The world is about to change in a major way. So much so that you may look back ten years or even five years from now and realize how profoundly different things are since 2019.
The rapidly advancing rollout of 5G will be a technological tipping point that crosses a threshold into the digital age where everything is connected to the internet. Today, only a few things are connected. In a few years, the whole world will be computerized.
5G is such a game changer that many companies and governments can’t afford to be left behind. The current Administration has labeled 5G a national security priority. It seems 5G is the news arms race.
Those are the stakes. And it’s coming fast. In this issue, I identify a company that is at the epicenter of the 5G rollout. It holds vital technology that is light years above the competition and is necessary to connect any device to 5G. Earnings and revenues should skyrocket as the rollout proceeds in haste.
Cabot Dividend Investor 1119
An Amazing Opportunity from the 5G Revolution
The world is about to change in a major way. So much so that you may look back ten years or even five years from now and realize how profoundly different things are since 2019.
Identifying change is crucial to successful investing. And rarely is there such a profound and easily identifiable change on the near term horizon. Technology is about to make a quantum leap forward with the rollout of 5G technology. The rollout has already begun, but it will really take off in 2020.
Technically, 5G is the fifth generation of wireless cellular technology. But it is much more than just another incremental advancement. It represents a technological tipping point that crosses a threshold into the digital age where everything is computerized (see the May issue).
It will offer speeds and internet connectivity on a scale far beyond what is available now. The current 4G technology supports about 4000 devices per square kilometer. 5G will support about a million with instantaneous interaction with the internet. Today, only a few things are connected to the internet. In a few years, the whole world will be computerized.
It will enable self-driving cars, real time artificial intelligence and virtual reality, smart homes and cities and it will reshape the way we receive healthcare, shop and use the military. You may think we are already in the digital age. But, in a few years, you’ll realize that the digital age has truly begun.
5G is such a game changer that many companies and governments can’t afford to be left behind. Consider recent history. The U.S. was the leader in the adaptation of 4G technology. It gave rise to the app economy, which the U.S. completely dominates. The implications of 5G are far greater. With a 5G advantage and a head start in the technologies it spawns, a country could gain a huge advantage in a myriad of areas for decades.
The current Administration has labeled 5G a national security priority. The US National Security Council has warned that if China gets 5G first it “will win economically and militarily”. One Senator recently commented in a hearing that failure to win the 5G race “would forever reduce the economic and societal gains that come from leading the world in technology”. It seems 5G is the new arms race.
Those are the stakes. And it’s coming fast. You will likely start seeing it in the coming year. In this issue, I identify a company that is at the epicenter of the new technology. And earnings and revenues should skyrocket as the rollout proceeds in haste.
What to Do Now
The portfolio is still well positioned. It has a combination of defensive plays with renewed momentum as well as value stocks that are awakening.
Since the last monthly issue, three weeks ago, the REIT and Utility sectors have regained their footing. The sectors had been the worst in the market over the past month as the renewed “risk on” mood shunned the more defensive plays. It remained a question whether the pullback was an overdue consolidation or a more meaningful correction. Recent behavior is indicating the latter.
The notable exception to the value stock resurgence has been energy. The sector has resumed its role as the worst performing in the market as a global oversupply and fears of an economic slowdown caused a fall in oil prices. But the sector tends to fix itself. As production pulls back amidst lower prices, the supply/demand dynamic gets fixed. Going forward things should improve for the sector, and positions in EPD and CQP, into 2020.
While performance of value stocks Valero (VLO) and Altria (MO) have leveled off over the past few weeks, AbbVie (ABBV) is still going strong. The stock is up over 40% since mid August and 11% so far in November as investors are realizing it is undervalued with a bright future. The better performance of the Healthcare sector isn’t hurting either.
Right now, the most attractive stocks to buy are AbbVie (ABBV), Enterprise Product Partners (EPD) and Valero Energy (VLO) for reasons explained below. Of course, I do like the other “BUY” rated positions as well. But if I had to pick just three, those are the ones I would choose at this point in time.
Qualcomm (QCOM) is the world’s largest supplier of chips for mobile devices. It also holds the patents for the key technology systems that are the backbone of all 3G and 4G networks. In 2018, chips accounted for 76% of revenues while licensing from patents accounted for 23%, although the smaller area is more profitable and better insulated from competition.
A chip is part of the processor that is essentially the brains of a computer, smart phone or device that controls other devices in the system. These chips are the cutting edge of computer technology and determine the power, speed and function.
