September 4, 2024

Welcome to September

It’s the post-Labor Day market. Investors tend to start paying attention again after the summer. This refocus prompted one of the worst selloffs this year.

Investors were positive about things in the middle of August before they went on vacation and stopped paying attention. The market rode out the rest of the month in the same form. But investors coming back to real life after the summer realized that there might be more to worry about.

There appears to still be some worry about a recession. That concern seemed to fade away in August but is returning post summer. All eyes are on the August jobs number, which comes out on Friday. It was the weak July jobs number that prompted recession fears and the market selloff in early August. Another bad number could reignite recession worries.

The market has also shown vulnerability to headline risk. And that risk is likely to grow as the election heats up, the two wars are still raging, and economic numbers could indicate a steeper slowdown than expected. It’s also September, historically the worst month of the year.

But all of these things were already known. There isn’t really any news. Jobs reports come out every month. Recession was unlikely but on the radar and stocks were high and showing vulnerability to headlines weeks ago when the market was partying hard. It appears mostly seasonal at this point. Investors came back from the summer malaise in a “risk-off” mood, as they have often done in the past.

Although the market got hammered on Tuesday, the selling was mostly driven by technology and particularly AI stocks. Defensive and interest rate-sensitive stocks in sectors including Consumer Staples, Real Estate, Utilities, and Healthcare were actually trading higher most of the day.

We’ll see if the selling lasts and if the job numbers confirm or deny the pessimism. But investors are starting September with a clear preference for defense and an expectation that interest rates will continue moving lower.

As of now, the bad start to September doesn’t change things. There is a good chance that stocks finish the year higher than they are now. But more volatility is to be expected. Unless the jobs number really stinks up the place, stocks should regain some traction. But there are likely to be more down days in the months ahead even if the overall direction of the market is solid.

Recent Activity

August 7
FS KKR Capital Corporation (FSK) – Rating change “BUY” to “HOLD”
Main Street Capital Corporation (MAIN) – Rating change “BUY” to “HOLD”
Eli Lilly and Company (LLY) – Rating change “HOLD” to “BUY”
Visa Inc. (V) – Rating change “HOLD” to “SELL”

August 14
Purchased Constellation Energy Corporation (CEG) - $182

August 28
Qualcomm (QCOM) – add 2/3rds to position

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.0%) – This infrastructure company stock has come back to life. After a couple of years of poor performance amid inflation and rising interest rates, BIP is returning to its historic good form as those trends reverse. It made a huge move in July, leveled off somewhat through most of August, but recovered and just made a new 52-week high. It’s now up more than 30% since early April. BIP had been a stellar performer for many years prior to inflation and rising interest rates. But now interest rates are moving significantly lower, and the main threat is now a recession. That’s in Brookfield’s wheelhouse as its crucial assets are highly recession resistant. (This security generates a K-1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 7.2%) – This steady midstream energy partnership bent a little but didn’t break in the recent market turbulence. EPD has gone sideways since April but it has still returned over 16% YTD, after two stellar years in 2022 and 2023, and is back to within pennies of the 52-week high. You can slow it down or temporarily interrupt EPD. But its consistent snail-like ascent endures and inches on. Enterprise reported earnings that were solid, up 12% over last year’s quarter. The distribution is also 5% higher than a year ago and there is still an industry standout 1.6 times distribution coverage with cash flow. (This security generates a K-1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 13.8%) – This ultra-high-yielding Business Development Company is also recovering from the recession scare that caused it to be downgraded to a HOLD. FSK also goes ex-dividend in early September. Because the payout is so massive, the date will cause a drop in price. But it appears, at this point, that the recession worry is overblown. While recession is still on the radar, it might be a long way off and that huge payout from FSK should be highly desirable in a more sideways market over the next few months. HOLD

