The Economy Roars On
The story of this market is changing. First quarter GDP came in at a blowout 3.2%, eons beyond what any economist was predicting. This wasn’t factored into the market math.
This economy was losing steam, or so they said. In fact, the losing steam narrative escalated into a fear that we might well be decelerating into the next recession. That was a big part of the psychological backdrop of the 20% selloff late last year. When that narrative collapsed the new slow growth narrative was born.
Now even that narrative is proving false. I didn’t read one economist or financial prognosticator that was anticipating an economic acceleration. I think it’s because these aren’t the most creative people in the world. All they have is historical context and their charts. The notion that ‘it’s different this time’ simply doesn’t compute. But it is different this time.
The first eight years of this recovery posted the slowest GDP growth in the post World War II era, thus the economy isn’t saddled with the excesses that normally accumulate by this stage of a recovery. As well, it is highly unusual for the economy to get a huge shot of adrenaline in the form of tax cuts and aggressive deregulation in the late stages of a recovery.
As I’ve mentioned in previous updates, the economy is in better shape than the experts knew. While things can change, we could have a strong economy for many more years before the next recession. Not only that, but the strong growth is coming with low inflation, which should keep the Fed from hiking rates.
We have a strong economy and low interest rates. That is a great backdrop for the market. The underlying fundamentals behind the market and this portfolio have significantly improved from just last week. And that’s a good thing.
Meanwhile, we are in the middle of earnings season. And a number of portfolio positions are in the spotlight.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 41 – yield 4.9%) – The global infrastructure MLP has a very good looking chart here as the stock is consolidating at recent highs. It has new projects, namely two new data centers, that came online in December and January, that should help boost earnings and it will announce first quarter earnings on Friday. It’s a good, defensive business with a strong yield 4.9% in an industry that’s coming into vogue. I like this in both the short and long term.
HOLD – Community Health Trust (CHCT 36 – yield 4.5%) – REITs are a good asset class to be in right now and Healthcare is a great sector, and this health care property REIT is in both. The stock has been on fire, up 48% over the past year and 26% year-to-date. This newer, smaller stock has only traded for about four years but it has been spectacular. It is continuing to make new highs, so it’s worth hanging on for the ride. It will probably pull back and some point but not yet.
BUY - Enterprise Product Partners (EPD 29 – yield 5.9%) – Enterprise announced earnings this morning that were significantly beyond expectations, $0.57 per share versus an expected $0.47. The company posted record volumes and an impressive 18% rise in distributable cash flow. The market seems pleased as the stock is 1.65% higher on the day. Because of time constraints, I will deliver a more detailed analysis of the results next week, but we’ll stay on Buy given the overall story and stock’s action still look healthy.
HOLD – STAG Industrial (STAG 29 – 4.8%) – The industrial REIT reported earnings yesterday that beat expectations. The stock has been a solid performer, up 16% for the year. It has also been flirting with a key resistance level near the 52-week high. We’ll see if the positive earnings announcement can propel the stock into a new range.
Dividend Growth Tier
BUY – AbbVie (ABBV 79 – 5.3%) – The drug maker reported first quarter earnings last week and beat expectations. The stock was up about 1% on the day. It showed EPS growth of 14.4% over last year’s quarter and raised guidance for 2019 earnings. The stock was rocked after fourth quarter earnings because it missed revenues as overseas competition took a bigger-than-expected bite out of Humira sales. But this quarter was much better and the company expects double digit earnings growth on the year, which is huge for a big drug company. But the market greeted the news with a yawn as investors need further proof that new and pipeline drugs can offset the slippage in Humira sales. The company is still at a bargain price with a great yield and should deliver nice appreciation over the intermediate term.
BUY – Altria (MO 54 - 5.6%) – Altria reported earnings last week and missed estimates. The stock fell about 6% after the announcement. Revenues were off 6% from the year ago quarter. Cigarette volumes fell 14% in the quarter. But considering seasonality and other one-time factors the real decline was 7%, still more than expected. As well, costs were higher because of the recent purchases of JUUL and Cronos (CRON). It was a rough quarter but the company is still projecting 4% to 7% earnings growth for 2019. The stock should hold its own in the quarters ahead while potentially huge growth catalysts in E-cigarettes and marijuana take shape. In the meantime, the stock is still a solid value with a very generous 5.6% payout.
