The Market Levels Off
The market has leveled off over the last few weeks. But the indexes are still within bad breath distance of the highs. We should be in for more of the same in the months ahead as this high market is due to cool off.
Let’s take some stock of where we are right now.
The S&P 500 is up over 100% since the bottom in March of 2020. That means the market has gained as much value since that bottom as it had accumulated from the beginning of time until March of last year. It’s also up about 40% from the high before the pandemic and 10% just since early October.
The pace must at least slowdown from here. Stellar earnings have saved this bull run of late. But the excitement is fading. As the market slows down, it may not be able to outrun the lingering problems.
Inflation isn’t going away. In fact, it is continuing to get worse. Supply problems aren’t improving either. At the same time, the Fed will soon pull back on stimulus by tapering its bond buying and raising the Fed Funds rate probably sooner than previously anticipated to counter the growing inflation.
That doesn’t mean we are in for a bear market or even a correction in the near term, but it’s highly likely that we will face a much choppier market with smaller returns going forward. That’s okay. It will be normal and healthy for the market to slow down.
While inflation and rising interest rates may not be the best thing for the overall market, certain stocks actually like those things. That’s why inflation beneficiary stocks were highlighted in the November issue.
High Yield Tier
AGNC Investment Corp. (AGNC – 9.0%) – The bad news is that the stock has wallowed around the current level since the spring. The good news is that the yield is safe and there is likely more upside potential than downside risk to the stock at this point. AGNC benefits from higher long term interest rates because that increases yield spreads and profits. The 10-year Treasury has spiked higher again recently and should have more upside in the months ahead as inflation continues to get worse. BUY
Blackrock Enhanced Capital and Income Fund (CII – 5.6%) – This covered call ETF is a great fund to own right now. The market is high but it also seems buoyant for the time being. The environment generates high call premiums with little opportunity cost. The returns tend not to be exciting in a raging bull market but this fund tends to chug along and provide a solid income and total return. BUY
Compass Diversified (CODI – 4.6%) – Although it doesn’t move fast, this Business Development Company has been consistently trending higher since the pandemic lows of 2020. It’s up about 13% since the middle of September. Compass has had very strong earnings growth over the last year because of new acquisitions as well as the economic recovery. Small businesses tend to thrive disproportionately in a recovering economy. I expect the uptrend to continue. BUY
Enterprise Product Partners (EPD – yield 7.8%) – The story for this midstream energy partnership is similar to that of AGNC in that the price doesn’t seem to go anywhere, but the distribution is rock solid. It also sells at a cheap valuation and the energy environment is very good for stocks in the sector. There should be another move to the upside in the months ahead and you can be patient with EPD because it pays you a huge income while you wait around. BUY
ONEOK Inc. (OKE – yield 5.8%) – This midstream energy company stock performs better than EPD. It cooled off this month but is still within bad breath distance of the 52-week high. I think energy will get moving again in the next several months and OKE should get another surge. HOLD
Realty Income (O – 4.2%) – I like the way this legendary REIT looks. Although it has fallen a little bit from the recent high, it’s still trending slowly higher. This is what should be expected of a stock like this. It is still priced well below the pre pandemic high while earnings are higher and growth prospects are better than they were then. This is a good solid stock to have as the market reverts to normal next year. HOLD
STAG Industrial (STAG – 3.4%) – This industrial REIT has leveled off since pulling back a little from the high set at the end of October. Earnings were great. STAG grew FFO per share by 15% over last year’s quarter as acquisitions and strong demand for industrial properties in the recovery powered results. We’ll see what it does from here, whether it goes back to new highs or pulls back further. HOLD
Verizon Communications (VZ – 4.9%) – The stock has dipped below the low point of the recent range. That’s a red flag. The stock has bounced higher over the last week, but if it dips below the recent low again I will likely sell at least part of the position. It had been assumed VZ would at least gravitate back to the higher end of the range. Recent action puts that into question and I will continue to watch this closely. HOLD
Dividend Growth Tier
AbbVie (ABBV – 4.7%) – The biopharmaceutical giant got a spike higher over the last week when it was upgraded by an analyst. It’s still dirt cheap from a valuation standpoint and should have a lot more upside. The recent earnings report was stellar. I like it long term and healthcare should be a good place to be as the market normalizes. BUY
Broadcom Inc. (AVGO – yield 2.6%) – This technology stalwart had been spiking higher for about seven weeks at was at a new high, but the selloff in the technology sector drags AVGO down with it. As inflation gets worse and interest rates rise, cyclical stocks rally and technology sells off. I don’t really understand why that is. Technology is still where the strong growth is and that growth should continue regardless of inflation or higher interest rates. Let’s just stay on this horse. BUY
Brookfield Infrastructure Partners (BIP – yield 3.6%) – This infrastructure partnership reported solid earnings and raised the dividend 5%. Then the infrastructure bill passing likely increased investor interest in the subsector. But Brookfield announced an equity offering and BIP pulled back over 6% from the recent high. New shares will dilute the existing share base. But the company has a proven ability to make up more than the difference in profitable investments. The stock has been slowly rebounding since. HOLD
Chevron Corp. (CVX – yield 4.7%) – Inflation is up. Crude oil prices spiked higher over the past week. Energy and other cyclical stocks have been rallying. Profits are soaring and this company is highly levered to oil prices. I’ve been expecting another surge higher after the stock leveled off. This might be the beginning of it. We’ll see. But I still like it over the next year even if the recent rally peters out. BUY
