March 27, 2024

A Fed Green Light

A bullet was dodged, and the bull market forges on.

It looks like the Fed is going to play ball. There was much worry among investors that the Fed would abandon the three-rate-hike goal for this year amid higher-than-expected inflation. But they didn’t. The Fed reiterated its intention for three cuts this year. The odds of a first cut in June increased to 70%.

A souring of the interest rate scenario threatened the rally. But that’s gone and the market finished strong last week, at a new all-time high. Things look good. Inflation is way down. The Fed will start cutting. The economy is still solid. It’s a new bull market that should have plenty of road ahead.

Most of the portfolio stocks reflect the strong market. Positions in healthcare, technology, energy, and financials are killing it. Of course, the utilities and certain REITs are lagging the market, but that’s OK. They’re cheap with higher yields and well positioned in case the economy sputters this year. I like the current portfolio diversification.

Energy has been on fire as oil prices rise amid still limited supply, the start of the driving season, and geopolitical issues. All the midstream energy companies are at or near 52-week highs. Marathon Petroleum (MPC) has soared 16% in March alone and is up over 40% since being added to the portfolio in November.

Also, the recent weakness in superstar positions Broadcom (AVGO) and Eli Lilly (LLY) has reversed. It appears both of those stocks are back in business and maybe heading for new highs,

Recent Activity

March 6
Xcel Energy Inc. (XEL) – Rating change “BUY” to “HOLD”
UnitedHealth Group Inc. (UNH) – Rating change “BUY” to “HOLD”

March 13
Purchased Main Street Capital Corporation (MAIN) - $46.18

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.6%) – It’s been a bad two years for Brookfield. The inflationary and rising interest rate environment beat up the utility sector and BIP wasn’t spared. But it is unlikely that rates will continue to move higher. There has also been encouraging behavior recently. BIP soared along with many other dividend stocks in the last two months of last year but, unlike many similar stocks, it didn’t pull back this year. It just kind of went sideways instead. Brookfield has some of the most defensive revenues possible. It’s also been expanding into cell towers, data centers and foundries. Meanwhile, Brookfield continues to deliver strong operational results. (This security generates a K-1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 6.9%) – The midstream energy partnership just hit a new 52-week high. These are good times for midstream energy stocks. Oil and gas demand remains strong while the high dividends separate them from the more interest rate-sensitive, lower-yielding stocks. EPD is already up over 10% YTD. Looking forward, the company should deliver solid growth this year with anticipated steady hydrocarbon demand and recent acquisitions coming online. EPD has produced solid and steady returns in different market environments with a 17.45% return in 2023 after a strong bear market return of 15% for 2022. That massive distribution is extremely well supported, and the stock is still well below the all-time high despite much higher earnings. (This security generates a K-1 form at tax time.) BUY

Main Street Capital Corporation (MAIN – yield 6.2%) – Although this newest portfolio addition is currently selling near the 52-week high, it is still reasonably priced at less than 1.6 times book value and most other valuation measures below the 5-year average. It also pays that safe and high dividend every single month with a strong possibility of supplemental dividends over the course of the year as well. MAIN should also provide strong total returns over time generated by its largely successful small business portfolio. BUY

ONEOK Inc. (OKE – yield 5.0%) – It’s another new high. It’s good to be one of the most volatile large midstream energy company stocks when the subsector is killing it. Midstream is the best place to be for income right now for the reasons explained above with EPD. Unlike most energy companies, OKE has eclipsed the pre-pandemic high and broken out to a new level. The price is up over 43% since last May and 19% since the beginning of February. Meanwhile, the company is justifying the strong stock performance operationally. ONEOK reported a 42% increase in profits over last year’s quarter on higher LNG volumes and the contributions of the recent Magellan Midstream acquisition. The company also set ambitious guidance for this year. BUY

Realty Income (O – yield 5.9%) – This beleaguered but legendary monthly income stock has failed to rally over the past month, as many of its peers have. O can’t seem to escape the high interest rate negativity. While it can’t buck the trend, it should react quite well if interest rates trend lower over the course of this year, which is a scenario with a strong possibility. The historically strong performer is dirt cheap ahead of an environment that will likely at least stop getting worse in terms of interest rates. It’s probably the very late innings for rising and high interest rates and O is well positioned ahead of a likely shift in the future. It is still a great stock at a cheap price with retail staple properties and solid growth likely ahead. BUY

