October 30, 2024

A Wild Week Ahead

It has been a great market for most of the last two years. But the bull run will be severely tested over the next couple of weeks.

The S&P 500 is within a whisker of the all-time high after rallying 22% YTD and over 60% in the past two years. The recent investor perception is that the Fed has begun a rate-cutting cycle that will last for two years, and the economy is still solid. That view will be put to the test this week.

This will be the busiest week of the quarter as numbers will be released regarding the economy (third-quarter GDP), inflation (the Fed’s preferred PCE), and October jobs. It is also the most intense week of earnings where 169 of the 500 S&P stocks report, including tech giants Alphabet (GOOG), Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Meta (META). Twelve Cabot Dividend Investor portfolio positions will also report earnings over the next week.

The economic numbers being reported can confirm or deny the current investor perceptions regarding the economy. They will also provide further insight into the next Fed moves. The big tech earnings will likely reveal whether this will be another big earnings season for technology and the AI catalyst or not.

But that’s just this week. Next week is the election. While the market has taken past elections very much in stride, with the exception of some brief volatility during the 2016 election, the potential for volatility is there. The market usually doesn’t care who wins, at least in the short term, but a disputed outcome could cause big trouble. We’ll see.

It is somewhat concerning that the market will face this huge barrage of headlines while perched at the high. Things have been good and might stay that way. But we should have a much better idea in a little over a week.

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 14.9%) Earnings – The mortgage REIT had a tough week as earnings disappointed and the stock fell 6.3% for the week. AGNC has 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 decline 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. Last week should be a blip in an otherwise positive story over the next several quarters. BUY

Brookfield Infrastructure Partners (BIP – yield 4.6%) – 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 about 40% 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. It should have the right stuff on the right side of the interest rate cycle and with highly defensive earnings. (This security generates a K-1 form at tax time). BUY

Enterprise Product Partners (EPD – yield 7.2%) – Although this steady midstream energy partnership has returned (between dividends and appreciation) over 15% YTD and is within a dollar of the 52-week high, it has been rangebound since the spring. The improving interest rate situation has reignited previously beleaguered REITs and Utilities, and those sectors have gotten most of investors’ attention. Midstream energy companies are not being seen as a turnaround because they have been performing well all along. Still, EPD has not had the recent move higher that many of its peers have had. Despite the lack of recent upside, EPD pays the highest yield, and the stock has been very steady. (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 strong job numbers and current perception of a solid economy going forward. It owns a portfolio of small companies that tend to be vulnerable during a recession but kick butt when the economy is humming. 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 prevailed. The stock should continue to deliver if the economy stays out of trouble. HOLD

Main Street Capital Corporation (MAIN – yield 5.6%) – Ditto on just about all the FSK spiel for this BDC. MAIN is back in business and just made a new high last week. It took a hit in early August from the temporary recession scare but it has recovered and been trending higher since. Solid earnings and reduced recession fears are leveling the stock. The BDC reiterated its monthly dividend of $0.245 per share for the rest of the year and announced an additional $0.30 per share supplemental dividend that was paid in September. The good performance should continue if the economy stays away from a recession. HOLD

ONEOK Inc. (OKE – yield 4.1%) – This midstream energy company stock continues to deliver terrific performance. It’s up 40% YTD and over 20% since early August. It dipped in late September but has since recovered all that and then some and made a new all-time high last week. The main recent upside catalyst is the soon-to-be accretive acquisitions of Enlink Midstream (ENLC) and Medallion Midstream. The deal will boost earnings over the next year and the market loves it. The company reports earnings this week and can hopefully get a further boost. HOLD

The Williams Companies, Inc. (WMB – yield 3.7%) – This midstream energy company stock made yet another new high last week. Without a lot of fanfare, WMB has returned over 50% YTD. It’s also up 13% in the last month. 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. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.3%) – This cutting-edge pharma company stock had leveled off and returned nothing for the two months. But it had a big surge to a new high before then and it didn’t pull back. That was encouraging because ABBV typically trades in a range and pulls back after a surge. It has only pulled back minimally. But the longer-term prognosis is still strong. Investors are increasingly confident in the company’s ability to replace the lost Humira revenue. ABBV is getting through this year in spades ahead of greener pasters next year when management expects the company to return to “robust growth.” HOLD

