Don’t Believe this Rally
The market has been strong over the last month. In fact, the S&P 500 has rebounded more than 9% from the June lows. Is this rally for real?
I doubt it.
There was the normal bounce off the lows and now investors can focus on earnings. The bad inflation report is out of the way and the Fed has tipped its hand that there will be a 0.75% rate hike later this month, which is better than the 1% hike that was expected after the 9.1% June inflation report. The bad stuff is out of the headlines for now and it’s earnings season, which has buoyed and reinvigorated stocks for the past two years.
But while earnings appear relatively solid so far, corporations are having very negative things to say about the economy going forward. Corporate executives are echoing a growing number of economists in calling for a recession in the next year. It’s also true that the problems that dragged stocks to the lows last month (high inflation, an aggressive Fed, and the growing probability of recession) haven’t gotten any better.
Inflation hasn’t even peaked. The latest inflation number indicates that the Fed has not been aggressive enough and will likely have to get even more hawkish. The probability of taming inflation while avoiding recession is decreasing. While anything is possible, and the market tends to confound even the best estimates in the near term, there is a high risk of new lows in the weeks and months ahead.
The portfolio is well situated with fewer cyclical stocks and several safe and recession-resistant companies in utilities, health care, and midstream energy. In addition, technology stocks have been turning some heads. The sector led the market lower and will likely lead it higher in the future. These stocks may be on a different schedule than the overall market and have started to move significantly off the lows.
Ratings change: Innovative Industrial Properties (IIPR) move from “HOLD” to “SELL”
High Yield Tier
Enterprise Product Partners (EPD – yield 7.5%) – This midstream energy partnership sold down with the rest of the energy sector in June but has been trending higher over the past month. Enterprise has revenues that rely on volumes and not commodity prices. While prices could do anything, volumes are more certain as prices soar and supplies are short. The solid revenue supports the high distribution, which is quite safe. A defensive high-income stock with inflation built into its contracts could be an ideal holding over the rest of this year. (This security generates a K-1 form at tax time). BUY
ONEOK Inc. (OKE – yield 6.4%) – This midstream energy company is also moving higher since last month, albeit in a less convincing fashion. The same things about EPD are true of OKE but the stock was up 65% in 2021 and the growth isn’t as impressive because it never declined much even during the pandemic. But it has stable revenues, a rock-solid dividend and inflation adjustments build into its contracts. OKE should be a good place to be going forward BUY
Realty Income (O – yield 4.2%) – This well-known legendary income REIT, along with utility stocks, 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. O has already recovered all the June losses and then some. It’s higher than it was before the recent bear market foray. It’s a trusted income generator and defensive play that investors are drawn toward in volatile markets like this. There’s no reason not to expect more market-beating performance over the rest of the year. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 3.8%) – Investors rediscover the defensive attributes of healthcare stocks in times like this. That’s why healthcare has been one of the best-performing sectors over the past month and the best-performing sector over the last three months. Healthcare will continue to thrive regardless of the state of the economy. Despite the strong performance, ABBV continue to sell at dirt-cheap valuations as it overcomes the looming loss of the Humira patent in the U.S. It’s a good stock to hold anytime, but the relative performance is especially good in markets like this. HOLD
Broadcom Inc. (AVGO – yield 3.2%) – The focus of the June issue was that technology had been oversold and was likely to recover before the overall market. Since then, tech has been the second-best-performing market sector and AVGO is up around 11%. Inflation and the Fed may be all the rage right now. In six months it could be a different story. But the fact that we are in a technological revolution that is gaining steam won’t change. Broadcom is also very well positioned to benefit in a fundamental way and should have continued strong earnings. BUY
Brookfield Infrastructure Partners (BIP – yield 3.8%) – This defensive infrastructure partnership took a hit along with everything else in June. But it has been solid in the absence of market panic. BIP should be ideally suited for this market over the rest of the year. Its earnings are highly recession resistant, and Brookfield has inflation adjustments built into its contracts. Earnings are growing at a higher-than-normal clip because of the recent midstream energy acquisition and the stock is a very reliable dividend payer. (This security generates a K-1 form at tax time). HOLD
