November 6, 2024

Trump Wins

The election is over. The biggest risk, a disputed outcome, has been avoided. The new President is being viewed by markets as generally good for business and stocks. The market is thrilled today and rallying substantially.

The post-election rally comes in two parts. One part is the removal of a huge uncertainty that held back stocks. The other is the general perception that Trump will be positive for the market while Harris represented no change. At least that is what the market seems to be saying in the immediate reaction to the election.

The election reaction is initially a big positive for the “risk-on” trade. The top performing sectors are Financials, which anticipate less regulation and possibly a more vibrant economy, and Energy, which see a much friendlier regulatory environment and a more bullish prognosis for the U.S. and global economies. The worst-performing sectors are defensive and interest rate-sensitive stocks. The economic prognosis got better but the interest rate situation got worse.

The Trump policies are being viewed, at least initially, as a detriment to lower interest rates. The benchmark 10-year Treasury rate is soaring in initial trading on Wednesday, up to 4.46%. The rate had been as low as 3.35% in September. Also, investor anticipation of the Fed’s aggressiveness in lowering rates is greatly diminished. The market sees a more adversarial relationship between the administration and the Fed, with the Fed less likely to accommodate the markets, and policies that will be more inflationary.

The market had been wavering between anticipation of a slower economy with lower interest rates and a strong economy with still-high rates. The strong economy scenario got a huge shot of adrenaline, and interest rates are behaving accordingly.

Of course, all of this is just the initial reaction to the election. Initial market assumptions often prove incorrect. In fact, sectors in recent presidencies have performed the opposite of what had initially been expected. Gun stocks soared during the Obama presidency. Clean energy stocks had huge gains during Trump’s first administration. Fossil fuel stocks had a huge resurgence during the Biden years.

We’ll see how the market behaves after it fully digests a Trump victory. But for right now, it’s “risk on” and lower interest rates off.

Recent Activity

October 9
Purchased Toll Brothers, Inc. (TOL) - $151
Constellation Energy Corporation (CEG) – Rating change “BUY” to “HOLD”
Alexandria Real Estate Equities, Inc. (ARE) – Rating change “BUY” to “HOLD”

High Yield Tier

AGNC Investment Corporation (AGNC – yield 15.4%) – The mortgage REIT had a tough couple of weeks after earnings disappointed. AGNC is down 10% since the report. The price had been running up toward the high and any kind of disappointment was bound to hit the stock. Costs were higher and the net spread shrank from last quarter. However, those represent short-term issues while the longer-term trend of lower rates should be very good for the stock as costs reduce and the book value increases. AGNC still earned $0.63 per share, easily covering the $0.36 in quarterly dividends. Also, book value increased by 5% over the quarter. Although the outlook is very positive, results need to catch up. BUY

Brookfield Infrastructure Partners (BIP – yield 4.8%) – This infrastructure behemoth is finally getting some lasting upside traction. BIPC hit a new 52-week high this month. After struggling mightily for what seemed like forever, BIP is up over 35% 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 in the quarters and years ahead. Brookfield is also highly recession-resistant should that come about. The partnership reports earnings this week. (This security generates a K1 form at tax time). BUY

Enterprise Product Partners (EPD – yield 7.2%) Earnings – The midstream energy partnership reported earnings last week that were solid as usual. EPD has moved slightly lower since. Earnings (adjusted funds from operations) were up 4% and distributable cash flow grew 5% over last year’s quarter. The distribution was raised 5% over the past year and cash flow covered the distribution with 1.7 times coverage and a 56% payout ratio, among the best such numbers in the industry. Enterprise also added over a billion dollars in new projects and has a strong backlog of future projects. The company set five volume records for the quarter. Nothing thrilling, but it’s all good. (This security generates a K1 form at tax time). BUY

FS KKR Capital Corp. (FSK – yield 13.5%) – FSK is getting some strength from the current perception of a solid economy going forward. It owns a portfolio of small companies that tend to be vulnerable during a recession. This ultra-high-yielding Business Development Company went ex-dividend last month and the price barely moved. 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. But the upside momentum met that downside catalyst head-on and greatly mitigated the damage. The BDC reports earnings later this week. HOLD

Main Street Capital Corporation (MAIN – yield 5.8%) – This BDC recently made a new high but has pulled back over the past week. It took a hit in early August from the temporary recession scare but it has recovered and been trending higher since the economic prognosis got better. Reduced recession fears are leveling the stock. The BDC reports earnings this week. The good performance should continue if the economy stays away from a recession. HOLD

