Investors Alley

Beleaguered retailer Bed Bath & Beyond (BBBY) was once a favorite among meme stock traders. But just last week, the company expressed doubt that it will be able to continue operating without filing bankruptcy. The stock price dropped 25% on the news, falling under $2 a share. Most options action on the day appeared to […]

Bear markets tend to move in 3 stages.  I believe we just entered stage 2 (yes, only stage 2 at this point!).  There’s one US economic chart I’m looking at today that verifies what I’m telling you.  Every Thursday, I share weekly videos like this for free.  This video is under 3 minutes so it’s

Last year, the energy sector was the only market sector to post a positive return—and it did a heck of a job! The Energy Select Sector SPDR (XLE) gained 60% last year.

One-year gains like that may make you cautious about committing to energy this year, but I believe your portfolio should continue to hold an above-average energy weight.

Let’s look at some of the fundamentals…

The mega-cap energy companies give a good view of the sector. With a $440 billion market cap, Exxon Mobil Corp (XOM) is one of the ten largest U.S. companies. Exxon is an integrated energy company with operations that include drilling for oil and gas, refining, and even retail. For the 2022 third quarter, the company reported earnings of $19.7 billion—yes, the company made almost $20 billion in one quarter!—and had $24 billion of cash flow from operations. For comparison, Alphabet (GOOG), with twice the market cap, earned $14 billion for the quarter. Despite appreciating by 65% over the past year, XOM trades at a P/E of 8.

Chevron Corp (CVX), with a $340 billion market cap, also operates as a fully integrated energy company. Chevron earned $11 billion in the third quarter, with $12.3 billion of free cash flow. After gaining 43% over the last year, CVX trades at a P/E of 9.

These large-cap energy companies will remain very profitable at current energy commodity prices. If oil and natural gas prices go up during the year (which I think is very probable), the share prices could post similar gains. I think both will beat the Wall Street estimates for fourth-quarter results.

However, I have a better idea for the energy sector for 2023. I predict energy midstream will generate very attractive total returns. Midstream companies operate gathering systems, pipelines, and terminals. The business operates on a fee basis with long-term contracts. Revenues and cash flow to pay dividends are stable and growing.

In the midstream sector, you find corporations and master limited partnerships (MLPs). Currently, I favor MLPs. Both camps have the same growth prospects, but the MLPs start the year with higher current yields.

Midstream companies will grow dividends by high single digits this year. Combine that growth with similar starting yields, and you end up with total returns in the mid teens.

Here are three MLPs with near 10% yields:

Crestwood Equity Partners LP (CEQP)

NuStar Energy LP (NS)

MPLX LP (MPLX)

MLPs do come with Schedules K-1 for tax reporting. They also pay tax-advantaged distributions. If you don’t want the hassles of K-1 reporting or want to own MLP investments in a qualified retirement account, I recommend the InfraCap MLP ETF (AMZA). AMZA pays stable monthly dividends and yields 8.6%—and there is a good chance of a dividend increase when the fund announces its January dividend.
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Before the coronavirus pandemic, most of us had never heard of mRNA vaccines, which is not surprising.

Although scientists had been experimenting with the technology for literally decades (reminiscent of fusion), the technology had never progressed beyond the laboratory and into widespread medical use. But now, many of us have been vaccinated against COVID-19 with mRNA vaccines.

However, the gold mine that was COVID vaccine quickly petered out. Here’s what’s next for these biotech companies…

For those of you unfamiliar on how exactly mRNA vaccines, here is a quick description from the Mayo Clinic website:

This type of vaccine uses genetically engineered mRNA to give your cells instructions for how to make the S protein found on the surface of the COVID-19 virus. After vaccination, your muscle cells begin making the S protein pieces and displaying them on cell surfaces. This causes your body to create antibodies. If you later become infected with the COVID-19 virus, these antibodies will fight the virus. After delivering instructions, the mRNA is immediately broken down. It never enters the nucleus of your cells, where your DNA is kept.