The Williams Companies, Inc. (WMB – yield 5.0%) – It’s a new high for this midstream company stock too. After going sideways for many months, WMB has broken out since the middle of February. Energy stocks are hot and midstream companies are mostly selling near multi-year highs. It’s a stable high-yield stock and the company should deliver solid and dependable earnings in just about any economy. Business remains solid and not dependent on commodity prices. It pays a well-supported dividend, and recent acquisitions and expansions ensure more solid growth going forward all the way out to 2028. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.5%) – After a subpar year in 2023 when the company suffered steeply falling revenues because of the Humira patent expiration, ABBV is up 13% YTD and 29% since late November. Although the ascent has petered and ABBV has gone sideways in March, investors are now looking toward the promising future as management expects moderate earnings growth this year and robust growth next year. ABBV has broken out of the old range to a new all-time high as investors are starting to price in the company turning the corner on the way to a bright future. BUY

American Tower Corporation (AMT – yield 3.3%) – AMT had been rallying after a bad start to the year until recently. It has been turning south for a couple of weeks. The reason is because the company cut the dividend by 4.7% to focus on debt reduction. It sounds worse than it is. It just lowered the dividend to the third-quarter level, which was the third quarterly increase of 2023. It’s dumb to negate the fourth-quarter increase, but the current dividend is still higher on a year-over-year basis. The reversal of the fourth-quarter hike is a headscratcher that shouldn’t affect the stock’s trajectory over the course of the year and AMT is recovering already. It’s still one of the best REITs on the market that deals in very high-quality properties. BUY

Broadcom Inc. (AVGO – yield 1.5%) – It’s back in business. After a rare pullback earlier this month, the infrastructure AI chipmaker soared over 10% in the last week. It also gained 5.6% last Thursday after announcing at a conference that it secured a new, large customer for its AI chips. AI revenue quadrupled in the last quarter and it is being speculated that the new customer is Amazon or Apple. AVGO has already gained back most of the earlier March losses and may be poised to make a new high. You can’t keep this one down for long in the current AI craze. HOLD

Digital Realty Trust, Inc. (DLR – yield 3.4%) – The data center REIT is pulling back in March. It’s down about 8% for the month after soaring 13% in just two weeks at the end of February. DLR can get knocked around in the short term with the technology sector, but the prognosis is still very good. The data centers will benefit from increasing AI spending, providing Digital with an additional growth catalyst that could last for years. DLR is still well below the all-time high made at the end of 2021 before the inflation bear market. But earnings and prospects are much better now. BUY

Eli Lilly and Company (LLY – yield 0.7%) – Even this healthcare juggernaut flirted with a pullback but has since recovered. LLY had fallen about 4.5% after the announcement that the FDA decision regarding approval of its high potential Alzheimer’s drug Donanemab will be delayed. A decision had been expected in the first quarter but will now likely be later in the year. But it’s just a delay and the stock is back on track. Lilly again killed on earnings and guided higher for 2024. The same great story is still very much in place. HOLD

Intel Corporation (INTC – yield 1.2%) – This chipmaker pulled back over the past week on news from China. The country announced they are phasing out American processors inside government computers. While Intel does generate 27% of revenue from China, the government only accounts for a low single-digit percentage. And China has issued similar decrees in the past that turned out to be nothing but bluster. Such news can push a stock down momentarily in the brutally competitive tech industry, but it is likely to be a yawner in the larger scheme of things. There are good days ahead as the bounty from the new AI chips and the foundry business gain traction. BUY

McKesson Corporation (MCK – yield 0.5%) – There’s nothing new to say about this stock. And that’s the beauty of it. MCK just continues to forge quietly higher while no one seems to notice. It’s been making a series of new all-time highs for the last year and just hit another one this week. It’s already up over 12% YTD while investors focus elsewhere. Earnings were stellar with 15% revenue growth and 12% earnings growth and McKesson raised guidance for 2024. The company dominates a market that grows all by itself because of the aging population. MCK continues to roll forward. It’s been in an uptrend since the pandemic. BUY