Main Street Capital Corporation (MAIN – yield 5.8%) – This BDC confirmed the monthly dividend of $0.245 per share for the rest of the year and announced an additional $0.30 per share supplemental dividend payable in September. The BDC also has a lot of small business exposure, which is problematic during recessions. The stock got knocked back with the recession scare early this month when it was downgraded to a HOLD. But it has been creeping back higher as recession worries wane. MAIN was down less than 3% in August after having been in an uptrend since last fall. A recession would certainly change the dynamics. However, solid earnings and reduced recession expectations are resulting in the stock regaining lost ground. HOLD

ONEOK Inc. (OKE – yield 4.3%) – The prognosis for this midstream energy company changed for the better over the past week. ONEOK announced $5.9 billion in acquisitions of two companies, pipeline company Enlink Midstream (ENLC) and Medallion Midstream. The deals are expected to close in the fourth quarter and be accretive to earnings immediately. The company conservatively expects a 5% jump in earnings and a 15% increase in cash flow through 2028. It greatly adds presence in the high-growth Permian Basin and adds predictable fee-based business. The market likes the deal as the stock jumped over 4% in the couple of days following the announcement. BUY

The Williams Companies, Inc. (WMB – yield 4.2%) – This midstream energy company continues to impress. It’s remarkably stable during market selloffs, yet it still performs well in an up market with a YTD return of 30%. It is still within pennies of the high made last week. WMB moves with the overall energy sector amid volatility in the near term like the other midstream stocks, but it is quicker to return to form. An escalation of tensions in the Middle East could send the energy sector higher and Williams guided to the upper half of 2024 estimates. WMB is still in an uptrend that began in the middle of February. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.2%) – The stock of this cutting-edge Pharma company has gotten hot. It just made a new high this week despite the down market and is within a whisker of 200 per share. It’s up 27% YTD. But this is a tough year with falling revenues from the Humira patent expiration. Newer drugs Rinvoq and Skyrizi are killing it with a combined $4 billion in revenue for the last quarter. It is highly encouraging that ABBV is performing well in a year this was expected to be tough with shrinking revenues with greener pastures ahead. AbbVie is well on track to replace the Humira revenues and return to robust profitability next year. BUY

American Tower Corporation (AMT – yield 2.9%) – This red-hot cell tower REIT cooled off in August after a big surge in July. But AMT is still in an uptrend that began in April. Earnings were solid and the stock is still higher than it was at any point, besides July, since January 2023. The prognosis looks bright as customers are being added to existing towers and the properties continue to expand in the U.S. and overseas. It also raised guidance for 2024. Likely lower-trending interest rates and the continuing expansion of mobile device data demand bode well for the REIT in the year ahead. BUY

Broadcom Inc. (AVGO – yield 1.3%) – Well, Nvidia beat expectations but the stock has fallen 14% since. Part of that is the down market this week that is hitting just about everything, especially the high flyers. The other part is that when a company becomes so highly valued it can’t just beat expectations, it needs to blowtorch them. AVGO is taking a hit too, although not as bad. It may be signaling the end of the initial AI hysteria. Broadcom reports earnings tomorrow (Thursday). They will likely be good but it remains a question whether the stock can buck the current trend and get a boost. We’ll see. HOLD

Cheniere Energy, Inc. (LNG – yield 0.9%) – Earnings were solid but natural gas prices have fallen. The recent price decline reflects the lower natural gas prices and the pressure that could add to margins. However, the price dip is likely to be temporary. The unpredictable weather and geopolitical tensions could ratchet prices higher in a hurry. The world still needs U.S. natural gas. Although the price can bounce around with gas prices in the near term, LNG exports continue to grow. BUY

Constellation Energy Corporation (CEG – yield 0.7%) – This nuclear power provider and newest portfolio addition is showing strength again and the electricity demand story gains traction. It had pulled back after a big surge and a high in May but recovered in August. The stock is up 71% YTD for a reason. It will likely benefit as much as any other electricity provider from the increased electricity demand. Nuclear offers uninterrupted carbon-free electricity and climate-conscious technology companies are making it a priority. BUY