The two most-used mRNA vaccines currently come from Moderna (MRNA) and the joint venture formed by Pfizer (PFE) and BioNTech (BNTX).

After riding high for much of the pandemic, the mRNA vaccine pioneers came down to earth hard in 2022. By mid-June 2022, the stock prices for both Moderna and Germany’s BioNTech had more than halved.

The Next Act for mRNA Technology Companies

But luckily for these companies, mRNA technology is more than a one-trick pony. It’s possible to use mRNA to trigger immune responses to other bodily invaders, including influenza and even cancer.

In fact, an announcement a few weeks ago from Moderna and partner Merck (MRK) has reignited interest in these companies. The two companies—jointly working on this project for six years—published a promising set of melanoma trial results in mid-December. The data released showed that a combination of the Moderna’s experimental cancer vaccine and Merck’s immunotherapy drug, Keytruda, reduced the risk of death or recurrence of melanoma in high-risk patients by 44%, compared with treatment using only Keytruda.

The results sent Moderna stock soaring 27% in the two trading days after their release.

The results emboldened Merck and Moderna to embark on a much larger Phase 3 trial (the Phase 2 trial involved only 157 patients). The companies will also test the combination against other kinds of cancer. “We believe that this should work in many tumor types, not only melanoma,” Moderna CEO Stéphane Bancel said in an interview.

Keep in mind, though, that unlike your typical vaccine, these shots will treat, not prevent, the disease.

In brief, here’s how a cancer vaccine would work: you get the tissue from a patient’s tumor, sequence it, and then, over a six-week period of time, you manufacture a vaccine that matches the top 10 to 20 mutations. The tailor-made vaccine stimulates a person’s immune system to selectively target those cancer cells.

Huge Potential

So, after five decades of failed attempts, cancer vaccines may be set for a breakthrough.

The nearly $17 billion jump in Moderna’s market value over two days following the announcement reflected investors’ hopes that cancer vaccines can work and become as common as the company’s mRNA vaccines.

Analysts from Jeffries say that the later-stage melanoma treatment market could be worth up to $5 billion (or between $9 and $15 per share in earnings) to Moderna. That figure may turn out to be far too conservative if mRNA vaccine technology works against other types of tumors.

Of course, there is no guarantee that the next phase of the Moderna/Merck clinical trials will be as encouraging as the last. And, even if the vaccine does work against melanoma, can the results be duplicated when tried against other types of cancers?

I think it can. Targeting multiple antigens decreases the odds that cancer cells will mutate in ways that make the vaccine useless, because the immune system will be attacking on multiple fronts. That makes personalized vaccines a great fit for fast-mutating cancers.

But we shall find out for sure in the years ahead.

Meanwhile, here’s how I look at both Moderna and BioNTech, which is working on its own half dozen or so cancer vaccines with companies like Regeneron Pharmaceuticals (REGN).

While many innovative biotech companies are struggling to raise funds, a successful coronavirus vaccine has left Moderna with roughly $7 billion of net cash. BioNTech has double that amount. The companies can now apply both their cash and the knowhow they gained during the pandemic to other urgent medical needs like cancer treatments.

Neither company is a low-risk investment. However, both Moderna and BioNTech look cheap when you consider the potential for cancer vaccines. Both Moderna around $175 a share and BioNTech at about $150 a share seem like reasonable bets.
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Although Peloton (PTON) has struggled since the pandemic, the embattled exercise company may have some bullish prospects in the coming months. A massive diagonal call spread traded last week in PTON options, which looks to be moderately bullish on the stock for 2023-2024 (and possibly into 2025). A diagonal spread is a combination of a

Last year, 2022, closed out as one of the worst years for investors on record. Stocks suffered a bear market, with the S&P 500 down 20% from its January high, and the Nasdaq lost 35%.

These numbers weren’t close to records, but when you add the record decline in bond prices, it was one of, if not the worst, year on record for a balanced portfolio.