Marathon Petroleum Corporation (MPC – yield 1.7%) – This superstar refiner is on fire and keeps hitting new all-time highs. The energy sector has gotten hot and has been the second-best performing market sector of the past month as demand for refined products remains strong and oil prices are rising. MPC is up 41% since being added to the portfolio in November and 16% in March alone. The stock tends to post good performance even when the energy sector struggles. But with the tailwind of a strong sector, the performance is huge. The company is flush with cash from the boom times while robust profits continue to roll in. We’ll see if the rally has more to go. BUY

Qualcomm Inc. (QCOM – yield 1.9%) – Qualcomm is secretly one of the best semiconductor and AI stocks to own. It had been held back by cyclicality, both in semiconductors and smartphones. But the negative cycle is ending, and AI is coming to mobile devices. QCOM cooled off after a huge rally in which it had risen 22% YTD and 65% since late October. It looks like the mobile device chip maker will simply bounce around with the technology sector in the near term. A breather would probably be a healthy thing for the stock. But the rest of the year looks strong as Qualcomm is also introducing new AI chips for PCs and smartphones and is well positioned for the next phase of the AI craze. BUY

UnitedHealth Group Inc. (UNH – yield 1.5%) – This massive healthcare insurance stock plunged recently because of a cyber-attack on its Change Healthcare unit that is threatening the security of patient information. The hack is also disrupting functions like discharges and prescriptions. It’s sending ripples through the industry as hospitals are struggling with payrolls and delayed approval for patient services. Although these issues will likely prove temporary and UnitedHealth has made progress in restoring its systems, the disruption is still ongoing and the extent of the damage is still unknown. UNH has been downgraded to HOLD until there is more clarity on this bizarre issue. HOLD

Visa Inc. (V – yield 0.7%) – This payment processing global goliath is thriving. V has been making a series of new highs since early November. It’s still in an uptrend that began in the fall of 2022. V was slow to recover from the pandemic because the global economy lagged. But now it’s making up for lost time. It’s up 9% YTD and will likely continue rising slowly unless and until the economy tanks. Earnings last month beat estimates with upbeat guidance through 2024. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.0%) – This one-of-a-kind life science property REIT cooled off early this year after a big surge in November and December as the interest rate trade reversed. But ARE has been trending higher since the middle of February and has already made up most of the early-year losses. It is likely that interest rates have peaked and will trend lower throughout the year or at least just stay where they are. But that’s mostly just short-term noise. ARE is a great income stock selling at the low end of historical valuations while the company is consistently growing revenues and profits from its niche properties. I’m expecting a good year for ARE and a solid income. BUY

NextEra Energy (NEE – yield 3.3%) – NEE has been moving higher this month. After moving with the ebb and flow of other defensive dividend stocks late last year and early this year, it has moved back to the high before this year’s earlier selloff. It had been a superstar performer before inflation and rising interest rates. It provides both safety from its best-in-class regulated utility business and growth from its considerable clean energy business. The utility reported strong earnings that exceeded expectations again last month and reiterated its growth projections for this year, near the top of the estimated range. The interest rate-related weakness should at least diminish going forward as rates have likely peaked. BUY

USB Depository Shares (USB-PS – yield 5.4%) – The party isn’t over for fixed income. Rates have still peaked and may trend lower for the year. The price has soared from the low of late October and has provided a 20% total return since being added to the portfolio in October of 2022. After the worst two years ever for fixed income, this preferred issue is well positioned for a further rebound. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.9%) – Ditto for VCLT, as evidenced by the recent 20% price surge. This long-term bond fund is very sensitive to interest rates. It held up relatively well in the rising rate environment and now rates may continue to trend lower. If the economic strength lasts, VCLT should remain stable and deliver a strong income. If the economy weakens, and/or rates move lower, there should be more upside for the price. BUY

Xcel Energy (XEL – yield 4.2%) – The alternative energy utility had a terrible week earlier in the month. The stock crashed 14% after it was reported that Xcel could be held liable for damages for the raging Texas wildfire, which is the worst in the state’s history and encompasses a land mass larger than the state of Rhode Island. Several utilities have been held liable for wildfires in recent years. Xcel has admitted that its equipment was likely involved in igniting the blaze. This weird development is also ongoing, and the scope of the damage is not known. NEE was downgraded to a HOLD until there is more clarity on the matter. The stock has bounced higher since the initial decline and has held steady. HOLD

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