American Tower Corporation (AMT – yield 2.9%) – This cell tower REIT was red-hot, but it has pulled back over the past month. AMT had been in an uptrend that lasted from May to early September where it rose more than 40%, but it has dropped over 10% since. A cool-off period after such a rise is normal, especially when the REIT sector is taking a bit of a hit. The prognosis looks bright as customers are being added to existing towers and the properties continue to expand in the U.S. and overseas. American Tower also raised guidance for 2024. The company reports earnings this week. BUY

Broadcom Inc. (AVGO – yield 1.2%) – It’s a big week for tech earnings. By this time next week, we will likely know if AVGO will get a big bump this quarter or not. This AI powerhouse was kind of bouncing around and going nowhere since the announcement of a 10-for-1 stock split in June. But it has been trending slightly higher since early September. The AI trade had cooled off last quarter, but it might be getting hot again. Nvidia (NVDA), the direction of which AVGO usually mimics, has rallied over 15% in October. The rise in chip stocks ahead of earnings is an encouraging sign. BUY

Cheniere Energy, Inc. (LNG – yield 1.0%) – I like what I’m seeing. Yeah, LNG has been bouncing and hasn’t done much since being added to the portfolio. But the trend has been higher for months. 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 0.5%) – This nuclear energy provider has become a star. It has already returned 35% in the two months it has been in the portfolio. CEG had a huge one-day 22% move higher after it was announced that Microsoft (MSFT) made a deal with Constellation to buy electricity generated from a future reopening of the Three Mile Island nuclear plant in Pennsylvania. But the stock has maintained the higher level. The deal will add to its projected double-digit earnings growth in the years ahead. Also, the electricity demand growth and technology companies’ desire for carbon-free nuclear power is getting a lot of investor attention. Future increases in business from other big technology companies are now more likely. HOLD

Digital Realty Trust, Inc. (DLR – yield 2.7%) Earnings – WOW. This was an earnings report that went well. DLR is up over 11% since the earnings report last Thursday and has now returned over 62% since being added to the portfolio 14 months ago. 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%) – LLY has been wallowing in oblivion for months now. It did recover from a big dip in July, and it is up 52% YTD. It made a lofty new high and maintained it without even consolidating. But LLY has stalled. Perhaps the earnings report this week will get it moving again. The prognosis is still excellent as its leading weight-loss and type 2 diabetes drugs are still just near the start of their global market penetration. Analysts currently forecast 73% annual earnings growth for Lilly for the next five years. BUY

McKesson Corporation (MCK – yield 0.6%) – It’s been a rough three months for this one. MCK is down 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. Fear of this quarter’s earnings has kept MCK down. Those earnings will be reported next week. It could get a relief rally if they aren’t as bad as expected. BUY

Qualcomm Inc. (QCOM – yield 2.0%) – This semiconductor giant stock is well down from the peak in June. It is currently down 25% from the 52-week high. But the stock has leveled off over the last two months and QCOM is still up 25% YTD. The AI trade lost a lot of its luster last earnings quarter. But there are signs that this quarter could be much better. We should have a better idea if that’s the case after this week. Qualcomm is still very well positioned ahead of the next wave of AI, which should be in mobile devices. Analysts are forecasting a strong upgrade cycle for smartphones sometime next year and QCOM can easily make up for lost time when it gets hot. Qualcomm also reports earnings next week. 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. But those 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 4.3%) Earnings – The life science REIT also had a tough week. It fell over 8% for the week after earnings disappointed. It was a mixed picture as revenue soared 10.9% and net operating 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 have to fund debt at higher rates. But the occupancy rates remain strong, and interest rates should be trending down from here. We’ll see if the REIT can continue rebounding this week. HOLD

NextEra Energy (NEE – yield 2.5%) – This combination regulated and clean energy utility reported earnings last week. NEE has been bouncing around but mostly falling over the last week. 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 over 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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