What clues does history offer as we look ahead to 2023?

First, I think making historical comparisons is challenging in this modern world. Investing and trading are very different today. Most of the past results occurred before we had an instant news cycle and the ability to trade without paying large commissions. For example, before the 1990s and the widespread use of the Internet, stock prices showed up daily in the Wall Street Journal, and it cost $100 or more in commissions to trade 100 shares of stock.

With that in mind, let’s look at some stock market history. In the last 50 years, the S&P 500 has posted consecutive down years just twice. The first occurrence occurred five decades ago, in 1973 and 1974. And the market experienced three successive down years, from 2000 through 2002. The Great Financial Crisis had just a single negative year, 2008. The market bottomed in March 2009 and finished with a 26% gain for that year.

2009 may be a good reference for 2023. When the market turned higher after that March bottom, stock prices went gangbusters. From its 2008 closing value until the March 2009 low, the S&P 500 dropped by 26%. It was a brutal time to be an investor. But over the final nine months of 2009, stocks gained 67%!

Bond prices are a different beast. Bond values are a mathematical function driven by interest rates. When rates go up, bonds go down. At some point in the next four-to-six months, the Federal Reserve will stabilize rates, and bond prices will do the same.

These historical anecdotes coincide with my belief that the first half of 2023 will remain volatile. But there is a strong potential for share price gains during the second half of the year.

Since my strategies focus on building an income stream, these next few months will let my subscribers build up their income stock positions, locking in excellent yields. I have added some high-yield bond investments to my Dividend Hunter recommendations list.

I know investing can be emotionally challenging when the market seems completely unpredictable. The truth is that it is always unpredictable. Investors in March 2009 had no clue that stocks would gain 67% by the end of the year. I tell my subscribers that if they invest with the goal of building their dividend income, share prices will take care of themselves.

Investing to grow your income naturally leads to buying when prices are down and watching your portfolio grow when prices move higher.

Look at Starwood Property Trust (STWD) for one stock to pick up now. At the current $18.50, STWD yields 10.5%. To get back to the historical typical yield of 7.5%, the shares must climb to more than $25.00.
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2022 was a very tough year for the ARK Innovation ETF (ARKK). Cathie Wood’s flagship fund saw a nearly 70% share price drop for the year. A 40,000 lot of short calls that traded last week in ARK options suggests there could be some (but not a lot) of upside for the embattled ETF early

I am sure you are aware that last week, Southwest Airlines Co. (LUV) canceled more than two-thirds of its scheduled flights, with the cancellations continuing for days after the winter storm that initially triggered flight delays and cancellations. You might know someone whose holiday travels were completely disrupted by the shutdown of most of Southwest’s operations.

The lesson I see from this event is that the more complexity there is in a system, the lower the system’s ability to handle disruption.

There’s a lesson there for those of us looking to maximize our investment income in 2023…

Modern airline schedules are incredibly complex. Airplanes must be at the right airport and right gate within a very small window of time. Airline crews have to be on time, with everyone present—a plane won’t fly if the crew is missing its pilot or a flight attendant. Plus, flight crews can only work a maximum number of hours before getting mandatory crew rest.

If the airline does not have any slack, such as spare aircraft or on-call aircrew built into the system, a service disruption can quickly snowball across the entire operation. It is apparent that Southwest did not have any slack in their schedules for the holiday travel season.

You might be asking yourselves: how does this apply to investing?

It is my experience that the same can happen with complicated trading or investing strategies. When something goes wrong, it affects your entire investing plan. For example, JPMorgan Chase & Co. (JPM) reported that the average retail trader is down 38% year to date.

A big problem with most investing strategies is that they rely on the expectation of significant capital gains within a specific timeframe. A bear market, such as the 20% plus losses of 2022, can put you years behind and may push you to be overaggressive to try to catch back up. Making bigger and more aggressive bets to catch up can easily (and likely) lead to even more considerable losses.