Big deal, there’s lots of semiconductor companies. And competition is fierce. But Qualcomm has an enormous advantage going for it right now. It is the undisputed king of the chips that will enable 5G technology.
Qualcomm’s 5G Snapdragon 855 chipset uniquely offers modularity, the ability to mitigate existing spectrum to accommodate 5G. It offers a bridge between older 3G and 4G and the 5G upgrade that virtually every company will need. In order to effectively compete in the fierce race between countries and companies to develop the new technology, equipment makers must have Qualcomm’s chips.
Sure, other companies, including Apple (AAPL) as well as companies in China, are working on competing chips. But they don’t have anything close to Qualcomm’s now and may not for some time. That’s a big deal.
Qualcomm estimates that smart phone makers will ship 200 million 5G enabled phones in 2020, 450 million in 2021 and 750 million in 2022. Analysts estimate that the 5G chip set market will grow from $2.1 billion in 2020 to over $23 billion by 2026. Qualcomm has already partnered with 30 smart phone makers that will use its chips and equipment. The new 5G enabled phones will start hitting the market in 2020. Over 75 5G devises are either in the process of being launched or in development.
Qualcomm is still, in my view, reasonably valued. It currently sells at 25 times earnings, which is only slightly higher than the five year average. Year-over-year earnings have fallen for the last couple of quarters largely because companies have pulled back on 4G products as they ramp up for 5G.
But the main reason to buy QCOM is acceleration in earnings next year as 5G rolls out. Analysts forecast a 45% spike in earnings next year and an average gain of 27% over the next five years. But those estimates could be quite modest.
Although the stock is up 60% so far this year, there are a couple of issues that have held it back. It had a legal dispute with Apple over Qualcomm’s licensing practices that was resolved. Apple is back to using its chips. However, there are other suits pending in the U.S. and abroad over Qualcomm’s practice of charging a percentage on the whole phone sale. It is likely that future rulings will somewhat diminish the profitability of Qualcomm’s licensing fees going forward.
Then there’s the China trade war. Bad news about trade disputes with China has hurt the technology sector and semiconductors in particular. It’s a problem because Qualcomm derives roughly two thirds of its revenue from China. There is a ban in doing business with device maker Huawai which is one of Qualcomm’s customers. Any negative headline about the trade situation usually hurts QCOM stock.
That said, Qualcomm offers the state-of-the-art 5G chip and other technology that China will need to compete. China needs Qualcomm more than vice versa. Even without a trade resolution Qualcomm will likely continue to sell to China. As well, a trade deal would probably be a huge positive for the stock.
Sure, the lawsuits will likely continue. And the market will continue to be uneasy about the trade situation. But QCOM is standing on the precipice of a massive growth in demand for its products as businesses expand into 5G. And the change to 5G is occurring at a much faster rate than the one for 4G, according to QCOM. The changeover will begin in haste next year in 2020 and will continue for several years.
Qualcomm Inc. (NASDAQ: QCOM)
Security type: Common Stock
Industry: Technology (semiconductors)
52-week range: $49.10 - $94.11
Profile: Qualcomm is the world’s leader supplier of chips for mobile devises and holds key patent technology for cellular network infrastructure.
- QCOM has by far the best chip for mobile technology and 5G.
- The company has already inked deals with 30 OEM manufactures for its 5G chips.
- A massive increase in demand should hit the market starting in 2020 and should continue for several years.
- The stock is reasonably priced and pays a growing dividend ahead of what is likely to be rapidly growing revenue and earnings.
- The company faces pending legal issues regarding its licensing practices that will likely hurt royalty revenue to some degree.
- The China trade war is holding back semiconductor sales and causing investor angst about the company.
- This is a cyclical stock that doesn’t like down markets.
Portfolio at a Glance
Prices on November 26, 2019 at 11:20 AM ET
High Yield Tier
The investments in our High Yield tier have been chosen for their high current payouts. These ?investments will often be riskier or have less capital appreciation potential than those in our other ?two tiers, but they’re appropriate for investors who want to generate maximum income from their? portfolios right now.