Digital Realty Trust, Inc. (DLR – yield 3.2%) – The data center REIT had pulled back from the high in July after a big surge. But it has leveled off and moved slowly higher since and is still in an uptrend that began in April. DLR was going strong when other REITs were struggling and now the sector is in a much better position as interest rates are likely to move lower. But the main story is the data center properties that 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 0.5%) – Looking good! This superstar Pharma company stock made a new high just a few sessions ago and has outperformed most “magnificent seven” stocks over the past few years. LLY also barely budged during Tuesday’s market selloff. The earnings report absolutely killed it and guidance was raised by many billions as the weight loss drug continues to do incredible business while the other drugs aren’t too shabby either. It’s up 63% YTD. It also has a likely blockbuster in the newly approved Alzheimer’s drug. It’s expensive from a valuation standpoint but the growth justifies it. BUY

McKesson Corporation (MCK – yield 0.5%) – The pharmaceutical supply chain powerhouse certainly stumbled. It fell double digits after the disappointing earnings report in July. Earnings were strong but revenues were less than expected as weight loss drug supplies couldn’t keep up with demand. The business is still strong and growing but when a company whose stock has performed so well disappoints the market is unforgiving. But MCK appears to have resumed its uptrend again and actually had a good day during Tuesday’s market selloff. I expect MCK to post solid returns between now and the end of the year. BUY

Qualcomm Inc. (QCOM – yield 1.9%) – After stumbling badly in the second half of June and July, the chipmaker stock had been moving higher since, until getting clobbered on Tuesday. The selloff did come after a huge surge earlier this year and QCOM is still solid YTD. Qualcomm crushed earnings forecasts for the June quarter and guided higher for the September quarter. But the stock fell on the day of the announcement on concerns about weaker-than-expected smartphone sales predicted for the December quarter. But the upgrade cycle is likely coming sometime next year. Qualcomm is well-positioned ahead of the next wave of AI, in mobile devices, and should benefit mightily in the year ahead. BUY

UnitedHealth Group Inc. (UNH – yield 1.4%) – What post-Labor Day selloff? UNH just made a new high while the rest of the world is going to Hell in a handbag. UNH soared over 20% since early July. It leveled off for a while but has regained the initiative. Earnings reinvigorated the stock. UnitedHealth beat earnings forecasts as it added more patients and pharmaceutical customers despite a continuing negative effect on profits from the February cyber-attack. UnitedHealth also reaffirmed previous guidance for 2024. It’s well positioned in a slowing economy as a highly defensive stock. BUY

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.3%) – After hitting a 52-week low last month, ARE leveled off and then had a nice move higher. While the other REITs were living it up in the falling interest rate environment, ARE floundered. Although earnings were basically solid and Alexandria reiterated previous guidance, it missed on revenue. However, earnings were only up 5.4% while revenues jumped 7.4%. The lease rates were solid, and Alexandria reported a healthy number of acquisitions. It stumbled after a big surge higher after the earnings report, but the defensive characteristics may serve ARE well going forward with the slowing economy. BUY

NextEra Energy (NEE – yield 2.6%) – The regulated and alternative energy utility stock continues to look strong and is within a dollar of the 52-week high. The previously superstar performer had a rough time with inflation and rising interest rates but has come back strong, even before the overall utility sector, which is one of the best performing market sectors this year. It is a highly defensive utility, and the recession fears make NEE more desirable. NextEra forecasts revenue growth of 8.3% per year over the next three years, compared to average growth of 4.7% for the electric utility group. There is also growing anticipation of a steep acceleration in electricity demand in the years ahead prompted by manufacturing, electric vehicle growth, and increasing data center electricity demand because of AI. Renewable demand is expected to grow the most. HOLD

USB Depository Shares (USB-PS – yield 5.3%) – Wow, falling interest rates and maybe no recession. 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 is moving up. The position has returned over 25%. 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. There could be some default issues in the event of a recession, but the fund is highly diversified and will benefit greatly from lower rates as well. BUY

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