Market Overview
As we start this short week, the stock market has experienced a slight downturn. The Dow is down about 1%, the S&P 500 is down 1.4%, the Nasdaq is down 2%, and the Russell 2000 is down 2%. While not a meltdown, it’s a noticeable dip as reality sets in and investors eye the upcoming jobs report.
The construction numbers for July came in lower than expected, aligning with the slowdown we’ve been observing in the construction and real estate sectors. Bonds have shown a slight recovery, up a bit after last week’s sell-off.
Technical Analysis
The S&P 500’s weekly chart shows that we’re not back up to the steep levels on the relative strength index (RSI) seen in previous peaks. The market maintains positive momentum and remains well above levels that would indicate a change in trend. We’ve been in a continuous uptrend since October, following a brief reversal earlier in the year.
While it may not be an ideal time to be a buyer due to elevated levels, I’m not advocating for widespread selling. Companies with strong fundamentals, those buying back stock and paying dividends, still merit holding. However, it might be time to exit positions in “story stocks” lacking earnings or solid fundamentals.
Bond Market and Interest Rates
Treasury bond yields are attempting to reverse a multi-year downtrend. The market is pricing in a potential rate cut in September, with some hoping for a 50-75 basis point reduction. However, such a significant cut would likely signal serious economic troubles, potentially leading to a substantial downturn in the stock market due to reduced earnings.
Market Health Indicators
About 62% of stocks on the New York Stock Exchange are trading above their 200-day moving average. This is a positive sign, indicating a healthy market without reaching the extreme levels that might signal a major top or bottom.
For the S&P 500 specifically, 77% of stocks are above their 200-day moving average, which is approaching an elevated level. Different sectors show varying strengths, with energy stocks currently underperforming while financials and IT remain strong.
Commodity Markets
Oil and Natural Gas
Crude oil has seen some pullbacks but remains volatile due to ongoing tensions in the Middle East. Natural gas prices have been crushed recently, but the long-term supply and demand fundamentals remain favorable due to increasing energy demands from various sectors, including AI, quantum computing, and the electrification of industries.
Agricultural Commodities
Grain prices, including soybeans, wheat, and corn, have seen significant declines. This downturn is creating potential opportunities in related stocks.
Investment Opportunities
Let’s take a closer look at the investment opportunities highlighted in the report:
- ConocoPhillips (COP)
- Recently approved merger deal with Marathon Oil
- Dividend yield: 2.87%
- Price-to-earnings ratio: 11x
- Strong track record of shareholder returns through buybacks
- Decent earnings increase projected for this year
- Major player in oil and gas production
- Devon Energy (DVN)
- Major player in the Permian Basin
- Price-to-earnings ratio: 7x
- Trailing twelve-month dividend yield: 4.1%
- Significant portion of free cash flow allocated to dividends, stock buybacks, and debt reduction
- High shareholder yield
- Growth strategy includes both organic growth and acquisitions
- Positioned to benefit from rising natural gas demand
- Coterra Energy (CTRA)
- Considered a top pick in the natural gas sector
- Dividend yield: 3.5%
- Price-to-earnings ratio: 8x (based on estimated earnings)
- Projected five-year forward earnings growth rate: ~15%
- Price-to-sales ratio: 0.92
- Major player in key natural gas fields, including the Marcellus Shale
- Utilizes AI and machine learning in drilling operations and business management
- Well-positioned to benefit from potential policy changes favoring domestic energy production
- Mosaic Company (MOS)
- Dividend yield: 3%
- Significant earnings increase projected for this year
- Price-to-earnings ratio: 10x (based on projected earnings)
- Key player in fertilizer production, particularly phosphates and potash
- Recent challenges include flooding at Esterhazy mine, now resolved
- Potential beneficiary of increasing global food demand and soil nutrient deficiencies in major markets like China and India
- Well-positioned to benefit from growing demand for phosphates in electric vehicle battery production
- Strong balance sheet noted by analysts
- NextEra Energy Partners (NEP)
- Current dividend yield: approximately 14.5%
- Management has reaffirmed growth targets presented in July
- Projected average annual growth rate of distributions: 6%
- Annualized run rate of $3.73, slightly higher than last year
- Growth target range for distributions: 5% to 8.7%
- Management actively engaging with investors through roadshows and presentations
- Despite market concerns, management maintains commitment to dividend growth
These opportunities span across the energy sector, from traditional oil and gas to renewables and associated industries like fertilizer production. Each company presents a unique value proposition, combining attractive dividend yields with potential for growth and strong market positions in their respective industries.
Conclusion
While the market shows some signs of weakness, long-term opportunities exist in energy, financials, and agricultural stocks. The Yield Report portfolio maintains a strong position with a focus on dividend-paying stocks with solid balance sheets and growth potential. Investors should consider using price weakness as an opportunity to accumulate shares in well-positioned companies, while maintaining a cautious approach given potential market volatility from various economic and geopolitical factors.