A Bull in the China Shop
Okay, the China trade issue blew up. Not only is a deal not likely anytime soon, but both sides are digging in and things are likely to get worse. A potential positive catalyst has turned distinctly negative—a swing and a miss.
What does this mean for the market going forward?
While pundits and global organizations like the International Monetary Fund (IMF) and the World Bank complain that this is the worst thing that happened in the history of humanity, the tangible economic damage is actually rather minor. Even if tariffs are imposed on the additional $300 billion in Chinese goods it won’t be anything close to a game changer for the strong U.S. economy.
Consider that between mid 2017 and mid 2018, oil prices soared about 40%. That is a sizable cost on the economy, dramatically more impactful that the tariffs, and the economy and the market did just fine. The bigger risk is to China and a negative effect a deteriorating Chinese economy could have on the global economy. But China will likely impose offsetting stimulus to blunt the negative effect in the near term.
While the aggregate economic effect of the trade war is not as bad as many say it is, to select industries and companies it is a big deal, namely technology. In particular the trade issues are devastating for portfolio position Intel in the near term. (I’ll address that in the individual write up later in the update.)
In terms of the overall market, consider this. After a lot of up and downs, the S&P 500 is still about where it was at the end of 2017. In nearly a year and a half the overall market has gone nowhere while earnings have increased significantly. Valuations have moderated. There is also less trade war headline risk going forward, as the situation has already blown up. And now, there is a much higher possibility of a Fed rate cut later this year.
If things start to go south, the Fed can come to the rescue. Meanwhile, the economy is stronger than just about anyone anticipated and the market probably has a Fed put. Of course, more investors will likely gravitate to the safer dividend-paying stocks amidst the renewed volatility. The situation bodes well for market sectors that have been the strongest over the past year or so, namely REITs and Utilities.
Portfolio performance has been solid overall. The conservative and defensive-oriented positions in the portfolio are in the right place at the right time.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 42 – yield 4.9%) – Never underestimate the staying power of a defensive, non-cyclical business model and a high dividend payout. In the past tumultuous week the stock moved higher. Earnings were good a couple of weeks ago and the global infrastructure company is poised to grow earnings at a much-better-than-the-market clip over the course of the year. The chart looks good and the stock could break above the January high of about $44 in the near future.
HOLD – Community Health Trust (CHCT 38 – yield 4.5%) – The little healthcare REIT that could just keeps forging ahead. It offers the safe-heaven stability of a REIT combined with prospects for strong growth. You can hide from the market volatility and get upside at the same time. CHCT has enjoyed an up week and is now at new all time highs. The stock is up 52% over the past year and 33% year-to-date. We’ll see how much further it can go.
BUY – Enterprise Product Partners (EPD 29 – yield 5.9%) – Earnings revisions for this energy infrastructure giant have been trending higher. That’s a good sign for the near term. The company has another $3.5 billion in new projects coming on-line this year that should help boost earnings. The stock is still cheap and could be on the verge of a breakout above $30. I’ve been saying that for a while now but it’s still true. Hopefully, we’ll get some sort of catalyst to push it over the top in the near future. In the meantime, enjoy the monster 6.1% yield.
HOLD – STAG Industrial (STAG 29 – 4.8%) – This industrial REIT is in a good subsector of the business. Industrial space is in short supply and high demand. The economy is strong and the proliferation of online retail demand for warehouse space gets even stronger. As well, the properties only have to house stuff and not people. Stuff is much less demanding and the housing of it tend to be much cheaper. In the first quarter revenue was up 15% from the year ago quarter, and adjusted funds from operations soared 21%. The stock made a new all time high this week. We’ll see how much higher it can go.
Dividend Growth Tier
BUY – AbbVie (ABBV 80 – 5.3%) – In a market near all time highs with volatility picking up, there has to be a place for value. Spooked primarily by the loss of exclusivity in overseas sales for its flagship drug Humira, AbbVie has crashed 30% and now sells at 8.4 times forward earnings. That’s pricing in a severe sales drop that is unlikely in my view. Newly launched hematologic oncology drugs Imbruvica and Venclexta are growing sales beyond expectations. Newly approved psoriasis drug Skyrizi should give results a boost. And there’s also the industry leading pipeline. Patience with a 5.4% yield should pay off over time.
BUY – Altria (MO 52 – 5.6%) – The cigarette maker is another value play right now, selling at less than 13 times forward earnings. It has huge longer-term growth catalysts from newly acquired stakes in E-cigarette maker JUUL and marijuana company Cronos (CRON). In the meantime, Altria still has strong pricing power in its flagship Marlboro brand that can offset volume declines. Well Fargo made the case for it this past week and issued a price target of $65 with 10% per year earnings growth longer term. In the meantime, the stock pays about 6% with limited downside from here.
BUY – American Express (AXP 121 – yield 1.4%) – The credit card giant in one of Warren Buffett’s favorites because of the massive fees it continues to collect and an ever increasing number of global patrons are opting for cashless transactions. Business is strong—the company is expecting another 8% to 10% in revenue growth in 2019. The blue chip financial stock still has strong momentum and has broken through the 52-week high. Unless the global economy really sputters there doesn’t seem to be a reason not to own it.
Rating change “HOLD” to “SELL”
SELL – Intel Corporation (INTC 44 – yield 2.2%) – This is a phenomenal blue chip company at the epicenter of the technological revolution which is gaining steam. The long-term prognosis for the stock remains excellent. However, the company is in the direct line of fire in the China trade war. Technology has become ground zero in the dispute and Intel is a prime beneficiary of trade with China, deriving roughly 30% of revenues from such. In addition, Chinese tech company and Intel customer Huawei has been targeted for bans on business because of predatory practices of stealing technology. It also appears unlikely at this point that a trade agreement will be reached as each side seems to be digging in. It might take Intel a while to move beyond this issue and headline risks will continue to persist in the meantime. Of course, it is possible that a deal is reached but the risk/reward tradeoff for Intel stock in the near term is unacceptable for risk averse dividend investors. I’m selling the entire position today.
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. When the market booms these ETFs seem like a waste and dead money but the recent volatility underscores why these safe havens make a lot of sense in a portfolio.
HOLD – Consolidated Edison (ED 87 – yield 3.5%) – The utility sector has been a top performer for the market over the past volatile month. The sector is right in the wheelhouse of the uncertain, low interest rate environment as many investors gravitate toward safety. Utilities are also getting a boost for the Fed’s decision not to raise rates this year, and they could get a further boost if rates are lowered. The changing market environment is benefitting a quintessential safe utility stock like ED.
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%) – The stock is getting pricey, but the spice maker already had good momentum and the renewed volatility should be a new tailwind for the stock. When things get hairy food stocks are a nice place to be. And this is a good one.
HOLD – NextEra Energy (NEE 199 – yield 2.6%) – Everything seems to be going right for this stock right now. This is a good environment for Utilities and NEE is the sexiest one of the lot. Not only does it generate steady, defensive and predictable returns and income; but it also offers a higher level of earnings growth than its peers with its magnificent alternative energy business. The stock just hit a new all time high. While the stock is starting to get expensive, it’s getting a renewed boost in the current uncertain environment.
HOLD – Xcel Energy (XEL 58 – yield 2.9%) – Sure, the stock is expensive here, but for good reason. This is one of the very best utilities in the market. It has a growing alternative energy business and is a darling of the regulators. It just announced it is closing two coal plants and replacing them with renewable operations. It also has strong momentum. Sprinkle in a dose of geopolitical tension and you have great stock to be invested in right now.
