Investors Alley

It’s time to put the November 2023 stock market rally into perspective because I’m seeing investors make the mistake of getting too bullish too fast.

For all I know the rally can certainly squeeze a bit higher, but ultimately high interest rates will slow down the economy.

What’s important to note about the November rally is the level that we’re back at right now.

For example, let’s take a look at consumer discretionary stocks – which have done extremely well this year.

The sector is up about 30% for the year – which is exactly the same level it was in mid-September…

And in June…

And in September of 2022…

So essentially, we’ve gone absolutely nowhere. The same goes for consumer staple and industrial stocks, as they’re back to early September levels too.

This isn’t the raging bull market that everyone wants to believe it is.

But there’s one area of the market that has been doing extremely well… and you can trade it using this ETF.

In today’s 2-minute video, I go over the top tech ETF on the market right now, why now is not the time to get bulled up and the science behind what’s actually happening in the November rally.

I release these weekly tips every Thursday for free, so stay tuned and stay subscribed here. 

It’s Christmas come early.

Not really, but with Thanksgiving behind us, I wanted to start the Holiday season off with a bang.

As everyone is making precise predictions about what stocks are going to do in 2024, I am using math to answer one simple question.

Is this a good time to buy stocks?

The equations and formulas I used are not overly complex, but they are time tested, and each individually has been very accurate when suggesting the future returns for the stock market will be below average.

In combination, they are extraordinarily accurate.

None of them are precise timing tools. They are more like red light-green light indicators.

On second thought, it’s more like road signs.

One reads, “Bridge out ahead.”

The other reads, “Welcome to the Speedway.”

Right now, all signs indicate that buying the stock indexes as a long-term investment is a bad idea right now.

The sane math is telling me that fixed income-bonds, preferred stocks, and discounted fixed-income closed-end funds are likely to deliver solid returns well in excess of historical stock returns.

Today I have a handful of fixed income ideas at various points on the risk curve that have high cash yields with the potential for even higher total returns.

Enjoy and Prosper!

In 2023, energy sector stocks have been on a roller coaster. Sector stock prices follow the price of crude oil, which means a lot of ups and downs in the short-term.

But the long-term prospects for oil are very bullish, so don’t be afraid to take advantage of the dips.

In particular, I suggest looking at these four stocks…

Here is the WTI crude oil chart for the last year:

Followed by the Energy Select Sector SPDR ETF (XLE):

I recommend picking stocks from the three energy subsectors. Each of these follows its own pattern in regard to energy commodity prices.

Upstream energy companies are the commodity producers, drilling for oil and gas, with profits directly tied to those commodity prices. In this group, I like the companies that pay variable dividends based on quarterly profits. Here are two:

Devon Energy (DVN) recently released third-quarter results and announced a fixed-plus-variable dividend of $0.77 per share. You can see from the chart above that oil prices were higher in the quarter, allowing Devon to boost the payout by 57%. DVN goes ex-dividend on November 15.

Diamondback Energy (FANG) declared a regular quarterly dividend of $0.84 (giving a 2.1% yield), plus a variable dividend of $2.53 per share. The ex-dividend date is November 15.

Downstream energy companies refine crude oil into fuels such as gasoline and diesel fuel. Refining profits swing with the difference between the cost of crude oil and the market prices for refined fuels. You can use the crack spread to check on refiner profitability. The better refining companies reward investors with growing dividends and stock buybacks after especially profitable quarters. Here are two favorites:

Valero Energy Corp (VLO), which yields 3.2%, should announce a dividend increase in January.

Marathon Petroleum Corp (MPC) recently increased its dividend by 10% and yields 2.3%.

Energy stock investing can be counterintuitive. Traders focus on short-term bad news, which lets long-term investors take advantage of the dips in the longer-term positive trend.