Brookfield Infrastructure Partners (BIP – yield 3.8%) – The global infrastructure company continues to make new all time highs. Its long-life stable infrastructure assets generate reliable cash flow that is growing as new higher margin investments in North America energy pipelines, North American railways and Indian telecom towers with higher margins increase revenue. The company also has an additional $1.1 billion in new investments that should come on line in future quarters. Infrastructure remains in vogue with investors as safety and high yield remains popular. The stock is still rated HOLD because it is already up over 60% on the year and valuation a little stretched for new money. But the momentum is still strong. HOLD
Community Health Trust (CHCT – yield 3.6%) – The stock retreated from its all-time high as REITs got a little beaten up by the market. But its upward momentum is still intact despite a minor consolidation. I am concerned about valuation which is why two thirds of the position was sold over the past couple of months. I will continue to hold the remaining third as this has been an all-star performer (up over 60% for the year) and I’m not convinced that the market has abandoned REITs beyond the near term. HOLD
Enterprise Product Partners (EPD – yield 6.7%) – The energy sector has been under pressure as oil prices have been weak because global inventories are rising while China trade fears persist. As a result, rig counts in the U.S. have been falling, which is probably curbing the enthusiasm for infrastructure stocks. The stock rallied a bit this week as crude inventories rose less than expected. This company is growing strongly regardless of the rest of the sector. It has billions in new projects coming on line in the upcoming quarters. The stock is a great value with an enormous dividend that is rock solid and growing. BUY
STAG Industrial (STAG – yield 4.6%) – The industrial REIT has been significantly outperforming the REIT index of late and is not far from the all time high. Its industrial properties are in high demand as supply is straining to keep up with huge demand for warehouse properties as the online shopping boom continues. It’s a great niche in the REIT sector and operational performance as well as stock performance should remain strong for the foreseeable future. Momentum still looks good. HOLD
Dividend Growth Tier
To be chosen for the Dividend Growth tier, investments must have a strong history of dividend increases and indicate both good potential for and high prioritization of continued dividend growth.
AbbVie (ABBV – yield 5.5%) – The stock actually pulled back slightly after a pretty much relentless move higher over the past three months. After being battered badly by concerns of slippage in sales of its blockbuster drug Humira, AbbVie stock has really found traction over the last several months.The stock is still up over 39% since mid August and 10% so far in November. The stock has also been aided by a rotation into value and positive news in the trial phase for a couple of its promising drugs. Yet despite the recent run-up, ABBV still sells at a remarkably cheap forward price/earnings ratio of about 9 times. This is still a great stock to buy here, especially with a stellar 5.3% yield. BUY
Altria (MO – yield 6.9%) – The news is unlikely to get better for E-cigarette maker JUUL, in which Altria took a 35% stake almost a year ago. Vaping is under siege by the regulators and politicians and the situation is unlikely to improve in an election year. That said, the stock has already priced in a terrible scenario and has likely already bottomed. Meanwhile, it offers great value, positive earnings growth and a safe 6.9% yield and value investors are taking notice. The company also got good news last week as the FDA has apparently dropped its bid to limit nicotine levels in cigarettes. The stock still offers great value with a massive dividend in an uncertain environment. I expect the stock to continue trending higher with a periodic downside jolt from bad headlines about JUUL. BUY
Cheniere Energy Partners (CQP – yield 6.1%) – This LNG exporter stock has been behaving poorly. The reason is likely a temporary glut in global LNG supply. New terminals in the U.S. and Australia have been cranking out liquid gas faster than global demand can keep up. Prices for LNG have halved in the last 14 months in Asia and fallen almost as much in Europe as well. There is concern that customers could opt out of delivery if prices continue to fall. Even though they have long term contracts, they can opt out of delivery with 30 to 60 days notice and a fee. The risk is making investors nervous. It’s just speculation for now but I will continue watching this one closely. HOLD
BUY – Crown Castle International (CCI – yield 3.6%) – This 5G infrastructure REIT has taken a hit over the past couple of months as the REIT sector experienced some consolidation after a long period of outperformance. Generally, the ones that had been up the most got hit worse. But at the end of the day, this REIT will continue to enjoy robust and growing demand for its properties as the 5G build-out continues in haste. The other 5G REITs are behaving in a similar manner and I still view the recent moves as a near term consolidation. BUY
Valero Energy Corp. (VLO – yield 3.7%) – The refiner stock has leveled out after a great run in October. Improving conditions in 2020 came into investor focus and third quarter earnings beat expectations. The easy move on 2020 anticipation has likely already occurred and the company will have to prove it from here. However, with inventories improving and the new IMO standards coming next year this refiner should show solid performance going forward and I expect the stock to trend higher. BUY
Safe Income Tier
The Safe Income tier of our portfolio holds long-term positions in high-quality stocks and other investments that generate steady income with minimal volatility and low risk. These positions are appropriate for all investors, but are meant to be held for the long term, primarily for income—don’t buy these thinking you’ll double your money in a year.
