October 5, 2022

Bad News Is Good News

After an awful September and third quarter, the market roared back earlier this week on bad economic news.

A bad manufacturing and employment report indicative of a declining economy sent Treasury yields lower and stocks higher. The reason is that the sooner the economy rolls over the sooner the Fed will be done hiking and the sooner the market will recover. If we can just get on with a recession, this high inflation and aggressive Fed misery will end, and a new bull market can begin.

Bring the economic pain now so it can end sooner. That’s the hope. Investors can’t stand this “looming recession” situation and the perpetually aggressive Fed and inflation. But the market is selling off today on news that OPEC will cut production, potentially causing higher oil prices and upward pressure on inflation.

That’s the tug-o’-war the market seems to be in these days. Bad news is good news.

It’s tough to see how things will play out in the near term. It is likely the market makes new lows before it recovers. But the worst is likely over, at least if the average bear market decline applies. We may not be that far from the bottom and a potential new bull market.

For now, the portfolio remains defensive. But even those defensive utility and REIT stocks got clobbered last month. Soaring interest rates increase the attractiveness of fixed-rate alternatives and dividend stocks suffer, at least in the short term. But interest rates are moving lower again, and these stocks are well-positioned for a recession.

High Yield Tier

Enterprise Product Partners (EPD – yield 7.9%) – Midstream companies took a big hit as the market took everything down in the second half of September. But these companies should quickly regain footing when the market stabilizes. EPD is already significantly higher this week. It offers a high and safe distribution from a company that should endure inflation and recession well, and investors should see that as one of the best games in town over the rest of the year. (This security generates a K1 form at tax time). BUY

ONEOK Inc. (OKE – yield 7.0%) – OKE is another midstream company that got clobbered last month but is shooting higher at a strong clip so far in October. The same dynamics for EPD apply to this midstream company in the form of a regular corporation. But OKE tends to be more volatile, which could be a good thing over the rest of this year. ONEOK earnings continue to grow through the pandemic. This is one of the few companies that can endure inflation or recession, or both. BUY

Realty Income (O – yield 5.0%) – This legendary monthly income payer recently hit the 52-week low and remains a long way from the pre-pandemic high, despite having higher earnings. REITs have been under pressure from rising rates at it raises costs for growth projects. But Realty just made a large acquisition and should get strong growth because of that over the next year. A great company with a fantastic track record is on sale. BUY

The Williams Companies, Inc. (WMB – yield 5.8%) –The same things mentioned above about EPD and OKE apply to Williams. I continue to rate this and the other midstream companies a BUY because, in the absence of indiscriminate selling, the stocks should resume trending higher because of the high dividend and resilient business. WMB had great momentum before the recent selloff because it’s ideal for the current environment for the aforementioned reasons. It should get going again as the market stabilizes. BUY

Medical Properties Trust, Inc. (MPW – yield 9.7%) – Although this hospital property REIT dipped along with just about everything else over the past couple of weeks, it still has the right stuff for this market. It is a fire-sale value. The stratospheric dividend is safe. It’s in one of the most defensive businesses, and it has automatic inflation adjustments build into its contracts. You can collect a huge income while being relatively confident that the stock price will be significantly higher over the course of the next year. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 4.0%) – This biopharmaceutical company stock has been one of the very few stocks on the market to hold up and retain its price through the tumult of the past month while just about everything else took a beating. Recession fears don’t seem to bother drug companies because it is one of the few businesses that doesn’t get hurt. Meanwhile, AbbVie is one of the best big pharma companies out there with one of the best pipelines and a population aging at warp speed. HOLD

Broadcom Inc. (AVGO – yield 3.4%) – The chipmaker and infrastructure software provider once again delivered on earnings with 40% earnings growth and a 25% revenue increase versus last year’s quarter. It also raised guidance for the rest of the year. But the stock has been dragged down by the technology sector. It currently sells at a forward price/earnings ratio below that of the overall market and below its five-year average. Things may get worse before they get better, but it can make up for lost time quickly when it turns around. BUY

Brookfield Infrastructure Partners (BIP – yield 3.6%) – This reliable revenue generator really took it on the chin over the last month, falling 15% to a new 52-week low. That’s surprising because its crucial infrastructure assets are virtually recession-proof and inflation adjustments are build into the contracts.

The problem is interest rates. BIP is classified as a utility, and that sector, along with REITs, have been the worst-performing sectors over the past three- and one-month periods. Competing fixed income investments become more competitive with higher rates. But all those other great attributes still apply. And a recession should bring interest rates back down. (This security generates a K1 form at tax time). HOLD

Eli Lilly and Company (LLY – yield 1.2%) – This big pharma stock is one of very few stocks on the market that moved higher over the last month. There was good news. Biogen’s Alzheimer’s drug reported very positive phase III tests and the news is seen to increase the likelihood of approval for other similar drugs, including Eli Lilly’s drug on the fast track for approval. The stock was also upgraded by UBS for another diabetes drug that has proved effective for weight loss, saying it could be one of the most successful drugs ever if approved. HOLD

Intel Corporation (INTC – yield 5.3%) – The chipmaker just made a massive investment in chip production. It partnered with BIP for a $30 billion investment in a semiconductor fabrication plant where Intel will maintain majority control by providing 51% of the capital. It’s a big and bold move. But the stock is still under pressure as growing recession worry weighs on projected PC sales over the next year.

The tech sector, and INTC in particular, is way oversold. These are also stocks that can make up for lost time very quickly when investors warm to them again. And they will eventually, because we are in a technological revolution that is likely to become even more dominant in the years ahead. But we’re not out of this muck yet. We’ll see if the tech sector continues to be under pressure in the days and weeks ahead. HOLD

Qualcomm Inc. (QCOM – yield 2.5%) – The saga continues. Inflation and rising interest rates are bad for growth stocks; as costs rise, profits projections and market multiples decrease. It’s been going on all year and the tech sector is one of the worst-performing sectors on the market. Although Qualcomm is in a strong growth phase, the market doesn’t care. But it will as things stabilize and eventually turn around. BUY

Visa Inc. (V – yield 0.8%) – As a cyclical stock, V gets selling pressure when the market reels over recession worries. But inflation isn’t a problem for Visa. On weakness, V usually falls to right around the 200 per share level. But the recent selling has taken it to a new lower level. Profits are soaring as the covid restrictions have come down internationally, but the stock has been held back by recent panic selling in the market. V is another stock that rebounds quickly when the market stabilizes, as it is doing this week. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.0%) – A little less than a month ago this alternative energy utility giant was flirting with the 52-week high. Then interest rates soared and utilities got crushed. NEE fell about 14% in just a few weeks but has recovered somewhat recently. Interest rates have also been falling amid weaker economic news, and the defensive business is well-positioned for a likely recession in the months ahead. HOLD

Xcel Energy (XEL – yield 2.9%) – Ditto everything mentioned above about NEE for this smaller alternative energy utility. XEL was soaring to new highs before it got rudely interrupted by rising interest rates. It also took a hit over the past month after soaring to a new high in early September. XEL still has a positive return YTD in this horrible market. In addition to being in timely sectors, utilities and clean energy, Xcel should also benefit from the passage of the CHIPs bill as it should get some generous subsidies and favorable treatment. HOLD

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