Last week, in our 48-Hour Income service, we sold a cash-secured put on software company, Palantir (PLTR). In 48-Hour Income, the goal of the service is to generate 1% to 3% returns per week by selling 2-day puts in certain stocks. PLTR had earnings coming up the next morning and its put option premiums appeared …

Trade of the Week: PLTR Read More »

It’s gratifying to see the Wall Street Journal catch up with advice I have given to my Dividend Hunter subscribers for several years.

They’ve finally discovered how to eliminate the main problem with investing in bond funds.

They’re late to the party, though – I’ve been telling my readers that for ages.

Let me show you…

I’m talking about defined maturity bond ETFs, as long-time readers may have guessed.

A recent Wall Street Journal article, “These Funds Offer a Way to Lock In High Bond Yields,” highlights the benefits of what they labeled as “defined maturity bond funds.”

This type of fund owns bonds that all mature near a specific date, typically by the end of the target year. This structure contrasts traditional bond funds, which continuously trade bonds to maintain a specific average maturity.

If you buy an investment bond, which could be a Treasury bond, a municipal bond, or a corporate bond, you will earn the yield to maturity in effect at the time of purchase if you hold the bond until it matures.

Bond prices adjust for changing interest rates by moving in the opposite direction of rates—so when interest rates go up, bond prices go down. However, if you hold a bond until it matures, you will earn the positive return you signed up for when you bought it.

With interest rates increasing, traditional bond funds—either ETFs or mutual funds—have posted negative returns for three consecutive years. If you instead invested in a defined maturity ETF that matures in 2023, you would have a positive return when the fund redeems in December.

On March 10, 2022, I purchased the Invesco BulletShares 2023 Corporate Bond ETF (BSCN) shares. Interest rates were lower then, and the fund will produce a 3% average return.

Currently, yields on these funds are much higher. Target maturity bond funds are offered by Invesco, called BulletShares, and BlackRock with their iShares iBonds funds. You can choose from funds investing in Treasury bonds, municipal bonds, investment-grade corporate bonds, and high-yield bonds.

You can choose from funds with maturities of up to 10 years. The fund series lets you set up a traditional bond ladder, the smartest way to invest in bonds. Both companies have tools to tell you exactly what returns you would earn. Here is a four-year ladder using the Invesco High-Yield BulletShares funds:

The yield-to-maturity column is the annual return you will earn if you buy shares now and hold them until they are redeemed. These funds pay monthly dividends; the distribution rate shows the dividend yield.

Locking in 8% plus yields, with the certainty that you will earn those yields, makes a lot of sense in today’s investing environment.
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Until recently, consumer staples stocks had been popular with conservative investors. These companies make and sell products that are everyday essentials, which means their revenues and profits are fairly stable and quite predictable—a characteristic investors should like.

Of course, this type of company is not going to grow rapidly. But their ability to be “Steady Eddies” and grow modestly, while throwing off lots of cash flow, has enabled many of them to pay attractive and growing dividends to their shareholders.

These characteristics make these stocks a better alternative to owning bonds, since they have the bonus of a growing income stream rather than a fixed one.

So, let’s now take a closer look at one of these consumer staples stocks—a Warren Buffett favorite…

Coke’s History

The company, Coca-Cola (KO), founded in 1892, has had to face up to many challenges in the economy over its long history.

Its current brand portfolio—which includes the iconic Coke, as well as Diet Coke, Sprite, Fanta, Schweppes, Dasani water, Innocent smoothies, Minute Maid juices, Costa Coffee and FUZE tea—has millions of loyal customers around the world who keep on buying these products again and again.

Yet, 2023 has been a very difficult year for the company’s investors. On a total return basis, the shares are down more than 11%. This compares with an 8.5% gain for the S&P 500 index. (Keep in mind that up until the start of this year, the stock had actually matched the cumulative performance of the S&P 500 for the previous four years.)

So, what’s gone wrong?

There are a few factors at play here. One is rising interest rates have lessened the attraction of so-called bond proxy stocks, lowering their valuations. Next, inflation is hitting consumers’ disposable income, which is forcing them to buy fewer items or to go for cheaper private label goods.