Alexandria Real Estate Equities (ARE – yield 2.5%) – This life science and research lab REIT continues to forge robotically higher. It was the most consistent and solid performing REIT in portfolio through the recent turbulent time for the sector. The stock is again at new highs as demand for its rare facilities remains strong and investors are still attracted to the defensive nature of the business. Even if the overall market continues to move higher, there is still a lot of uncertainty out there and I believe investors will continue to demand a rock solid dividend payer like this. Alexandria is still a great place to be in this environment. BUY
Invesco BulletShares 2019 Corporate Bond ETF (BSCJ– yield 2.3%)
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.7%)
The best thing I can say about these short-term, investment grade bond ETFs is that there’s nothing to say. These bonds remain steady and predictable, just like they should. It’s comforting to have something in a portfolio that pays interest and is unaffected by market volatility. It tends to steady out portfolio performance and can help keep you invested in times of volatility. BUY
Invesco Preferred ETF (PGX – yield 5.4%) – This preferred stock ETF is a great way to get a high yield and diversify into an asset class that is not correlated to the stock or bond markets. It is a rare way to get a good yield in a low interest rate world without taking on much risk. The performance has been solid and it remains a nice position to have in the late stages of the market cycle where uncertainty remains a factor. BUY
NextEra Energy (NEE – yield 2.2%) – This utility not only earns consistent and growing regulated utility income from its Florida Power and Light division in regulator friendly Florida, but it is also a huge player in alternative energy, which enables a higher level of earnings growth than its peers. At present, NEE is the best performing large utility in the country. But it has a bright future, as alternative energy only represents about 10% of America’s energy consumption and is expected to grow strongly over the next decade. Investors still love defense and NEE remains near the all time high with still solid momentum. HOLD
Xcel Energy (XEL – yield 2.6%) – XEL also has a strong presence in alternative energy which is driving a higher level of growth than its peers and also bodes well for the future. Utilities are still a strong choice going forward as uncertainty continues to loom and investors are desperate for yield. The stock has returned over 100% since being added to the portfolio in October of 2014, significantly outperforming both its peers and the overall market over that period. I believe the outperformance will continue in the years ahead. However, it is rather pricey at this point and I will consider selling at least a partial position on further weakness. HOLD
Don’t Forget Healthcare
Here we are in the very late stages of a recovery and bull market. Overall, the market seems at least fairly valued near an all time high.
The more cyclical stocks have performed well of late, but how long can that continue? Defensive stocks are a good place to be but most of the best ones have gotten expensive. There has been resurgence in certain long neglected value stocks, but not all.
In the current investment quandary it is well worth considering stocks in the Healthcare sector. Healthcare has been the second worst performing sector, next to Energy, so far this year and many of the best of the bunch are still reasonably valued. The sector seems to offers everything investors want right now.
It is one of the most defensive sectors on the market, as people need healthcare regardless of the economy. But it is a defensive sector that isn’t overpriced; in fact it’s cheap. And value stocks are coming back. In a pricey, late-stage bull market, you need value with a promising future and often high yields. What’s the problem?
Given all those attributes, why has the sector underperformed?
The problem is politics. Several candidates for President have suggested a radical revamping of the entire healthcare system. Both parties are advocating price controls. The sector doesn’t like all this talk, and the rhetoric will get turbo charged in the upcoming election year.
But I believe the situation is creating an opportunity to invest in the sector cheaply. Consider that regardless of politics or sectors going in and out of favor or a recession somewhere on the horizon, this is a sector perfectly positioned in front of a megatrend. The population is older than ever before and getting still older at a torrid pace. No matter what, society will demand more and better healthcare.
A sector with such increasing demand for its products will not be a bad place to be over the longer term, especially if you can get in at cheap prices. In the end, politicians will be unable to do anything unpopular with something so vital to voters as healthcare. As the short-term merry-go-round turns investors off to the industry, it creates a fantastic opportunity to invest in an industry that will boom, and at reasonable prices.
And Healthcare may not be just a great longer term play. Investors may already be awakening to the opportunity. Healthcare has been the second best performing market sector over the past month.
Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates estimated.
The next Cabot Dividend Investor issue will be published on December 18, 2019.
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