To have an investment strategy for the long term, that strategy needs to be predictable, flexible, and simple to employ.

“Simple” doesn’t mean you won’t have to do research. What it means is that when your research finds a good investment, you can put your money to work and not have to monitor the results constantly.

Dividend-focused strategies are predictable. For any dividend-paying stock or fund, you know when you will be paid and how much you will receive. Good dividend-paying companies will grow their payouts over time.

With high-yield investing, as in my Dividend Hunter service, the investment goal is to earn income. We track results by tracking income. It’s a simple concept, but it takes a mental shift to understand that share prices will take care of themselves, and you can add to your high-yield investments at any time to grow your income stream. A decline in share prices means future income is on sale.

Another approach, dividend growth investing, lets you generate attractive total returns with confidence that if the stocks you own keep growing their dividends, you will also realize share price appreciation. I use this strategy with my Monthly Dividend Multiplier service, where the goal is mid-teens compounding annual growth.

That growth target will double your money every five years. It’s sort of boring (as dull as making money can be), and there are times when it seems nothing is happening when suddenly, a few years in, you see how much your portfolio has grown significantly.

Main Street Capital (MAIN) is one stock that fits both strategies. MAIN currently yields 7.5%, and the company has grown its dividend by about 5% yearly. Since its launch in 2007, MAIN, with dividends reinvested, produced an average 15.7% annual total return, turning $10,000 into $91,407.
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2022 was not a comfortable year for investors. Tech stock values imploded. The broad market coverage S&P 500 dropped by 20% for the year. The hot investment themes of 2021 lost investors trillions of net worth in 2022.

If you feel like nothing works in this uncomfortable market, consider my Dividend Hunter strategy, which generates reliable growth quarter after quarter and year after year – including in 2022.

Let me show you how it can work for you, too…

Last week, the daily DealBook email from the New York Times included these tidbits:

The S&P 500 is on pace for its first annual decline since 2018 and its worst performance since 2008.

Tech stocks, Treasury bills, cryptocurrencies, real estate. The great market sell-off of 2022 has been indiscriminate, wiping trillions off the stock market capitalization of risky and not-so-risky assets, and taking a huge bite out of average investors’ retirement plans.

Investors who followed my Dividend Hunter strategy realized a completely different outcome from their investment portfolios. The Dividend Hunter recommended investments list consists of high-yield stocks and other high-yield investments.

If you invest for income, I tell subscribers that you should track your income as the primary tracking metric. If your portfolio income is stable-to-growing, you are doing fine. With this approach, the portfolio value will take care of itself over time.

I own the Dividend Hunter recommendations in my solo 401k retirement account. I reinvest all dividends, some manually and some automatically, and I make monthly contributions. As I recommend to my newsletter subscribers, I record and track every dividend earned and total results quarterly.

For the 2022 fourth quarter, my portfolio income grew by 35% year over year. That is in line with my historical results since I established the account five years ago. I want to make clear that the income growth is from the investment of my contributions and earned dividends. I don’t do any market timing. I buy more shares every month as the cash hits my account.

If you aren’t contributing to your portfolio, investing in the Dividend Hunter recommendations will generate an average yield of 9%. Reinvesting the dividends will grow your income by 9%, compounding each year. The income growth is reliable and predictable and a heck of a lot better than the 20% to 30% or more investors who follow conventional strategies lost in 2022.

Here is a high-yield idea to get you started: the InfraCap MLP ETF (AMZA) yields 8.5% and will pay three monthly dividends in January. (It’s an ETF rules thing.) If you buy shares of AMZA this week, you will earn at least two of the dividends, and if you purchase today, January 2, you will receive all three.
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New Year is in just a couple days. We spent Christmas in my house noisily with one of my two granddaughters in attendance, with a prime rib roasting away. As is tradition, my wife had the TV tuned to a station that plays seasonal tones while the screen is filled with a roaring fireplace.

