A Rally That’s Too Good to Be True
This market is having quite a rally. The S&P 500 just had one of the best months ever in July, up 9.1% for the month, and is currently up more than 12% from the June low. Will the good times last?
Investors are sniffing an end game to the misery of ever-rising inflation and an ultra-hawkish Fed that has been dogging the market all year. The market tends to anticipate six months or so into the future. By then, it sees inflation under control and a Fed that is done hiking rates and maybe even talking about easing again.
That would be a beautiful thing. But I’m not so sure.
Much can go wrong with that rosy scenario. Inflation still isn’t under control even with lower gas prices amid growing recession concerns. There is still little evidence that Fed actions so far are doing anything to quell inflation. The economy is likely already in a recession that could get worse or last longer than the market is anticipating.
It’s still way too early to buy into the notion that this bear market is ending. It’s been a big rally for sure. But it still has a long way to go to get back to the old highs. And investor sentiment can turn on a dime in this environment.
The portfolio will continue to play things more conservatively until there is more evidence of an end to the current problems. In the meantime, just about all the stocks in the portfolio have gotten a bump in the recent rally. And the defensive positions have been killing it on earnings.
High Yield Tier
Enterprise Product Partners (EPD – yield 7.1%) – Enterprise is killing it. The midstream energy business is strong and perfect for the current environment. These companies are like utilities except with more growth and higher dividends. Enterprise reported an exceptional quarter today. Adjusted funds from operations soared 23% and distributable cash flow increased 30% over last year’s quarter. The company has a remarkable 1.9 times distribution coverage from cash flow and a payout ratio of just 56%. A big part of the strong results is the strong and growing demand for natural gas.
All that retained cash is also funding three recent expansions in the Permian basin, two in natural gas processing plants and one in a natural gas liquids (NGLs) pipeline system. In this tough regulatory environment, it’s much easier to get approval for existing system expansions than new projects. And that’s a big advantage for established players like Enterprise. The stock is back in business and looks to be on the way to new highs. (This security generates a K1 form at tax time). BUY
ONEOK Inc. (OKE – yield 6.3%) – This midstream energy company reports earnings next week. But the strong results for other midstream players so far, especially regarding natural gas, is lifting OKE. It’s been trending higher for the last six weeks but remains undervalued and well off the 52-week high. The stock is a great place to be in the current uncertain environment. It’s defensive with a cheap valuation and a lavish dividend payout. BUY
Realty Income (O – yield 4.0%) – This legendary monthly income REIT is marching back to the 52-week high. O has been a star performer in this recession-fearing environment. Although it deals in retail properties, most tenants are staples like supermarkets and drug stores. It is seen as a defensive income stock. This stock is a great place to be in the current market environment. Realty reports earnings after close. Hopefully, it will get a further boost. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 3.7%) – The biopharmaceutical company reported mixed earnings last week and the stock sold down. It beat on earnings, up 11%, but missed on revenues. The revenue miss was because of diminished sales from its cosmetic franchise in the worsening economy plus, and more importantly, disappointing results for its cancer drug superstar amid increasing competition. That cancer drug is part of the answer to replacing Humira revenues which faces a patent expiration in the U.S. next year.
It’s not good news but the core story is still intact. AbbVie is still a defensive company in a recession with an excellent longer-term prognosis amid the aging population. Disappointments like this are part of the life of all pharma companies, even very successful ones. It should pay to simply hold the stock and collect the dividend through rough patches en route to better things in the future. HOLD
Broadcom Inc. (AVGO – yield 3.1%) – The performance of the tech stocks has been encouraging. After leading the overall market lower earlier this year, the sector has outperformed the index for the last several months. The sector should turn around before the overall market. Broadcom is also very well positioned to benefit in a fundamental way from the 5G rollout and the proliferation of cloud computing and should have continued strong earnings. BUY
Brookfield Infrastructure Partners (BIP – yield 3.7%) – This defensive infrastructure partnership reported terrific earnings today. Funds from Operations, the true measure of earnings for an MLP, was up 30% from last year’s quarter and a new record. That’s powerful growth for a highly defensive, dividend paying company.
