The Economy Might be Stronger than We Thought
The tide is changing. The recent perception was that of sputtering economic growth in a market that was panicking about the possibility of a near-term recession. The panic subsided this year and we had an oversold market in an economy that was slowing but nowhere near recession yet.
But it is starting to look like the economy is stronger than previously assumed. The job market is strong, consumer spending looks good and housing starts have gained new life. In fact, the Atlanta Fed has raised their previously bleak first-quarter GDP growth forecast to 2.3%. That’s a solid number considering first-quarter growth is always weaker than growth in the rest of the year.
It is starting to look a lot like the market of a year ago, with one key exception: the Fed. The Fed has stopped raising rates and announced its intention not to raise rates at all this year. It appears as though we might be in a strong economy that is free of Fed harassment. But we’ll have to wait and see how first quarter earnings pan out for confirmation.
Moving to our portfolio, many of our defensive positions have gone gangbusters in the past turbulent year. The market still loves them, for now. But several of these stocks are getting pricey and if the defensive orientation of the market shifts with better economic fortunes, they could pull back. I’ll be watching the situation closely but for now I will bow to strong momentum.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 41 – yield 4.8%) – This infrastructure MLP has good momentum and sells at a reasonable valuation. After an uncharacteristically bad year, down 23% in 2018, the stock is up 20% so far this year. It sells at a reasonable valuation of 11.6 times cash flow, and pays a 4.8% dividend that will likely grow annual earnings at least by high single digits in the future. The stock suffered last year because it sold a business and has since reinvested the proceeds in higher-return business that will come on line this year. The long-term formula is great and it looks like the short-term circumstances check out too.
HOLD – Community Health Trust (CHCT 35 – yield 4.6%) – After enduring a brief dip at the end of February/beginning of March this small healthcare REIT has come roaring back. It has a great record of outperforming the index and the market and looks poised to move higher in the coming weeks.
BUY – Enterprise Product Partners (EPD 29 – yield 5.9%) – This U.S. energy behemoth just raised its quarterly dividend for the 59th straight quarter; that’s every quarter for about 20 years! You just don’t do that unless you have a stable and predictable cash flow backed up by a solid business. Enterprise is still selling at a cheap valuation, with a monster 5.9% yield and strong earnings growth likely this year as new projects come on line. As I mentioned in previous updates, the stock faces strong resistance at the 30 level, and currently trades at 29.25. A breakthrough here would be a huge technical positive.
HOLD – STAG Industrial (STAG 29 – 4.8%) – This star-performing industrial REIT just keeps on going. But it has been trading in a range for more than two years. It just recently broke slightly above the old range, but is still fairly valued. It also has a history of falling back after breaking the old highs, so I’m cautious here. I’ll be watching closely if it can break out to a new level or starts to pull back. It pulled back a just a little this week, but that could be healthy. There is no cause for alarm yet.
Dividend Growth Tier
BUY – AbbVie (ABBV 83 – 5.3%) – The drug maker has had a pretty good April so far, up about 3% for the month while the market is basically even. More importantly, it’s broken into a higher range since bottoming at the end of January. The main test in the near term will be when it reports earnings later this month. The stock could have a big move up or down depending on how lower Humira sales overseas compare to growth of revenue from newly launched drugs. I’m very confident that over the intermediate and longer term the company can more than compensate for increased competition for its blockbuster drug, but I don’t know exactly how it will play out in three-month increments. Meanwhile, the stock will go ex-dividend tomorrow.
BUY – Altria (MO 55 - 5.6%) – Shares of this cigarette maker want to go up. MO slowly trends higher while periodically being rudely interrupted by bad news. Last week it was down because of a Morgan Stanley report that cigarette sales volume this year fell 8.8% through March as more smokers are shifting to vaping. This really isn’t news. It’s another reminder of the factors that are holding back Altria. The company is addressing the issues head on by raising prices on its flagship Marlboro brand and big investments in e-cigarette maker JUUL and marijuana company Cronos (CRON). I believe the stock will slowly move into the 60s while it awaits further news on its new forays.
BUY – American Express (AXP 110 – yield 1.4%) – Unlike Visa (V) and Mastercard (MA), American Express lends money directly to its customers. It’s a good thing in that they collect all the high interest for themselves but can be a problem in a recession because they are on the hook for delinquencies. Amex is the best lender in the business, only lending to prime borrowers with high credit scores. And the low delinquency rates prove it. Things look strong for this stock right now. Operationally it’s thriving and it has solid momentum.
Safe Income Tier
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.2%)BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.7%)
It’s nice to have something in the portfolio that isn’t vulnerable to a market downturn. These funds fit the bill. The yield isn’t great but it’s something. As long as there are a lot of risks out there and we seem to be in the late stages of the economic cycle these short-term fixed income funds are worth holding.
HOLD – Consolidated Edison (ED 84 – yield 3.5%) – This NYC utility is still behaving well. It’s very near the 52-week high but still a few dollars from the two-year high, with a little room to run. True, the stock has underperformed its peers over the past year but it has been stronger lately. For now it’s a HOLD.
HOLD – Ecolab (ECL 181 – yield 1.0%) – The good news for this chemical and sanitation company stock is that it has fantastic momentum. After outperforming its peers and the overall market in every measurable period over the past five years it continues to forge to new all-time highs with no end in sight. The current environment just loves this defensive player. The bad news is that valuations are getting very stretched, and the stock is selling at metrics well above the five-year average. It can’t go up forever but for now I won’t get in its way.
HOLD – Hormel Foods (HRL 42 – yield 2.0%) – This is an excellent food company that had a fantastic year last year in a turbulent market, returning over 30%. But the valuations are getting stretched for what looks at this point to be relatively slow growth going forward. The stock also appears to have run out of momentum. It goes ex-dividend tomorrow so I will hold for now.
BUY – Invesco Preferred ETF (PGX 15 – yield 5.6%) – The market is being kind to the preferred stock asset class right now. The high yield and lack of correlation to the stock and bond markets make this a nice portfolio holding and income generator. I’ll take a juicy yield and monthly payments with a stable price in this market any day of the week.
HOLD – McCormick & Co (MKC 153 - yield 1.5%) – After stumbling on disappointing earnings in January on the heels of a fantastic year, the stock has resumed its ascent and is up over 12% in the past month. The stock has now surpassed its January high and is trading at a new all-time high. I may sound like a broken record but while momentum is great valuations are getting very stretched. I won’t fight the tape on this one but I may pull back when it loses momentum.
BUY – NextEra Energy (NEE 190 – yield 2.6%) – Defensive utilities have their moments in the sun. But this company is much more. It is a best in class utility with huge exposure to the fastest growing energy sources. It is destined to provide reliable and growing income with growth as well. Although the stock is nearing the 52-week high, valuations aren’t stretched especially considering the high level of earnings growth it offers. Stay tuned for fourth-quarter earnings in a couple of weeks.
HOLD – Xcel Energy (XEL 56 – yield 2.9%) – The stock blew right past the 52-week high and still has more upside momentum. Utilities have been the best-performing sector of the market over the past year, but XEL has nearly doubled that return! It’s not a buy here because it is bumping up against the 52-week high but there is no reason to sell as long as the outperformance continues. Utilities had a subpar week so I’m not concerned that the upside stopped. Xcel announces first-quarter earnings in a couple of week. We’ll see what happens. But for now it’s a hold.
