November 27, 2024

The March of the Cyclicals

After a brief dip following the post-election euphoria, the market is right back to a new high.

So far, the promise of stronger economic growth is more than offsetting the likelihood of higher interest rates for longer. As a result, new sectors have emerged as market leaders. Cyclical sectors have taken off. The financial, energy, and consumer discretionary sectors are leading the market. Those sectors are up 9.3%, 5.7%, and 8.6% respectively in the three weeks since the election.

The cyclical stocks in the portfolio are killing it. Midstream energy companies Enterprise Product Partners (EPD), ONEOK (OKE), and The Williams Companies (WMB) were on a tear until pulling back on Monday. Natural gas exporter Cheniere Energy (LNG) is up 14% since the election. And homebuilder Toll Brothers (TOL) had a big day on Monday after it was reported homebuying activity jumped in October.

Of course, other portfolio stocks haven’t been as thrilled about the election. Healthcare stocks came under pressure because of trepidation over the RFK Jr. nomination. He’s threatened to bring the hammer down on drug prices and may change other policies. However, the sector has been recovering as investors sense a possible overreaction by the market.

Interest rate-sensitive sectors, utilities and real estate, initially recoiled after the election and the increased likelihood of higher rates for longer. But those stocks are still relatively cheap and have leveled off over the past couple of weeks.

The market is right back up to the high with new leadership, which is a healthy thing. Of course, it may take a while before the higher growth potential is realized. But for now, investors are rolling with it. Markets that are this strong this late in the year tend to finish the year strong.

As a reminder, the monthly Cabot Retirement Club video will be today, Wednesday at 2:00 pm, because Thursday is Thanksgiving. Please join me and I will try to make it worth your time.

Have a happy Thanksgiving!

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. – Rating change – “BUY” to “HOLD”

High Yield Tier

AGNC Investment Corporation (AGNC – yield 14.8%) – The mortgage REIT pulled way back from the near high in October as the interest rate prognosis pointed to higher rates for longer. But the mortgage REIT has been trending higher in November. Although interest rates are likely to trend lower over the next year, the still-high rates are diminishing profitability. The deterioration of the interest rate story in more of a short-term issue. The stock is still on track for improving performance over the next year. The stock is up over 6% in November and hopefully will continue trending higher. 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%) – The price of this liquid natural gas exporting partnership doesn’t move much because the security is mostly about the quarterly payout. But it has been on fire since the election, up 11.5%. 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 6.5%) – The good times are rolling. Energy stocks have been on fire since the election and midstream energy companies are benefiting, although they pulled back Monday because oil prices fell. The anticipation of a much more fossil fuel-friendly administration is being seen as an unambiguous positive for the whole sector. EPD had been wallowing around since early spring, but it has soared to a 52-week high and the highest price in more than nine years. EPD is up 15% in November and has returned over 30% YTD. (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. The prognosis just got better going forward. FSK is mostly about the huge dividend, but the price has moved up over 8.5% 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, especially after the recent price increase. 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. At the same time, not only does it yield 5.3% based on the regularly scheduled monthly dividend, but the yield is also 7.6% if you include the supplemental dividends. BUY

ONEOK Inc. (OKE – yield 3.6%) – This midstream energy company stock kept moving higher into the stratosphere until Monday, when it was down 4.72% for the day. The market loved the recent acquisitions of Medallion Midstream and a controlling interest in Enlink Midstream (ENLC), as the new additions will be accretive immediately. Yesterday ONEOK announced it is buying the remaining shares of ENLC for $4.3 billion.

But this deal will involve OKE shares and will dilute shares by about 6%. It’s still a good deal but the market won’t accept less-than-perfect news on a stock that had been up 16% in November and 65% YTD. 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 3.3%) – The red-hot midstream energy stock pulled back on Monday as well, although not as much as OKE. There doesn’t seem to be any reason for the pullback in midstream stocks other than OKE except the fact that they were riding so high they were due for a comeuppance. WMB had returned 70% YTD and 11% in November. When stocks are this hot the cool-off is more dramatic. 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 3.7%) – Healthcare stocks have been struggling for the last few weeks on fear of what RFK Jr. might do as head of Health and Human Services. ABBV crashed over 12% earlier this month after it reported that its Schizophrenia drug flopped in phase II trials. The company had high hopes for the drug. AbbVie acquired Cerevel Therapeutics for $8.7 billion in August and this drug was a big part of the reason for the purchase. But that’s life with big pharma. ABBV is getting through this tough year with flying colors ahead of greener pastures in the years ahead. ABBV has bounced nicely off the low in the past couple of weeks and just got a new analyst upgrade. HOLD

American Tower Corporation (AMT – yield 3.1%) – This cell tower REIT is bouncy. It trades in a wide range, but one that has been featuring higher highs and higher lows. AMT had a big dip in September and October after a price spike in the spring and summer, as it had done earlier in the year after a late 2023 price spike. But it has been trending higher again over the past few weeks. It’s a growth business as cell tower demand will only grow 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 in a few weeks, 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 53% YTD. BUY

Cheniere Energy, Inc. (LNG – yield 0.9%) – This liquid natural gas (LNG) exporter is benefiting bigly from the Trump election. LNG is up over 14% 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 forecast 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 regulatory environment should be a lot friendlier as the new administration will encourage LNG exports. BUY

Constellation Energy Corporation (CEG – yield 0.6%) – This nuclear energy provider has returned 118% YTD and 34% in the three 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 regulatorily friendly administration and provides renewed hope of more deals. HOLD

Rating change – BUY” to “HOLD”

Digital Realty Trust, Inc. (DLR – yield 2.5%) – This data center REIT had a positive earnings report in October and the stock hasn’t looked back since. DLR is up 23% since early October and 46%YTD. It wasn’t that the earnings were so good, although they were solid. It was the company’s statement indicating that demand is booming because of AI. That bodes very well for future earnings and the stock price. The main story is that data center properties are a high-growth business. DLR has moved up very high very fast and has moved above the ideal buy price. It is downgraded to a HOLD on price alone. 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. But the selling accelerated as the nomination of RFK Jr. for HHS Secretary spooked the sector and Lilly in particular. He has expressed skepticism about weight-loss drugs as well as overall drug pricing.

The weight-loss drug is likely just emerging from the initial euphoric stage. But it is still a likely mega-blockbuster. The RFK stuff may be an overreaction. It’s hard to say at this point. But regardless, this is still a company on track to grow earnings around 70% per year in the years ahead. Investors are coming around and LLY is up 7% in the last week. BUY

McKesson Corporation (MCK – yield 0.5%) – McKesson is simply a pharmaceutical distributor and is less affected by possible new HHS policies in the new administration. But the healthcare sector weakness has been enough to quell the stock’s ascent. It was on fire and leveled off in November. Earnings were strong and the company raised guidance for next year. It looks like the stock is back in business and ready to continue reflecting the fact that 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. But 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%) – TOL soared over 6% as homebuilder stocks had a big day on Monday after it was reported that housing starts were up 3.4% in October. It was the first time the number moved higher in years. There were also encouraging statements by one of the Fed people about inflation. TOL is up over 9% since the election as the expectation of a stronger economy is counterbalancing the spike in mortgage rates. The main event for TOL over time is the fact that there is a short supply and massive pent-up demand for new homes. The central reason to buy this stock got better with the election. 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. 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 mildly concerned. BUY

Safe Income Tier

NextEra Energy (NEE – yield 2.7%) – Things were bad for NEE. Then they got very good. Now, things 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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