The Summer Rally Forges On
Things look pretty darn good. The S&P 500 has broken the 3000 level for the first time ever and is within a whisker of its all-time high. The index is up over 9% since the beginning of June and 20% so far in 2019. Can it last?
The upward slog may very well continue for a while. We have a rare situation where the Fed is cutting rates amidst a solid economy and strong market. Usually, the Central Bank cuts rates as an offset when the economy and the market are falling apart. At this point in the cycle, rates are usually rising or remaining at a high level. A good market and falling rates is a rare situation of the market having its cake and eating it too.
It’s also true that summer markets have a unique personality.
It’s the middle of summer, man, a season that turns otherwise diligent people into slackers. Investors are thinking about vacations and squeezing more fun into the rest of the summer. In my experience, summer markets tend to continue to behave in a similar fashion to the way they did when investors stopped paying attention. Of course, a negative external event can always jolt the market into a different state. But otherwise we seem to be on a slow slog higher on autopilot.
It’s also worth noting that the market isn’t being irrationally exuberant. Sure the S&P 500 is up 20% already this year, but most of that is a recovery from the selloff at the end of last year. The index is only a tiny bit higher than it was last October. It’s up 8.6% over the past year, not bad but hardly a speculative bubble. We’ll have to see how second quarter earnings pan out but it looks like this market can continue higher.
However, I am still somewhat cautious beyond the summer swoon. Investors seem to be pricing in more rate cuts before the end of the year, after the likely one this month, and a resolution to the trade issues with China. I’m highly skeptical of these events happening. The market is set up for a disappointment. That said, investors probably won’t be punished for those misguided notions until after Labor Day.
In the meantime, have a great summer. And enjoy the continuing strong performance of dividend stocks.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 44 – yield 4.6%) – BIP is part of Brookfield, one of the best asset managers in the world. The partnership has a solid track record of investing in profitable, stable, long life assets with near monopolies in these areas. Since the 2008 IPO, BIP has returned 468%, nearly four times the return of the S&P 500. Looking ahead, the company has been selling mature assets and reinvesting in higher return properties. The defensive nature of the cash flow, high dividend and superior track record make this a great dividend stock. The stock is still reasonably valued and looks poised to break through the old high of $45.
HOLD – Community Health Trust (CHCT 40 – yield 4.2%) – There’s no news about this small healthcare REIT, just higher prices. The market continues to love REITs. While REITs have been strong over the past year, CHCT has nearly tripled the return of the index. But it still keeps on going, making news highs just about every week. Keep enjoying the ride, and the yield.
BUY – Enterprise Product Partners (EPD 30 – yield 6.0%) – The stock of this best-in-the-business energy infrastructure company has still not recovered from the oil price crash and ensuing industry carnage from 2014 to 2016. But earnings have recovered. New projects coming on line should grow earnings at a strong clip this year and next. The high dividend is rock solid with one of the lowest payout ratios among its peers. The stock has finally broken above the 30 resistance level and could start to run here. It’s had value all along but now it may have timing and momentum as well.
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 crawling 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 sector seems to be benefitting from the proliferation of E-commerce as much retail space is moving into warehouses. The market loves this monthly dividend payer right now and it still has good momentum.
Dividend Growth Tier
HOLD – AbbVie (ABBV 69 – 6.1%) – I don’t love the Allergan deal. It seems like the company did it to please the market. And the market hated it. That said, AbbVie is still one of the best drug companies on the planet with one of the best pipelines of newcomers. The company believes recently launched cancer drugs Imbruvica and Venclexta can generate $9 billion in annual sales by 2025. In addition it has two immunology drugs gaining approval this year that market research firm EvaluatePharma ranks the number 2 and number 3 drugs in its analysis of top new drug launches for 2019. AbbVie thinks the two drugs could bring in $10 billion a year by 2025. In addition, the stock is dirt cheap at less than eight times earnings and the 6% dividend is safe.
HOLD – Altria (MO 49 – 6.5%) – The stock has been reeling from falling cigarette volumes and concern about profitability at E-cigarette maker JUUL. It’s now selling at valuation multiples near the ten-year lows. The concerns are likely overblown and the stock is ridiculously cheap with a safe monster dividend. It got a boost this week when Goldman Sachs raised the stock rating to “BUY”, citing cheap valuations and likely earnings resilience.
HOLD – American Express (AXP 128 – yield 1.2%) – The credit card business is a great place to be as the world moves to increasingly cashless transactions and American Express has the highest quality clientele. As long as the economy is okay and the market is on a solid footing this stock should continue to do well. The stock is reasonably priced at 15 times forward earnings and could easily move higher. The company has been delivering strong operational results and there is no reason to expect the same from earnings that will be announced at the end of the week.
BUY – Crown Castle International (CCI 132 – yield 3.4%) – Speaking of earnings, this cellular infrastructure company announces its quarterly results at the end of the day today. The growth dynamics surrounding the 5G infrastructure build-out are amazing. The company should continue to experience solid growth for several years to come with a robust market for its properties. This is a REIT that offers both defense and growth in an uncertain market. REITs are a great place to be right now and this stock offers significantly more growth than most with a projected average of 20% earnings growth over the next five years and a solid and growing dividend.
BUY – Valero Energy Corp. (VLO 82 – yield 4.3%) – 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. I see this as a stock that recently had a down leg in an uptrend. The big rebound in earnings will likely occur in 2020, but the market looks ahead. Meanwhile, analysts are expecting stronger second quarter earnings, to be reported on July 25th.
Safe Income Tier
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.3%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.8%)
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 things get ugly you’re happy you have these.
HOLD – Consolidated Edison (ED 88 – yield 3.3%) – There was a power outage in parts of NYC last weekend. It only lasted a few hours and investors have shrugged it off as ED stock barely moved. There will likely be more questions and fallout but, so far, this looks like a non-event for the stock. This is still a good time for utilities with the market uncertainty and interest rates likely to fall. 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 for this entire year so far and that’s exactly what investors sign up for with this ETF. With rates likely to fall and the demand for income strong this ETF should continue to thrive in the foreseeable future.
HOLD – McCormick & Co (MKC 160 – yield 1.4%) – The spice maker is yet another safe stock that keeps on rising despite lofty valuations. I sold half of the position to take profits ahead of the second quarter earnings announcement and the stock just kept on going. It’s overpriced, but it might get even more overpriced in the weeks ahead. For now it’s a HOLD.
HOLD – NextEra Energy (NEE 211 – yield 2.4%) – You can’t argue with results. This stock has been beating the market and the utility index consistently for the past several years. It’s the country’s largest utility that offers stability and growth in its alternative energy business. Management is actually targeting 12% to 14% annual dividend growth through 2020. The price is a little on the high side, but stronger growth than its peers and the defensive business justify a higher price. The momentum is good as well.
HOLD – Xcel Energy (XEL 62 – yield 2.7%) – This utility is similar to NextEra in that it has a strong alternative energy business, but it’s a lot smaller which gives it potentially more upside. The company is doing well as earnings estimates have been raised for this year and next year. Over the past five years the price has move 92% higher compared to just a 15% move by its peers. The stock continues to outperform the market and its peers and momentum could drive it still higher in the weeks and months ahead.