Finally, and perhaps the most important factor, has been the arrival of the pioneering weight loss drugs made by Novo Nordisk (NVO) and Eli Lilly (LLY), which suppress appetite.

This has raised fears on Wall Street that the demand for many food and drink products will fall—perhaps sharply. In 2023, Wall Street is selling now and asking questions later when it comes to whether companies like Coke will actually be affected by the weight loss drugs.

While the bears think they have a strong case for selling Coke, a closer look at the company suggests that it still has a lot to offer investors.

Coca-Cola still has a diverse brand portfolio and a huge global scale that is unmatched in the soft drinks industry. Its revenues in 2023 are expected to exceed $45 billion.

Recall that Coke makes most of its money by selling concentrates to its network of bottling companies around the world. It is these companies then that add water and sweeteners to the concentrates before packaging the finished products and selling them to retailers and wholesalers.

Coke’s portfolio of brands is backed by the world’s largest soft drinks distribution system. Coke had retained an equity stake in these companies, but in recent years, it has been shedding its investments in bottling and distribution assets to focus more on selling its highly profitable concentrate instead. This has allowed it to improve its operating margin (to around 27%) and maintain a healthy return on capital employed (ROCE) of around 17%.

Despite the bears’ concerns of tapped-out consumers trading down, Coca-Cola’s pricing ability is a real source of strength that should reassure investors. The company’s global scale and tremendous brand power have given it the ability to raise prices year after year, without seeing sales volumes decline.

Coke’s Future

While the company still relies heavily on its legacy Coke brand, it has been very successful in adapting to changes in its markets and customer preferences.

For example, there is Coke’s recent push into the alcoholic ready-to-drink and hard seltzer markets. The trend towards lower-alcohol drinks as a halfway point between soft drinks and more traditional alcoholic drinks is growing, especially among younger consumers.

Coca-Cola has launched a hard seltzer with its Topo Chico water brand; it has also partnered with alcohol companies in the ready-to-drink category. This includes products such as Jack Daniels and Coke, which will be joined next year by an Absolut vodka and Sprite product.

This gives me optimism for the future. But even now, the company continues to perform well.

Despite the doom and gloom surrounding Coke on Wall Street this year, Coca-Cola’s business is doing fine, thank you. Its recent third-quarter results were excellent, and the company raised its full-year revenue and earnings per share (EPS) guidance.

Organic revenue growth for the year is expected to be a very healthy 10% to 11%, with constant currency growth in earnings per share expected to be 13% to 14%. And despite a currency headwind (a strong U.S. dollar), earnings per share growth is expected to be in the 7% to 8% range, which should lead to another hike in the annual dividend payout.

Coke is expected to generate $9.5 billion in annual free cash flow this year, which comfortably funds the dividend payment—about $7.8 billion—while allowing for further share buybacks.

Looking at the valuation of the stock based on its next 12 months’ forecast price/earnings (PE) ratio, Coca-Cola shares trade at about 20 times. This is not a bargain-basement valuation, but it is as cheap as the shares have been on this measure for a number of years.

Coca-Cola is a Dividend Aristocrat, having increased its dividend every year for the past 61 years, and it is currently expected to keep on doing so. Only very good and resilient businesses can do this.

The current dividend yield of 3.23% remains attractive to income-seeking investors who want dependable income growth going forward.

And if interest rates have peaked or are close to peaking—as Wall Street seems to believe—then the shares of Coca-Cola will be poised for a decent recovery, leading to capital gains.

KO is a buy anywhere in the $50s.
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The rapid increase in interest rates over the last 18 months has changed investor sentiment about “cash” investments. Short-term cash investments such as money market mutual funds and Treasury bills now pay around 5%. Meanwhile, over the last two years, the overall stock market has gone basically nowhere, with a lot of volatility along the way.

Stock prices start to rally higher, and just as investors feel confident, prices then turn down. The major market indexes have dropped by about 10% in the three months since the end of July.