Eli Lilly and Company (LLY – yield 1.2%) – LLY recently made new highs in a rough overall market. It has also returned nearly 20% YTD and more than 40% over the past year. The stock is benefiting from the relative strength of healthcare stocks. There is also more good news: There is a strengthening outlook in its immunology drugs and more Covid treatments were ordered by the government. It’s just more positive news from the terrific pipeline that keeps investors interested in the stock. LLY is also a good stock to have in a weak market with increasing recession worries. It’s a superstar of a great sector to be in these days. HOLD
Rating change “HOLD” to “SELL”
Innovative Industrial Properties, Inc. (IIPR – yield 6.2%) – This marijuana farm REIT was a very undervalued, high-growth money maker. But it doesn’t seem to matter because this market hates anything to do with marijuana and you can’t fight City Hall. And the story deteriorated last week. One of Innovative tenants defaulted on a rent payment. In and of itself the damage is very minimal. But it feeds into a negative narrative that several tenants are at risk of default. Even if there are no more defaults, that risk will be greater and weigh on this stock. It’s an unforgiving market with too high of a risk that the story will get worse. It’s a loss but we can make it back at some point in the future when IIPR gains upside momentum. SELL
Intel Corporation (INTC – yield 3.8%) – The trouble with buying undervalued companies is that they can stay undervalued for a while, and even sell down more in markets like these. But INTC has rebounded 14% already from the lows of last month and does pay a 3.8% yield in the meantime. Looking ahead, tech is oversold and should continue to bounce back. Plus, Intel’s earnings should grow at a solid clip in the years ahead. It’s a great company at a dirt-cheap price that should deliver strong results over the longer term. But it could take a while. BUY
Qualcomm Inc. (QCOM – yield 2.0%) – While technology has recovered over the last month, QCOM has blown away the overall sector, up more than 30%. It’s more desirable than most of its peers because earnings should continue to grow strongly for some time because of the 5G rollout and increased cloud applications. The stock still sells well below what the fundamentals justify. And such things win the day eventually. BUY
Visa Inc. (V – yield 0.7%) – The recent market upside is being kind to Visa. V got knocked back amidst all this recession talk and the downgrading of global growth projections. But it always seems to bottom in the just under 200 per share range and quickly recovers when market selling eases. Visa continues to get a huge benefit from the removal of Covid restrictions globally despite slowing global growth. Earnings blew away expectations with YOY revenue growth of 25% and 30% earnings growth. This stock will be one of the first in line to move higher as the market recovers. HOLD
Safe Income Tier
NextEra Energy (NEE – yield 2.0%) – NEE struggled for a while despite the solid performance of the utility sector after the earnings report revealed that delays from solar panels in Asia will slow solar projects. But the stock bottomed and has been solid in the recent market environment, having recovered all the June losses and then some. NEE is now at a higher price than before the market fell into bear territory. This is a great utility and a phenomenal way for conservative investors to play the growth in clean energy. It’s also in two timely sectors, utilities and clean energy. NEE is looking good again. HOLD
Xcel Energy (XEL – yield 2.8%) – After superior performance all year long where the stock was hovering near the high in a tanking market, the recent tumult finally took XEL down a peg or two. But the weakness isn’t lasting. XEL has come right back over the last several weeks. In the absence of panic, XEL is gravitating back to where it belongs. Plus, like NEE, it’s in two timely sectors and the future should be solid too. HOLD
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on close 7/19/22 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 25 | 15% | 7.5% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 58 | 18% | 6.4% | BUY | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 70 | 23% | 4.30% | HOLD | 1 |
| Current High Yield Tier Totals: | 6.2% | 18.7% | 6.1% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 150 | 130% | 3.70% | HOLD | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 509 | 18% | 3.3% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 14 | Qtr. | 2.04 | 3.6% | 37 | 74% | 3.8% | HOLD | 2/3 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 327 | 121% | 1.2% | HOLD | 2/3 |
| Innovative Industrial Props. (IIPR) | 05-11-22 | 123 | Qtr. | 7.00 | 5.4% | 89 | -26% | 7.9% | SELL | 1 |
| Intel Corporation (INTC) | 03-09-22 | 48 | Qtr. | 1.46 | 3.1% | 40 | -15% | 3.8% | BUY | 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% | 214 | 3% | 0.70% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 2.9% | 40.3% | 3.3% | |||||||
| Safe Income Tier | ||||||||||
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 79 | 93% | 2.0% | HOLD | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 69 | 187% | 2.8% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 2.3% | 140.0% | 2.4% | |||||||
1) Please tell me about a time you made money on one of my trades – how much? How fast? What did you do with your profits?
2) How would you describe Cabot Dividend Investor to a friend?
You can simply send your response by email to CDI@cabotwealth.com. We’ll share interesting responses, anonymously, with you on the website.