July 3, 2024

The Market Stays High Despite Technology

Well, the results are in for the first half of the year. And they’re very good. The S&P 500 soared an impressive 14.5% in the first six months of 2024. That’s a 29% annual pace. And it follows a 22% market return in 2023.

But I believe it is unlikely that the S&P will finish the year up 29%. That would be an epic year, but there are still a lot of challenges, like interest rates near the highest level in two decades. That means market returns must at least flatten out somewhat going forward. It’s also true that the technology rally has petered out in the last few weeks.

If the tech rally continues to sputter, what will drive the market higher? The S&P gains have been driven by the technology sector and without that propulsion, the rally will have to broaden and include previously neglected sectors. So far, the rest of the market is at least holding up the market, as the S&P is near the high.

Hopefully, the tech pause turns out to be good news for some of the struggling dividend stocks like REITs and utilities. The cheap prices and high yields should attract investors. We are already seeing improving performance in the midstream energy companies Enterprise Product Partners (EPD), ONEOK, Inc. (OKE), and The Williams Companies (WMB). These stocks have started moving higher again as the high yield and inflation protection are attracting investors.

We’ll see what happens. It’s possible that technology reignites. But so far, some of the other sectors have been picking up the slack.

Recent Activity

June 5
SOLD Realty Income (O) - $54.03

June 12
NextEra Energy (NEE) - Rating change “BUY” to “HOLD”
GTC order Eli Lilly (LLY) - $580
GTC order Broadcom (AVGO) - $1000

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 6.0%) – Just when this one starts to get some upside traction, it reverts to its recent meandering ways. This infrastructure company that used to be a market superstar in years past has been going sideways since the end of last year. The operational performance has been sound. Brookfield reported strong earnings and the shares rallied strongly off the early April dip. The company also raised the quarterly dividend by 6%. During sideways periods you still get the dividend and there could be a big move in store if interest rates trend significantly lower. (This security generates a K-1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 7.1%) – This midstream energy partnership pulled back a little bit from the high of early April but mostly it has just stopped going higher for now. The energy sector has been weaker because of falling oil prices but prices have spiked higher in June. We’ll see if it is just a bounce or more of a sustained move. Earnings again showed Enterprise is solid operationally, and that huge distribution yield is safe. I expect EPD to continue to pay the massive distribution and trend higher at a snail’s pace. (This security generates a K-1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 14.1%) – 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. FSK has moved off the recent lows and is trending higher again. 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 5.7%) – This Business Development Company pulled back somewhat after making a high in early May, but it has been trending higher again since late May. 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 5.9% because I only include the regularly scheduled dividend. Including the supplemental dividends, the yield is 8.2%. BUY

ONEOK Inc. (OKE – yield 4.9%) – 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 a strong energy market. BUY

The Williams Companies, Inc. (WMB – yield 4.5%) – This midstream company stock made a new 52-week high last week. WMB tends to be the least volatile of the three in the portfolio. It didn’t fall in price as much during the earlier months and, as the environment for the subsector has improved, it’s back to new highs while the other stocks are still catching 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 3.6%) – Although the stock has leveled off over the past couple of weeks, ABBV is back in business. The stock appears to have broken out of its recent funk when it rallied over 11% from the recent low in late May. It might be making a run back to the old high and beyond. We’ll see what happens, but a move to a new high would be very much in character with the past patterns of the stock. The company has one of the best pipelines and new drugs in the industry and it usually doesn’t stay down for long. It’s still cheap ahead of what is likely a return to robust earnings growth next year. BUY

American Tower Corporation (AMT – yield 3.3%) – AMT had a good month of May and then pulled back a little in June. But the price remains right near the May high. As with ARE, better interest rate news should be good for this cell tower REIT. It too has been bouncing around with interest rates. 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%) – The AI stock has certainly sobered up since its torrid run after the company reported strong earnings and announced a 10-for-1 stock split, effective July 15. On the one hand, AVGO is down more than 10% from the recent high. On the other hand, it’s still up 25% since the beginning of June and 52% YTD. The recent pullback is a normal and healthy consolidation, and the future for the stock is still very bright. Things are still very good, just not quite as good as they seemed a few weeks ago. HOLD

Digital Realty Trust, Inc. (DLR – yield 3.2%) – The data center REIT has been trending higher for 13 months. The uptrend sort of sputtered in April and May. But it’s moving higher again and recently cracked the 150 per share level and appears on its way back to the 52-week high. It’s been bouncy, but make no mistake about it, 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 55% YTD. 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%) – This supply chain pharmaceutical giant has pulled back from the high over the past couple of weeks. It’s no big deal. That’s normal behavior for this stock that has been trending higher since March of 2023. Everything continues to look solid. McKesson indicated earnings growth of 14% to 17% for this year. MCK is up 24% YTD. The pharmaceutical supply chain Goliath dominates a market that grows all by itself because of the aging population. BUY

Marathon Petroleum Corporation (MPC – yield 1.9%) – This refiner company stock came way off the high from the beginning of April. But it has leveled off and it’s been going mostly sideways for a couple of months. It’s been a wild year. The stock was red hot, then turned ice cold, and now it’s just hovering. But the price of oil is back up and energy stock performance has improved. Profits are still at historically high levels and the prognosis for refiners still looks good. MPC is also a hedge against trouble in the Middle East and inflation. HOLD

Qualcomm Inc. (QCOM – yield 1.7%) – It’s been a few weeks of comeuppance for the mighty AI stocks. QCOM soared 39% from May 1 to June 18^th. But it has fallen 12% in the last few weeks. Not to worry, it was only down 2% for June. 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. BUY

UnitedHealth Group Inc. (UNH – yield 1.7%) – Everything points to UNH being a great stock except the performance since it has been in the portfolio. Since it was added in April of 2023 it has returned -3%. The S&P is up 36% over the same period. MCK is up 63% and LLY is up 150%. I’m tempted to dump it but every time I look at the profits, the industry, and the track record I talk myself into keeping it. UnitedHealth reported impressive earnings last quarter and issued strong guidance. The stock has blown away the returns of the S&P over the last five- and ten-year periods. BUY

Visa Inc. (V – yield 0.8%) – The payment processing global Goliath again reported stellar earnings. It reported a 10% jump in revenue and a 20% increase in adjusted earnings per share over last year’s quarter. 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. 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 4.5%) – This life science specialty REIT was up a little over the past week. The improved interest rate outlook should be good for ARE, but it hasn’t moved higher yet. The REIT has been bouncing around all year and is currently at the low range of the bounces. Hopefully, it can catch a wave in the weeks ahead. This is a solid REIT that reported strong earnings and raised the dividend again this quarter. ARE will likely bounce around somewhat at the mercy of the interest rate narrative and not significantly surge higher until rates muster a sustained move downward. BUY

NextEra Energy (NEE – yield 3.0%) – After a huge run higher from March until the end of May, NEE is having a comeuppance in June. After a 40% run higher, the stock pulled back 11% in June. The story hasn’t changed. It’s just that the rally had to run out of gas at some point. The quite long-in-the-tooth rally is the main reason NEE was downgraded to a HOLD last month. 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 5.7%) – This preferred stock has just weathered a strong interest rate storm and has still returned about 15% 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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