As a result, investors have put a massive amount of new money into money market mutual funds instead of into stocks.

This move will, at some point, be the fuel for the next stock market bull market…

It is easy to understand how investors are more comfortable putting large amounts of their investment portfolios in safe 5% investments. A recent Wall Street Journal article highlighted how money market mutual fund assets have climbed from about $3 trillion in 2020 to over $5.5 trillion today. The article also pointed out that, over the last two years, institutional investor cash allocation percentages have climbed from the mid-teens to the low 20s.

The bottom line is that trillions of dollars have come out of riskier investments into safer cash equivalent holdings. This is also money that could quickly flow back into stocks if investors believe the next bull market has started.

What could trigger the movement of money market fund cash back into stocks?

Historically, as we go from the third quarter into the fourth quarter, inflows to stock funds increase dramatically. Recently, TheMarketEar.com reported that equity funds should see inflows of $2.5 billion per day starting in November. The window for corporate stock buybacks stays open until December 8, and the following month could be the strongest period of the year for buybacks, adding $5 billion per day of stock demand.

If stocks rally into the end of the year, investors will start to feel left behind and may begin to move cash into stocks. A final trigger would be the Federal Reserve hinting at when it will start to cut interest rates. When the Fed begins lowering rates, the money market mutual funds yields will also decline.

Real estate investment trusts (REITs) have performed especially poorly as interest rates have increased. The opposite (share price gains) should happen when rates fall, and investors pile cash back into the market. The trick is to figure out the timing of the start of the next bull market.REIT stocks pay attractive dividends, so if you get in a little early and wait patiently for the upcoming bull market, you will be paid well. The Hoya Capital High Dividend Yield ETF (RIET) pays monthly dividends and yields more than 10%. Just make sure you get the stock symbol right!
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Is the bottom for stocks in? That’s the question I will address in this week’s first edition of the Hidden Profits Report. The Fed has a lot to say about both the current level of stock prices, and no matter how much you may hate the Fed or wish we did not have a fiat …

Is the Bottom for Stocks Finally In? Read More »

I view liquefied natural gas (LNG) as the most critical energy source for the future. A recent report forecasts that LNG demand growth will continue to at least 2040 and double from current production levels. Several stocks let you participate in the attractive growth potential.

VettiFi recently interviewed Stifel managing director Ben Nolan to discuss the global LNG market. Nolan stated that he expects annual demand growth of 5% to 6%. Production of 400 million tonnes (metric tons) of LNG will double by the mid-2030s.

As luck would have it, there are two great stocks that will profit as this trend sets in. Let’s take a look…

There are a handful of factors that will propel demand growth for LNG.

For starters, global economic growth requires ever greater amounts of energy. LNG can provide a clean source of energy anywhere in the world. LNG can also provide energy security. When Russian gas was cut off to Western Europe, the European countries could replace the lost supply by importing LNG. LNG provides diversification of a country’s or region’s natural gas supply.

LNG is a clean energy fuel that can replace dirtier energy sources such as coal, fuel oil, and diesel for power generation. It remains significantly cheaper than fuel oil or diesel. Making the switch from one of these fuel sources can save energy producers significant money.

The U.S. is the world’s largest LNG producer. Qatar and Australia also have significant production capacity.

Cheniere Energy (LNG) produced 30 million metric tons in 2022. The company has more than 180 million tonnes of committed sales on long-term contracts. In 2010, Cheniere announced a plan to start a natural gas liquefaction project. The company began producing LNG in 2016. The thousandth LNG cargo from Cheniere was produced and exported in 2020. As of the first half of 2023, the company is shipping 600 cargo loads annually. Cheniere continues to build production capacity.

New Fortress Energy (NFE) initially focused on regasification facilities. Over the last couple of years, the company added LNG power generation services, LNG boiler conversion services, and its Fast LNG wellhead liquefaction projects. New Fortress operates in the Caribbean, Europe, Latin America, and the United States.