ONEOK Inc. (OKE – yield 4.1%) Earnings – The midstream energy company reported earnings that missed estimates this last week. OKE pulled back initially but has since regained ground and then some. Although profits fell slightly short of expectations, they still grew 19.2% over last year’s quarter and ONEOK raised guidance for the year. The main event is still the recent acquisitions of Enlink Midstream (ENLC) and Medallion Midstream which are expected to close in the fourth quarter and be accretive to earnings right away. The stock is back to within pennies of the high. HOLD

The Williams Companies, Inc. (WMB – yield 3.6%) – It’s another day and another high for this midstream energy company stock. Without a lot of fanfare, WMB has returned about 60% YTD. Midstream energy companies continue to outperform because they have little commodity price exposure and offer a high income in an uncertain market. Williams guided to the upper half of 2024 estimates and is still in an uptrend that began in the middle of February. William also reports earnings this week. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.3%) Earnings – This cutting-edge pharma company stock reported earnings last week and revenues beat estimates while earnings lagged. Revenue grew 3.8% while earnings per share were $0.88 versus $1.00 for last year’s quarter. The shrinking earnings aren’t a big surprise as Humira revenue is yet to be replaced. But the other drugs continue to grow, strongly on track to replace the lost revenues and then some. In fact, analysts expect the company to grow earnings by an average of 21% over the next three years. ABBV is getting through this tough year with flying colors with a 35% year-to-date return ahead of greener pastures in the years ahead. HOLD

American Tower Corporation (AMT – yield 3.1%) Earnings – This cell tower REIT reported earnings that beat expectations but lowered guidance for the full year. AMT is down over 4% in the last week. The company attributed the reduction in the yearly forecast to the sale of one of its subsidiaries as well as lower spending by major telecom providers amid an uncertain economy. It was a disappointment for a stock that had been riding high not long ago. But the trend for cell tower demand remains strong and things should trend higher over time. BUY

Broadcom Inc. (AVGO – yield 1.2%) – This infrastructure technology Goliath isn’t far from the high but is still at the same price it was near the beginning of the summer. It also hasn’t been a great earnings quarter for technology so far. The market seemed more worried about the cost side of artificial intelligence with the major investments. However, the more AI-exposed companies like Nvidia (NVDA) still haven’t reported. It could still turn out to be a big quarter for AI stocks. The price movement since October has been encouraging. The longer-term situation is great, and we will have to wait and see if AVGO gets a near-term boost. BUY

Cheniere Energy, Inc. (LNG – yield 1.1%) Earnings – The liquid natural gas exporter reported earnings last week. Revenues were in line with expectations and earnings beat consensus by 111%. Both revenue and earnings are down from last year’s quarter as prices and margins have fallen. But the low prices are likely to be temporary, and the consensus expectation is for Cheniere to grow revenue at an average of 11% over the next three years compared to forecast revenue growth of 2.8% for the oil and gas industry over the same period. LNG is up 6% since the report and 15% year to date.

LNG, and just about all energy-related stocks, can live and die in the near term on the fortune of energy prices. But the longer-term trajectory should be higher as the world will continue to demand U.S. natural gas and Cheniere is the largest exporter. LNG might bounce around. But the trend is on its side. BUY

Constellation Energy Corporation (CEG – yield 0.6%) Earnings – CEG fell over 12% on Monday but has recovered about 4% by midday on Wednesday. The nuclear power company reported earnings Monday morning but that isn’t why the stock fell. Results were better than expected with stellar earnings growth of 28% and revenue growth of 7% over last year’s quarter. Guidance for 2024 was also raised. But Nuclear energy stocks plunged after the Federal Regulatory Commission shot down Amazon’s (AMZN) recently announced nuclear deal with Talen energy (TLN).