Now we’re heading to Orlando to my son and his wife’s house for Christmas part two, with our youngest granddaughter. To keep our New Year’s tradition alive, we will swap the prime rib for a pork roast and black-eyed peas.

As we ring in 2023, many investors will feel thankful that 2022 is over. Unfortunately, this year has not been much fun for traditional investors.

For less conventional investors, things looked much better…

If you bought into the Wall Street story and used low-cost indexes, or if you formed your portfolio along the suggested 60% stocks and 40% bond allocation, you have gotten waxed.

What worked in 2022 was unconventional thinking:

Those who invested in heavily discounted closed-end funds that own a lot of energy-related assets have done well in 2022.

Buying high-yielding bank stocks during market sell-offs has worked out OK as well.

Ignoring electric vehicles and renewable energy and buying fossil fuel-related stocks has turned out to be a brilliant strategy.

Heeding the late, great Marty Zweig’s old Wall Street adage, choosing not to fight the Fed was just as reliable a piece of advice this year as it always has been.

Buying stocks that trade below liquidation value has always been a winning strategy and is again this year. If you followed this approach, there would have been no wonderful, world-changing technology stories to tell around the water cooler about your 2022 portfolio.

Instead, you would have owned some incredibly boring companies that made hand tools, automobile locks, built ships, canned vegetables, and other mundane businesses.

And you would have had gains of more than 20% for the year.

If you followed Wall Street’s advice, you would have had close to 20% losses this year.

It would have been worse if you followed the growth stock gurus like Cathie Woods at Ark Funds. Her flagship Ark Innovation ETF (ARKK) has a portfolio filled with all the exciting companies that are supposed to be changing the world.

But investing in these stocks is not just about owning the companies that are changing the world: it’s about how they make or lose you money. Your investment portfolio can change your net worth and scheduled retirement date, and investors who owned ARKK this year and bought into the rebound story are down more than 60%.

It’s unlikely to get better. If you think that once inflation is under control, things are going right back to the way they have been the last decade, you are sadly mistaken.

The near-zero interest rates, tightly controlled by monetary policy, that we had for more than a decade are over. The markets will play a much more significant role in setting rates now.

The environment for stocks will be much less favorable. After a decade of above-average returns, we are in for a decade of below-average returns.

The good folks at GMO have forecast negative returns on domestic stocks and bonds for the next ten years or more. And Vanguard is looking for U.S. stock market returns of just 2.3%–4.3% annualized for the next decade.

If you do what everyone else is doing in the financial markets, you are probably about to have a very uncomfortable decade. Even the best-case scenario is that conventional approaches to investing will not provide the returns you need to live the life you have been hoping to achieve.

But there are strategies that have provided market-beating returns regardless of economic and market conditions.

They are not conventional. Most of the time, they are not even exciting. Most of them involve minimal trading, so there is no action to be found with these strategies.

But there are profits.

Chasing exciting dreams has never led to a happy ending in the stock market. Every time we get one of these world-changing stories, we have seen very fast large gains in the markets, followed by an epic collapse.

Everyone believes they are smart enough and quick enough to get out before the collapse. Most of us are not.

The world is changing in many exciting ways over the next few decades. Picking the winning companies in all the risky research and development efforts needed for those changes to occur is a crapshoot at best.

During the California gold rush in the 1840s, some prospectors and miners got rich. But everyone who sold supplies, blue jeans, picks, and shovels made a fortune.

The same approach to the next big thing will work for us in the markets for the next big thing: we can be the bankers and landlords to everyone working to make the future brighter. We can build their homes, sell them tools and supplies, and meet their everyday needs.

Investing at bargain basement prices in the companies that provide these services will consistently be a profitable approach capable of delivering the returns you need to make your goals a reality.

Have a fantastic New Year. I will be back in January to show you more ways to uncover the hidden profits in the unexplored corners of the financial markets.

Until then!
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