Either or both of these stocks would be an excellent place to get LNG exposure in your portfolio.
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Investors tend to take one particular U.K.-based electric utility for granted. Its history of predictable and defensive returns has long made it a no-brainer for income investors. Its dividend, which grows in line with inflation, has not been cut since 1996.

Let’s take a look to see if it’s worth your time…

The company I’m speaking about is National Grid (NGG), which the British government privatized in 1990. It owns, develops, and maintains the infrastructure that transmits electricity around England and Wales.

It also does the same, as well as distributing natural gas, here in the U.S.—in New York and Massachusetts—accounting for 45% of its profits.

National Grid

In the U.K., the company is essentially a monopoly and is therefore highly regulated. It is only allowed to make a certain rate of return, determined in advance by the regulator Ofgem (Office of Gas and Electricity Markets) and put in place for several years at a time.

Ofgem made its latest determinations for electricity distribution, covering 2023 to 2028, at the end of 2022. In its investor presentation, the company announced its new electricity distribution price control, targeting 100 to 125 basis points in operational outperformance as compared to the previous price control measure.

Ofgem’s price control framework is complex. However, in very simple terms, here is how it works: the bigger National Grid’s asset base becomes, the more money it is permitted to make—particularly given that its U.K. asset base is indexed to inflation.

The abundance of U.K. and the U.S. investment opportunities in aging energy transmission networks and renewable energy should be a boost for the business. For example, National Grid was awarded a $50 million grant from the U.S. Department of Energy (DOE) for a project that will deploy digital technology to optimize the use of distributed energy resources (DERs) to improve electric system reliability and resilience. In addition, an ever-growing network of renewable energy in Britain and the U.S. will push the company’s earnings and dividends higher.

Some worry that National Grid has low equity and lots of debt; however, it has been this way for many, many years. Dividend cover has been slim, even in the best of times, with earnings-per-share only slightly higher than dividends-per-share. But the company has almost always surprised investors in a good way—and analysts at Credit Suisse actually expect dividend cover to improve slightly over the next few years.

Back in 2021, the company decided to shift its focus completely to electricity and move away from gas. The goal was to transform National Grid from a low-growth gas transmission business to a higher growth utility business. It agreed to buy Western Power Distribution (WPD)—which ran grids in the English midlands and southwest regions, as well as in Wales—from U.S.-based PPL Corporation (PPL) for about $11 billion.

The company’s decision to sell off its gas assets should also free up some cash. In July, National Grid sold a further 20% stake in its U.K. gas transmission and metering business to the existing majority owners, an investor-consortium led by Australia’s Macquarie Asset Management. The stake sale was on the equivalent financial terms as when it sold a 60% stake to the consortium in January. That deal had implied an enterprise value of about $12.5 billion for the unit, National Gas.

Over the longer term, these monies—when plowed into infrastructure—should yield ample rewards for shareholders.

Investing in National Grid

If you’re interested in NGG’s dividend policy, it’s different from that of U.S. utilities.

The company’s dividend payout is linked with the rate of CPIH inflation in the U.K. CPIH is the Consumer Prices Index, including owner occupiers’ housing costs. CPIH inflation is currently at 6.3%, compared with a peak of 9.6% last October.

I believe that electricity infrastructure will play an increasingly important role in the move towards net-zero emissions. National Grid is well positioned to capitalize on this industry trend, given its demonstrated leadership on climate change. Its move to increase the weight of electricity networks over gas ones against a backdrop of accelerating energy transition has been sensible.

I consider the company a dividend aristocrat: it has been increasing its dividend every year since 1998, delivering an impressive 6.3% average annual growth over that time period. In the period from 2005 to 2012, the dividend grew at a 10% annual rate. And, thanks to the high selling price of its U.K. gas transmission assets, National Grid should be able to continue to grow dividends in line with inflation.

Keep in mind that inflation is a good thing for NGG, and its income-seeking investors. The stock (current yield 5.61%) is a buy in the $58 to $62 range.