China Syndrome
Things were going so well in the market. Last week I gushed about the strong 3.2% first quarter GDP report. I noted that the fundamental backdrop for stocks had improved. And it did. Then an outside event had to come in and spoil the party, at least for now.
There has been an apparent breakdown in trade negotiations with China and President Trump is threatening to impose much higher and wider-ranging tariffs on Chinese goods as soon as Friday. This would be a considerable escalation of the trade war, would be a significant drag on the global economy, including the U.S.
The threat doesn’t appear to be negotiation posturing, either. Reports are that the Chinese have gone back on previously agreed upon issues. That’s not good. The odds of a deal being made have decreased while the chances of a full-blown trade war have increased. Negotiations are continuing and you never know what will happen. But it isn’t looking good at this point and that’s why the market is selling off.
It just goes to show that any market is vulnerable to bad news at any time. A trade escalation probably wouldn’t be fatal to the bull market, but it would at the very least limit the potential upside for the rest of the year. This is bad news in the near-term at least. But the story can change on a dime. I will certainly keep you posted.
In the meantime, earnings season rolls on. Several of the portfolio positions have reported consequential earnings over the last week.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 41 – yield 4.9%) –This global infrastructure MLP reported a slight miss in earnings last week. But it’s more complicated than that. Strong operating results were tarnished by recent asset sales and currency fluctuations. Organic growth was up 10% year-over-year. More importantly, the process of selling underperforming assets for higher margin ones that began last year appears to be working. New projects are coming online and boosting profits. The company projects that when all projects in the pipeline are online later this year funds from operations (FFO) will be up 22% from when the strategy started a year ago. The market was pleased with the results and the stock got a bump after the announcement. The chart still looks strong here.
HOLD – Community Health Trust (CHCT 38 – yield 4.5%) – The small healthcare REIT reported earnings yesterday that were very slightly below consensus expectations. That’s not too alarming though because the company has been doing exactly that for several quarters now and it hasn’t hurt performance, with the stock up 42% for the past year and 29% year-to-date. To be honest, I’m a little torn about whether to take some profits here since the stock has had a great run and is near the 52-week high. But the stock has yet to show any weakness and until it does it can go higher. So I’ll hold for now.
BUY – Enterprise Product Partners (EPD 29 – yield 5.9%) – Enterprise announced earnings last week 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 (DCF). The company began investing heavily to accommodate the energy boom in 2017 and those investments are coming online and boosting profits. DCF was buoyed by $1.7 billion in new projects that have been put into service so far this year. There is another $3,5 billion worth that should be in service before year’s end. The company is investing heavily in the crude oil and refined export market, building infrastructure and facilities, which is forecast to exceed Saudi Arabia’s by 2025. Things look good.
HOLD – STAG Industrial (STAG 29 – 4.8%) – The industrial REIT reported earnings last week that beat expectations. The stock has been a solid performer, beating the overall market and its peers in every measurable period for the last three years. It has also been flirting with a key resistance level near the 52-week high. The chart still looks strong and in the absence of any real sign of weakness it could still go higher.
Dividend Growth Tier
BUY – AbbVie (ABBV 78 – 5.3%) – This is a fantastic company that just isn’t getting any love right now. Earnings were good and the market didn’t even care. The main issue is whether it can replace competition for its top selling Humira drug with newly launched and pipeline drugs. I have outlined often how I believe it will. But the market won’t believe it until there is obvious proof. That may take a few quarters. In the meantime, it’s getting knocked around by all the political healthcare talk and the recent selloff in the market. This is a fantastic drug company that is obscenely cheap and it’s paying you fantastic 5.4% yield to wait it out.
BUY – Altria (MO 53 – $5.6%) – In many ways, this story mirrors AbbVie’s. Altria’s core business, cigarettes, is shrinking and the company is seeking to replace the falling revenue with new products, E-cigarettes and marijuana. The market is waiting to see proof that Altria can pull this off and until that happens the stock isn’t getting much love. As I’ve mentioned, I believe the company will pull it off. In the meantime, it is a highly undervalued stock paying you about 6% to wait around a little bit.
BUY – American Express (AXP 117 – yield 1.4%) – The credit card company, and perennial favorite of Warren Buffet’s, is performing great on an operational basis (revenues up 7%, EPS up 8%, and total loans up 14% in Q1). It also has solid momentum and should continue to run higher; JPMorgan raised their price target on the stock to $140 per share, about 20% higher than the current price. However, if the international situation deteriorates on this renewed friction with China I could change my opinion. I’ll be watching closely.
BUY – Intel Corporation (INTC 50 – yield 2.2%) – When it rains it pours. After disappointing earnings, the chip maker now has to contend with a bigger trade war with China. I believe the bad quarter was mostly an aberration as the data center market got a little ahead of itself recently. Plus, the new CEO was probably anxious to air out all the dirty laundry in the reporting period on the other guy’s watch. But China is a bigger concern. An all out trade war could certainly hurt Intel’s bottom line as many technology exports could be taxed and penalized. Stay tuned.
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%)
There is nothing to say about these safe short-term bond ETFs. And that’s the beauty of them. They just keep rolling on at a steady price paying interest. The value of that is evident in the last couple of days as the market has gotten scary again.
HOLD – Consolidated Edison (ED 84 – yield 3.5%) – The NYC utility announced an earnings beat last week on both earnings and revenue. Performance has been good this year, better than its peer group. It recently moved out to new highs and looks technically solid. As well, the new market turbulence could play in Con Ed’s favor as investors gravitate toward safer stocks. If things go well it could run up past the two year high of $89 per share.
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. As well, the recent market turbulence could give investors a renewed appreciation for an investment like this.
HOLD – McCormick & Co (MKC 154 – yield 1.5%) – What can I say? Since stumbling on disappointing earnings in late January, the stock has been on a roll, returning 23% 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.
HOLD – NextEra Energy (NEE 188 – yield 2.6%) – I love this stock but I’m not married to it. If the opportunity presents itself, I might leave it for a younger and prettier utility. That said, I don’t see any prospects out there. This steady revenue generator and earnings grower is still the hottest utility around. The stock was downgraded to a hold last week on concern that the price had gotten a little ahead of itself in the near term. It’s pulled back $6 since. But it is still fairly valued and the best in its class. With the pullback and a newfound respect for safety in the market, the stock could move higher from here.
HOLD – Xcel Energy (XEL 56 – 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. Increasing common climate conscious legislators at the state level are giving Xcel unfair but welcome advantages. 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 it has solid momentum.