Results were higher across the board and Brookfield got the most growth from the midstream energy sector, powered by last year’s large pipeline company acquisition. But the stock isn’t doing anything today as investors are skeptical that such growth can last. It probably can’t, but it should maintain a very high level of growth for a defensive company that still sells at a cheap valuation. (This security generates a K1 form at tax time). HOLD
Eli Lilly and Company (LLY – yield 1.2%) – LLY continues to buck the trend in a bear market. The stock is up over 15% YTD. LLY has pulled back recently, which it tends to do, but the company reports earnings tomorrow that could ignite a new upside move. It’s a fantastic company to own anytime because of its superior drugs and spectacular pipeline. But the relative performance accelerates in a tough market like this. It’s a superstar of a great sector to be in these days. HOLD
Rating change “BUY” to “HOLD”
Intel Corporation (INTC – yield 4.0%) – The chipmaker reported earnings last week that were a disaster. Both revenues and earnings were well below expectations; revenue dropped 22% and earnings came in at an $0.11 per share loss versus and expected $0.69 profit. Intel also lowered guidance for 2022. The company blamed supply chains, China, and its own execution.
This year was always going to be bad. That’s why the stock was so low. The main attraction was the longer term and the cheap price as the company refocused on the foundry business and technology. Last week, the near term got even worse while the longer-term outlook may have improved. The new CHIPS Act will likely provide generous subsidies for its foundry business expansion. We’ll see if the stock continues to get a bounce. But the rating is reduced to HOLD for now. HOLD
Qualcomm Inc. (QCOM – yield 2.0%) – The chipmaker stock fell as much as 6.8% after its earnings report last week but has recovered somewhat since. The quarter beat expectations on 36% higher revenues and 54% higher earnings than last year’s quarter as smartphone royalties soured 59%. But the company lowered guidance for next quarter and the rest of the year as slowing global growth is expected to reduce handset sales. The market didn’t like that.
The likelihood of slowing phone sales has pressured this stock lower for most of the year. That’s why QCOM is still 25% off the high even after the recent surge. But those slower sales haven’t even materialized yet, and the company still expects 23% year-over-year revenue growth for the rest of the year. It should also benefit as 5G gets applied to many more devices. Slower sales were already priced into the stock. Meanwhile it sells at just 12 times forward earnings with better than 20% growth ahead even in a recession. BUY
Visa Inc. (V – yield 0.7%) – Visa reported earnings earlier last week that again knocked it out of the park. It beat expectations on both earnings and revenues, which were up 33% and 19% respectively. The company continues to benefit from increased global business from the ending of covid restrictions. The very profitable cross-border transactions soared above pre-pandemic levels this quarter. But the stock has moved lower since the announcement on news of a pending bill in the Senate that will limit credit card fees. We’ll see what the bill looks like and gauge the chances of passage. In the meantime, business is still booming despite inflation and recession. HOLD
Safe Income Tier
NextEra Energy (NEE – yield 2.0%) – NEE has been on fire and appears poised to retake new highs. It had been a rough year for the alternative energy utility. It underperformed the sector as delays from solar panels in Asia will slow solar projects. But the stock bottomed this spring and is really turning things around. It also got a big boost as the passage of a climate change bill appears more likely in congress, which would be very generous to companies like NEE. The stock is up over 20% since mid-June. This is a great utility and a phenomenal way for conservative investors to play the growth in clean energy. HOLD
Xcel Energy (XEL – yield 2.7%) – Xcel reported earnings yesterday that matched estimates and beat estimates on revenue. It was a solid report, and the stock has moved higher, but not necessarily because of earnings. This smaller alternative energy utility also got a boost from the climate change bill. Plus, it’s in two timely sectors, utilities and clean energy and should be well positioned for the longer term as well. HOLD
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on close 8/02/22 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 26 | 22% | 7.1% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 59 | 21% | 6.3% | BUY | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 73 | 28% | 4.00% | HOLD | 1 |
| Current High Yield Tier Totals: | 6.2% | 23.7% | 5.8% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 140 | 116% | 4.00% | HOLD | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 531 | 23% | 3.1% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 14 | Qtr. | 2.04 | 3.6% | 40 | 85% | 3.6% | HOLD | 2/3 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 320 | 117% | 1.2% | HOLD | 2/3 |
| Intel Corporation (INTC) | 03-09-22 | 48 | Qtr. | 1.46 | 3.1% | 36 | -24% | 4.0% | HOLD | 1 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 147 | 85% | 2.0% | BUY | 1/3 |
| Visa Inc. (V) | 12-08-21 | 209 | Qtr. | 1.50 | 0.7% | 206 | -1% | 0.70% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 2.5% | 40.3% | 2.7% | |||||||
| Safe Income Tier | ||||||||||
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 86 | 110% | 2.0% | HOLD | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 73 | 206% | 2.7% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 2.3% | 158.0% | 2.4% | |||||||
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