Eli Lilly and Company (LLY - yield 1.3%) – The biopharmaceutical giant bounces around a lot. It had a huge surge over the summer on the likelihood of an approval of its Alzheimer’s drug next year. It then pulled back 25% for no good reason. But it has since shot back up over 20% since the beginning of October. It looks like it might be back on its way to new highs. And of course, LLY is a great stock for the long term as well. HOLD
KKR & Co. Inc. (KKR – yield 0.8%) – This alternative investment asset manager has really cooled off. That was to be expected, which is why half the position was sold a few weeks ago; KKR had run up 40% in a month on blow-out earnings. It has since pulled back 10% from the high. The stock has returned almost 70% since being added to the portfolio in March. Prospects still look bright for the stock, but it may have gotten ahead of itself in the near term. HOLD
Rating change “BUY” to “HOLD”
Qualcomm Inc. (QCOM – yield 1.5%) – Tech stocks have really been under pressure. The sector pullback even halted QCOM’s torrid ascent. Yes, QCOM has pulled back about 5% from the intraday high of last week. But it still looks like it wants to go higher. This could be the end of the recent surge, or it could start moving higher again once the pressure in the sector abates. For now, I’m downgrading to a HOLD rating. There is often a consolidation after a huge spike. I still like the prospects in the months ahead, but let’s play it safe in the near term. HOLD
Spectrum Brands Holdings, Inc. (SPB – yield 1.6%) –The recent earnings report indicated that Spectrum is handling supply and cost inflation issues well. The stock got a bunch of upgrades and price target raises and SPB is up over 10% since the report and over 30% since being added to the portfolio in August. HOLD
U.S. Bancorp (USB – 3.1%) – The regional bank stock pulled back last week but quickly recovered as interest rates are again trending higher. This is a good stock to own as inflation gets worse and interest rates move higher. It should actually be a beneficiary of the looming economic issues. I like the bank’s prospects over the intermediate term. HOLD
Valero Energy Corp. (VLO yield 5.6%) – Things were starting to look grim in the near term for this refiner. VLO pulled back over 17% from the October high as the energy sector consolidated. But the recent energy and cyclical stock rally is bringing another spike higher. I like the prospects for this refiner going forward as gasoline and diesel demand is strong and prices are high with no end in sight. We’ll see if this latest spike turns into a big move in the near term. BUY
Safe Income Tier
Invesco Preferred ETF (PGX – yield 4.9%) – After falling during the pandemic, this preferred stock ETF has recovered and is back near its pre pandemic high. This preferred stock ETF is much less volatile than the stock market while providing a big yield. It also adds diversification as preferred stock performance is historically not correlated to the stock and bond markets. HOLD
NextEra Energy (NEE – yield 1.8%) – This large and well-known alternative energy utility had a rough year as investors looked away from alternative energy and safe stocks as conventional energy and cyclical stocks got hot. But NEE is a great value and a safe play on the growth in alternative energy that should come back into favor. It has quietly recovered and is near all-time highs. It should make up for lost time when things get back closer to normal after the pandemic recovery. BUY
Xcel Energy (XEL – yield 2.8%) – This alternative energy utility has been a dog with fleas of late. It’s still busy wallowing near the low point of its recent crummy range. But it has been moving up in the last week and it’s a great holding while cyclical stocks get clobbered. This is one of the best utilities out there. Defensive stocks should have their day in the sun as the market and economic environment normalizes into next year with stock prices at very high levels. And Xcel should also be a huge beneficiary of the growth in alternative energy beyond that. Patience should pay off before too long. BUY
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on 11/24/21 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| AGNC Investment Corp. (AGNC) | 04-14-21 | 17 | Monthly | 1.44 | 9.00% | 16 | -3% | 8.9% | BUY | 1 |
| Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.2% | 21 | 4% | 5.6% | BUY | 1 |
| Compass Diversified (CODI) | 10-13-21 | 31 | Qtr. | 1.44 | 4.6% | 30 | 1% | 4.6% | BUY | 1 |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.10% | 22 | -3% | 8.2% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 7.00% | 64 | 26% | 5.8% | HOLD | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.1% | 70 | 19% | 4.2% | HOLD | 1 |
| STAG Industrial (STAG) | 03-21-18 | 24 | Monthly | 1.45 | 3.5% | 44 | 116% | 3.4% | HOLD | 1/2 |
| Verizon Communications (VZ) | 02-12-20 | 58 | Qtr. | 2.51 | 4.7% | 52 | -5% | 5.0% | HOLD | 1 |
| Current High Yield Tier Totals: | 5.5% | 30.6% | 5.3% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 119 | 78% | 4.7% | BUY | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.9% | 552 | 26% | 2.6% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 57 | 72% | 3.6% | HOLD | 2/3 |
| Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 5.5% | 117 | 32% | 4.7% | BUY | 1 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 260 | 76% | 1.3% | HOLD | 2/3 |
| KKR & Co. Inc. (KKR) | 03-09-21 | 48 | Qtr. | 0.58 | 0.9% | 76 | 64% | 0.8% | HOLD | 1/2 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.9% | 180 | 124% | 1.5% | HOLD | 1/3 |
| Spectrum Brands Holdings, Inc. (SPB) | 08-11-21 | 81 | Qtr. | 1.68 | 2.1% | 104 | 31% | 1.6% | HOLD | 1 |
| U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.3% | 60 | 35% | 3.1% | HOLD | 1 |
| Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 6.0% | 72 | -2% | 5.6% | BUY | 1/2 |
| Current Dividend Growth Tier Totals: | 3.2% | 53.6% | 3.0% | |||||||
| Safe Income Tier | ||||||||||
| Invesco Preferred (PGX) | 04-01-14 | 14 | Monthly | 0.74 | 4.9% | 15 | 55% | 4.9% | HOLD | 1/2 |
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.8% | 87 | 111% | 1.8% | BUY | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 66 | 168% | 2.8% | BUY | 2/3 |
| Current Safe Income Tier Totals: | 3.2% | 111.3% | 3.2% | |||||||
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