Gosh, I guess all those perma bears out there were wrong, again. The S&P 500 is on the cusp of making new all time highs. The market is already up 16% for the year. And there is no recession in sight.
The new all time high is a significant milestone. Although the S&P 500 hasn’t hit new highs quite yet it is only just about .01% from the mark. The new high is significant because it negates any possibility that we have been in a bear market since September, when the previous high was established.
The bull market lives, and probably for a while longer. Those who were preaching gloom and doom last December have been proven wrong and the economy is actually in pretty good shape. Of course, there could be a recession looming two years out. I don’t know. But it seems clear that no recession looms on the radar, a year or less from now.
It’s all about earnings right now. This is first quarter earnings season and it’s an unusual one. Last year, we had blowout earnings. The average S&P 500 company posted earnings growth of over 20% for 2018. That is highly unusual in an economy not just coming out of recession. But the market didn’t really care because that earnings boom was already baked into the cake. With tough year over year comparisons, earnings growth in the aggregate is shrinking slightly this quarter. But the market doesn’t care because that too is already baked in.
It’s all about expectations. And companies tend to be very good at jiggling things around in order to beat them. Nevertheless, earnings will be a very important determinant of the near term direction of several Cabot Dividend Investor portfolio positions. I will be watching very closely.
In the meantime, we have an economy and market that look solid. As I often mention, it’s an ideal time for dividend stocks. The relative performance of dividend stocks is likely to be better than it has in many years. You’re in the right place.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP $42 – yield 4.9%) – This global infrastructure investor in utilities, transportation assets, oil and gas pipelines and storage, and data services has been outperforming the market recently. It also sells at a reasonable valuation with a 4.9% yield. It a good market for defensive income paying stocks like this but BIP also has the advantage of being invested in a sector rapidly coming into vogue. I like this stock for both the long term and the near term.
HOLD – Community Health Trust (CHCT $35 – yield 4.5%) – REITs are a good asset class to be in right now and Healthcare is a great sector. The health care property REIT is in both. It’s a newer, smaller REIT of this kind. That’s a good thing if the company performs. This REIT has grown revenues by an average of 43% per year for the past three years and the stock price has averaged a 30% annual return over that period, double that of the overall market. It’s also outperformed both the market and the REIT index in every measurable period so far this year. It’s still a great stock to hold.
BUY - Enterprise Product Partners (EPD $29 – yield 5.9%) – Every week I tell you how great this energy pipeline and storage company is. The stock really checks all the boxes: a steady dividend (20 years of increases), a catalyst for earnings growth (new projects coming online), a balance sheet with investment grade rated debt, and a fantastic track record. It’s also operating in the midst of an energy boom. But the stock has been range-bound since early 2016. If it can break out above $30 per share this time around it can go a lot higher. We’ll see what happens in the next few weeks. The company announces first quarter earnings in a few weeks; maybe that’s what it will take.
HOLD – STAG Industrial (STAG $28 – 4.8%) – This all 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. It is just about at the 52-week high and 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 to see if it can break out to a new level or it starts to pull back. It pulled back just a little recently but it might be healthy. There is no cause for alarm yet but I’ll be watching. The earnings announcement on April 30th may reveal its direction.
Dividend Growth Tier
BUY – AbbVie (ABBV $78 – 5.3%) – The biopharmaceutical giant pays a 5.3% yield, that’s huge for a big pharmaceutical company, especially one with as much growth potential. As well, it’s grown the payout an average of 17.5% a year for the last five years. Of course, the fact that the stock is 25% off the 52-week high is boosting the yield and there are reasons for subpar stock performance. Increased competition for its blockbuster Humira drug is scaring investors. I’m confident that over time its strong newly launched drugs and industry leading pipeline will overcome the problem. The near term is less certain. We’ll see what happens when AbbVie reports earnings next week. But either way, you’re really getting paid to wait it out.
BUY – Altria (MO $56 - $5.6%) – This is another stock in which the near term direction will likely be determined by earnings, which it will deliver next week. Its new investments in marijuana and E-cigarettes will take some time to get a thumbs up or down from the market. In the meantime, the market will want to see if the cigarette maker can beat earnings estimates and the level of cigarette volume slippage in the quarter. The stock just paid a nice quarterly dividend and will pay another in June.
BUY – American Express (AXP $112 – yield 1.4%) – The credit card company announces earnings tomorrow morning. The stock is approaching the 52-week high after a strong year. The good news about earnings is that Wall Street expectations are relatively modest and a significant beat would probably send the stock beyond the old highs. But signs of growth stalling out will have the opposite effect. I’m maintaining the BUY because I believe the earnings will offer more upside potential than downside risk. But we’ll see. I’m be watching closely,
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%) – The 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. It may well be that conservative utilities have been given new life by the Fed. Utilities like ED are particularly vulnerable to rising rates.
HOLD – Ecolab (ECL $184 – yield 1.0%) – What can I say? The stock is on a tear. It just hit a 52-week high after being up 23% in the past three months and 6% over the last month. Sure, it’s getting pricey, especially for a slower growth defensive chemical and sanitation company. But it has the big mo. Let’s see how far it can go.
Rating change “HOLD” to “SELL”
SELL – Hormel Foods (HRL $40 – 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 stock has run out of momentum while other defensive stocks have been going strong. It has significantly underperformed its packaged food peers as well as the overall market in every measurable period so far this year. It’s starting to become technically dangerous as well, threatening key support levels. Given the current valuations and the modest growth expectations going forward, I believe there is more downside risk than upside potential. It’s time to sell.
BUY – Invesco Preferred ETF (PGX $15 – yield 5.6%) – 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. Preferred stocks took a dip during the market selloff, so I will watch this closely if things get ugly again. But for now, it’s been nice and steady.
HOLD – McCormick & Co (MKC $152 - yield 1.5%) – After stumbling on disappointing earnings in January after a fantastic year, the stock has resumed its ascent and is up over 10% for the past month. The stock has now surpassed its high of January and is near an all time high. Momentum is still there but valuations are getting very stretched. I won’t fight the tape on this one but I may pull back when it loses momentum. You saw what happened to Hormel.
BUY – NextEra Energy (NEE $190 – yield 2.6%) – This is a stock you can hold indefinitely. You get solid predictable cash flow with a high level of growth from its alternative energy business. Although the stock is nearing the 52-week high, valuations aren’t stretched considering the high level of earnings growth it offers. It reports earnings next week where a modest level of year over year growth is expected. The report could certainly impact the near term direction of the stock. There is no reason not to be confident but stay tuned.
HOLD – Xcel Energy (XEL $55 – yield 2.9%) – Utilities have been the best performing sector of the market over the past year and Xcel has nearly doubled the index return of the period. It’s not a buy here because it is bumping up against the 52-week high and valuations are getting stretched. This alternative energy utility has a bright future but utilities have been sputtering as a market sector over the past several weeks. Like many other portfolio positions, Xcel will report earnings next week. I will HOLD for now.
