The Market Makes a Fresh All Time High
The S&P 500 is at new all time highs as I write this. We have a market that wants to go higher, but it just keeps getting interrupted with negative headlines. It seems like we can’t get through a week without bad trade news or signs of a weakening global economy that prevents the market from taking off.
On one hand, things are looking good. The market is up over 20% already this year, coming off the best first half of the year in decades. But that is a little deceiving. The S&P 500 is still only just a few percentage points higher than it was at the beginning of 2018. But now valuations are more reasonable than they were then and a move higher from here is a more justifiable proposition.
As I’ve often mentioned, I believe the economy is stronger than it is getting credit for. Sure, second quarter GDP will likely be a lot lower than the first quarter. But that’s the normal ebb and flow in an economy that is trending strong generally. GDP growth in the second half should be solid. That’s a good fundamental backdrop for the market. Plus, money that wants to earn a decent return has no place to go but stocks.
That said, I am still somewhat cautious here. Investors seem to be under the impression that a trade deal with China is likely in the near future. I don’t see that happening. The market also considers it likely that the Fed delivers multiple rate cuts this year. I’m skeptical about that one too. Therefore, the possibility of disappointment in the months ahead seems likely.
I’m generally positive on the market for the rest of the year. But the second half will likely not be nearly as good as the first half, and there is a good possibility of some ugly selloffs along the way. I continue to favor the more reasonably priced stocks as well as the high priced defensive positions that have strong momentum.
Meanwhile, ABBV has rebounded nicely after the 16% bloodbath following the announcement of the Allergan (AGN) acquisition. I’m also reducing the rating on Altria (MO) to a HOLD because of technical deterioration in the stock chart.
Have a great 4th of July!
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 44 – yield 4.7%) – This global infrastructure giant has been upgrading its property portfolio by selling mature businesses and using the money to invest in higher return opportunities. Its most recent purchase is a railroad with properties in North America, Australia and Europe. It also owns diverse infrastructure including data centers, pipelines, toll roads and utilities around the world. The company knows what it’s doing as it’s grown cash flow and the dividend consistently for ten years. The stock just made a new 52-week high and is poised to move higher.
HOLD – Community Health Trust (CHCT 40 – yield 4.3%) – There’s no news about this small healthcare REIT, just higher prices. The market continues to love REITs. After being the top performing market sector last year, it has also been among the top performing sectors in this year’s market rebound. While REITs have been strong over the past year, CHCT has nearly tripled the return of the index. It keeps making new highs just about every week. Let’s keep riding the momentum.
BUY - Enterprise Product Partners (EPD 29 – yield 6.1%) – Stuck in the mud Product Partners is what I’m calling this energy infrastructure giant. The good news is that the stock is poised near a breakout level above $30. The bad news is it’s been at the same level since March. Everything has been great operationally with the company. It could be that second quarter earnings, which it reports in about a month, will get it over the hump. In the meantime, enjoy the 6% yield.
HOLD – STAG Industrial (STAG 31 – 4.6%) – This industrial REIT continues to look strong. It broke out to new highs in June and after pulling back slightly it’s been slowly moving back higher. It’s a high dividend payer with a great niche in a strong REIT sector. Industrial REITs enjoy a high demand that outstrips current supply. The market loves this monthly dividend payer right now and, although it has gotten somewhat expensive, it still has great momentum and is worth holding.
Dividend Growth Tier
HOLD – AbbVie (ABBV 74 – 5.5%) – After the 16% drop following the announcement of the purchase of Allergan (AGN) the stock has recovered nicely. It’s up 13% since last Tuesday’s close and is now only about $4 below the pre-announcement price. Wall Street hated the deal when it was first announced but analysts are warming. The stock has been down the past year because of falling Humira sales, which account for almost 60% of revenues. The merger solves that problem as Humira will account for only 38% of sales and there is new cash flow to bridge the gap between falling Humira sales and growing revenues on new drugs and the pipeline. While Allergan does solve some problems it saddles AbbVie with a lot debt. I loved the company before the merger, but now we’re just friends. It’s a hold for now.