The decision is a sign that attempts by tech companies to hook up data centers directly to sources of power could face obstacles from regulators. Constellation’s Microsoft (MSFT) deal wasn’t mentioned but the news has a chilling effect on the potential for more deals going forward. The story is unfolding, and I will keep you posted. HOLD

Digital Realty Trust, Inc. (DLR – yield 2.7%) – Digital Realty had an earnings report that went well. DLR soared over 11% in the days following but has since pulled back a few dollars and has leveled off. 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. Tech companies are forecast to invest $1 trillion in data centers over the next five years to accommodate AI. BUY

Eli Lilly and Company (LLY – yield 0.6%) Earnings – The superstar drug company finally laid an egg with its earnings report last week. Sales of its new weight-loss drug Zepbound were far lower than expected. The company also slashed earnings guidance for the year and lowered the high end of revenue guidance. The stock is down 11% since last week’s report and about 18% from the high. What does it all mean?

It isn’t clear. It may be the end of the hype period for weight-loss drugs, and we need to see what the more normalized market will be going forward. It’s also unclear if approvals for new applications can offset the reduced revenue expectations. We will have to wait and see. But a company that is still up 38% YTD and 204% over the last three years has finally stumbled a bit. It is still expected to earn over 70% per year over the next five years and has more high-potential drugs in the pipeline. BUY

McKesson Corporation (MCK – yield 0.5%) – It’s been a rough three months for this one. MCK had fallen over 20% from the early August high. Unfortunately, supply issues with Novo Nordisk’s (NVO) weight-loss drug are a problem for this pharmaceutical supply chain company. Earnings disappointed with lower-than-expected revenues last quarter and the company cited weight-loss drug supplies that couldn’t keep up with demand as the main cause. A recent report indicates that it could be more of the same for McKesson in this quarter. Fears of this quarter’s earnings have kept MCK down. Those earnings will be reported this week. It could get a relief rally if they aren’t as bad as expected. MCK has already bottomed out and moved 9% higher over the last month. BUY

Qualcomm Inc. (QCOM – yield 2.1%) – This semiconductor giant stock continues to bounce around with no clear direction. It is currently down nearly 30% from the 52-week high. But the stock has leveled off over the last two months and QCOM is still up 17% YTD. Qualcomm is still very well positioned ahead of the next wave of AI, which should be in mobile devices. The jury is still out on the earnings quarter with respect to AI stocks. Qualcomm reports earnings this week, and other bellwether stocks report later in the month. After this week, we should have a better idea if QCOM will get a bump soon or we will have to wait longer. BUY

Toll Brothers, Inc. (TOL – yield 0.6%) – This new-addition homebuilder company stock pulled back from the high over the past week as mortgage rates spiked higher, although it has moved higher this week. Mortgage rates are still more likely to trend lower in the quarters and years ahead. The main event for this stock over time is the fact that there is a short supply and massive pent-up demand for new homes. Sure, the market and the stock can always bounce around in the near term, but the strong trends are highly likely to result in good performance for this stock over time. TOL also sells at a cheap valuation despite the strong YTD performance. BUY

UnitedHealth Group Inc. (UNH – yield 1.5%) – The health insurance behemoth stock had a nice move higher since July. But it has been a sideways slog since. UNH stumbled earlier this month after reporting earnings that the market didn’t like. UnitedHealth shares plunged after the company’s forecasts for 2024 and 2025 fell short of investors’ expectations. The numbers are only slightly below what was expected, and this company tends to outperform forecasts. But the company cited higher medical expenses and stricter federal reimbursement levels for the shortfall. But UNH has stopped falling and it has leveled off. BUY

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.6%) – The life science REIT also had a tough few weeks after earnings disappointed. It’s down 10% since. It was a mixed picture as revenue soared 10.9% and net operation income rose 12.5% but funds from operation increased only 4.9%, which was less than expected, as funding costs rose. The higher interest rates are catching up as companies must fund debt at higher rates. But the occupancy rates remain strong, and interest rates should be trending down from here. High rates are biting now before the impact of lower rates in the future is realized. It’s like AGNC except ARE was sucking wind before earnings. HOLD

NextEra Energy (NEE – yield 2.6%) – This combination regulated and clean energy utility reported earnings two weeks ago and has been bouncing around since. It moved higher at first but then pulled back. Revenues were below estimates but strong earnings beat expectations. The company expects to deliver 10% average earnings growth over the next several years. It also stands to benefit from the increased electricity demand from AI and data centers, which will favor clean energy sources. The stock has recovered from the funk during rising rates and inflation. Now, it has an additional catalyst it didn’t have last time it delivered market-beating performance. BUY

USB Depository Shares (USB-PS – yield 5.2%) – The environment is still very 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 will probably 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, and the price and total return are moving up. The position has returned 30%. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.7%) – 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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