nothing for four months, this data center REIT is on the move again. It made a new 52-week high this week and is now up about 20% YTD. DLR has for years outperformed its REIT peers in a tough market. But REITs have come alive again, and DLR is also moving higher with the group. It’s been bouncy, but make no mistake, DLR has vastly outperformed the REIT index over the past several years because of the data center exposure. Management recently stated that the REIT is seeing accelerating demand for AI-oriented opportunities. BUY

Eli Lilly and Company (LLY – yield 0.6%) – It’s another week and another new high. I don’t know what to say about LLY anymore. This superstar pharmaceutical company stock is up 61% YTD and 556% since being added to the portfolio a little less than four years ago. The catalyst for the latest surge is good news from its Alzheimer’s drug Donanemab. The drug got a very favorable report from the FDA Panel which has a huge input on whether a drug is approved or not. The report was practically a rave. Between the need for the drug, the prior approval of Novo Nordisk’s (NVO) inferior drug, and the panel nod, it is now a near certainty the drug will gain FDA approval, and probably soon. HOLD

McKesson Corporation (MCK – yield 0.4%) – What is this? The supply chain pharmaceutical giant stock hasn’t made a new high since late June. In fact, it has moved 5% below the high. I’m tempted to write a snippy letter to shareholder services. That’s okay. Nothing goes straight up all the time. MCK is still very much in an uptrend that began in March of 2023 and it’s still up over 22% YTD. McKesson indicated earnings growth of 14% to 17% for this year. The pharmaceutical supply chain Goliath dominates a market that grows all by itself because of the aging population. BUY

Qualcomm Inc. (QCOM – yield 1.7%) – After a big dip in June following a huge surge in the spring, QCOM appears to have bottomed out and is crawling back. QCOM soared 39% from May 1 to June 18. But it fell 15% after that. Not to worry, it’s still up 50% YTD. The recent stock performance reflects profit taking in the AI space after a big surge from the last round of earnings reports. But QCOM should continue to deliver as several analysts see a major smartphone upgrade cycle for AI next year. Qualcomm is at the leading edge of chips that enable AI for smartphones and should benefit mightily. The good news about the recent weakness is that it might not be called away on our options expiration date later this month. BUY

UnitedHealth Group Inc. (UNH – yield 1.7%) Earnings – Just when I started bad-mouthing this stock it rallied. UNH is up over 11% in less than two weeks and at the highest price since January. It was up over 5% for the day at midday Tuesday after reporting earnings. The company 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 its previous guidance for 2024 despite the negative impact of the cyber-attack. The market is apparently happy and reassured. BUY

Visa Inc. (V – yield 0.8%) – The payment processing global Goliath again reported stellar earnings last quarter. The stock has been a dud for a while now but it reports second-quarter earnings next week. Hopefully, V gets a bump from these earnings like it did last time. We’ll see. It is still thriving from cross-border transactions and benefits from the recent economic news. Visa also reported upbeat guidance for the rest of this year. But somehow it has been floundering since March. The stock is putting me to sleep. Although performance has leveled off, V should be solid if the economy holds up. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.1%) – This niche REIT that owns and operates innovation campuses had a big move over the past week. It’s up 10% since July 9. It’s the interest rate prognosis. A better-than-expected inflation report for June triggered more optimism that the Fed will cut rates before the end of the year and contributed to the overall perception that interest rates have peaked and will likely trend down from here in the months ahead. ARE had a rough couple of years but has shown upside potential when it looks like interest rates will fall. This is a solid REIT that reported strong earnings and raised the dividend again last quarter. Hopefully, this recent move will last longer. BUY

NextEra Energy (NEE – yield 2.9%) – After a huge run higher from March until the end of May, NEE had a comeuppance in June. After a 40% run higher the stock pulled back 11% in June. NEE was having a good July, up about 9%, until it gave most of that gain back on Monday. NEE has become a more volatile stock this year as the interest rate narrative changes. But NextEra posted solid earnings in the recent quarter, which also added to the stock’s revitalization. NEE had been a superstar performer before inflation and rising interest rates. I expect solid performance going forward over the longer term. HOLD

USB Depository Shares (USB-PS – yield 5.5%) – This preferred stock has just weathered a strong interest rate storm and has still returned about 20% since being added to the portfolio. I believe it is unlikely that rates eclipse the high of this cycle. Rates have fallen over the last month and may be a harbinger of things to come. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.0%) – Ditto for VCLT. It doesn’t like rising rates. But that’s okay unless rates rise to new levels beyond what has been seen in this cycle. I believe that VCLT is still well positioned after the worst two years for fixed income ever. BUY

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