Rating change “BUY” to “HOLD”
HOLD – Altria (MO 49 - 6.4%) – The stock has been trending down since the beginning of April. Every time it starts to move up it gets knocked back down. It has problems with falling cigarette volume sales in the U.S. It is trying to overcome that issue with stakes in e-cigarette maker JUUL and marijuana company Cronos. Now there is a question as to whether JUUL can get approval from the FDA necessary to sell its product. The former commissioner expressed his skepticism a couple of weeks ago. Due to the technical deterioration of the stock chart, I am lowering the rating to a HOLD.
HOLD – American Express (AXP 126 - yield 1.3%) – The credit card business is a great place to be as the world moves to increasingly cashless transactions. Amex has a high quality clientele with much less delinquency than average and it charges high, bankable fees. As long as the economy is okay and the market is on a solid footing this stock should continue to do well. Amex is one of the top performing Dow stocks this year and it looks poised to continue to move still higher.
BUY – Crown Castle International (CCI 135 – yield 3.4%) – The growth dynamics surrounding the 5G infrastructure build-out are amazing. This is a REIT that offers both defense and growth in an uncertain market. The stock had a slight pullback over the past couple of weeks but still looks technically strong. The rising earnings and dividend should continue to power this stock higher in almost any market.
BUY – Valero Energy Corp. (VLO 82– yield 4.4%) – This is in my view the best refiner in the country. The longer trend is still strong for American refiners with the advantage of cheaper crude oil feedstock. And Valero has moved down and is cheap because of temporary factors. Things are turning around and it should also get a boost from the new fuel standards required by the IMO starting in 2020. It got knocked back yesterday on concerns about the global economy. But, dealing in commodities, this sort of volatility is normal. I like the stock longer term and I think the timing could be very good.
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. Isn’t that beautiful? 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 when things get ugly you’re happy you have these.
HOLD – Consolidated Edison (ED 89 – yield 3.4%) – This is still a good time for utilities with the market uncertainty and interest rates likely to fall. Utilities have been the number one performing sector of the market over the past year. But even so far in this up year, ED has kept pace with the S&P 500. The stock has had a great run recently and may have gotten a little ahead of itself but the momentum still hasn’t shown signs of faltering. It could go higher in the weeks and months ahead.
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. The stock price has barely budged this year and that’s exactly what investors sign up for with this ETF. Enjoy the juicy yield and stable price in this uncertain market.
HOLD – McCormick & Co (MKC 161- yield 1.5%) – Last week, in the June issue, I sold half of the position in MKC. The reason was that the stock had a meteoric rise over the past year before heading into the second quarter earnings announcement. Any kind of disappointment could have sent the stock reeling. It was a good time to take some profits off the table. As it turned out, MKC beat estimates and raised 2019 guidance and the stock moved about 3.5% higher. That’s good news for the half position remaining and I don’t regret the prudent decision of taking a profit in a stock that had risen over 50% the past year and was selling at a lofty valuation of 26 times earnings. For the remaining position, the stock still has strong momentum and I will continue to hold for now.
HOLD – NextEra Energy (NEE 209 – yield 2.4%) – It seems like every single week this best-in-class utility forges still higher. The stock is up over 20% so far this year and over 10% in the last three months. Investors love utility stocks in general and this one in particular right now. That said, NEE is selling at valuations well in excess of the five-year averages and is no bargain at current levels. That’s why it is only rated a HOLD. High historic valuations and strong momentum are staples among the defensive stocks in this portfolio. There’s no point in fighting the tape and NEE will remain a HOLD for now.
HOLD – Xcel Energy (XEL 61 – yield 2.7%) – Ditto on everything I just said about NEE. Being a much smaller utility, XEL could have more upside left in the tank than NEE. This upstart clean energy utility still has very favorable tailwinds and momentum and will remain a HOLD for now.