BUY – American Express (AXP 117 – yield 1.4%) – After reporting strong earnings two weeks ago (revenues up 7%, EPS up 8%, and total loans up 14%), AXP has continued to move higher. The metrics look solid and JPMorgan raised their price target on the stock to $140 per share, about 20% higher than the current price. The stock has solid momentum and is up about 8% since it was raised from a HOLD to a BUY on March 27th.
BUY – Intel Corporation (INTC 51 – yield 2.2%) – The chip maker and brand new recommendation reported clunker earnings on Friday and the stock has fallen 11% since. While second quarter earnings were in line with expectations, the company reduced 2019 guidance. The semiconductor market is saturated right now, global demand is weaker and trade issues with China are weighing on things. But the main problem as far as Intel is concerned is slower demand in the all important data center market (accounts for half of the firm’s revenues and most of its growth) as it’s still digesting recent expansions. These things are temporary. There will be good and bad quarters. Growth occurs in fits and starts. But Intel is uniquely positioned to benefit as technology inevitably expands. This is a great entry point for the stock which should recover fairly quickly.
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 fill the bill. The yield isn’t great but it’s something. As long as there are a lot of risks out there and we could be in the late stages of the economic cycle these short-term fixed income funds are worth holding.
HOLD – Consolidated Edison (ED 86 – yield 3.5%) – The NYC utility is on a nice run, up 13% in the last three months. It’s been outperforming its peers in every measurable period this year. It also just broke out above recent highs and may run up to the high of late 2017 at $89. It reports earnings on Thursday which may provide the catalyst needed. There’s no reason to expect a bad performance so I’ll hold it here.
Rating change “HOLD” to “SELL”
SELL – Ecolab (ECL 184 – yield 1.0%) – It’s been marvelous. This defensive juggernaut is up over 25% so far this year. This is a stodgy, defensive company that’s been acting like a tech stock. But the stock has gotten ahead of itself in my opinion. It broke through the old high of $160 and kept on rolling. The chemical and sanitation company announced earnings this week that were generally positive, an earnings beat and revenue miss. The stock didn’t do anything, and I don’t see how the stock can move much higher from here, while I see some downside risk. Thus, I’m firing the stock for overly good behavior and selling the remaining one half of the position at a 45% profit in a little over a year.
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 any day of the week. Preferred stocks took a dip during the market selloff, so I will watch this closely if the market takes another dive. But for now, it’s been nice and steady.
HOLD – McCormick & Co (MKC 154 - yield 1.5%) – After stumbling on disappointing earnings in January after a fantastic year, the stock has resumed its ascent and is up 25% in the last three months. Since being added to the portfolio last summer this spice maker has returned over 30%, way better than the overall market and with less volatility. The stock has now surpassed the old 52-week 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.
Rating change “BUY” to “HOLD”
HOLD – NextEra Energy (NEE 194 – yield 2.6%) – This is the largest utility and, in my opinion, the best. It offers steady income from its best-in-class regulated utility business while delivering a higher level of growth courtesy of its world-leading alternative energy business. It keeps slowly forging to new highs. At this point, it’s fairly valued, considering it delivers a higher level of growth than its peers, but not overvalued. The market loves this stock right now. As long as investors continue to gorge it with affection we’ll take it. But it is too highly priced to continue to accumulate at the current level. I’m changing the rating from a “BUY” to a “HOLD”.
HOLD – Xcel Energy (XEL 57 – yield 2.9%) – Utilities operate near monopolies in their areas. But in exchange they are highly regulated. Regulators can be accommodating or hostile. Xcel is a favorite child of these regulatory bodies because it offers cleaner, alternative energy sources. Increasingly common climate-conscious legislators at the state level are giving Xcel an unfair but welcome advantage. It’s in regulatory heaven. And it’s not going away. It has the advantages of a utility but not the offsetting disadvantages. Earnings were good and the stock rolls on. The stock isn’t cheap (near the 52-week high) but the chart looks good and has solid momentum.
