What a Difference a Week Makes
The market has undergone a radical personality transformation since I released the July issue last week.
We were rolling along within a whisker of the all time highs. It seemed like the market would continue on in that same fashion for the rest of the summer while everyone is on vacation. Then, an external event swooped in and shattered the dynamic, and the market sold off 6% to 7% at lightning speed.
Trade frictions with China took a serious turn for the worse. Last week, President Trump announced 10% tariffs on an additional $300 billion of Chinese imports as trade negotiations faltered. The Chinese responded by devaluing their currency and banning agricultural purchases from the US. Not to be outdone, the US Treasury designated China a “currency manipulator.” Here we go.
It’s a double whammy for the market. First, investors were foolishly expecting a resolution to the dispute in the not-too-distant future. If the market simply learned that the trade issues wouldn’t be solved this year, stocks would have fallen to some degree. But this is an escalation. Not only are things not getting better. They’re getting much worse.
Now there is a risk of a full-blown trade war and currency war and all the negative ramifications, like a deteriorating global economy and a possible U.S. recession. The market doesn’t like it at all. Of course, recent hostilities could be taken back any day and the market will rally. But risks have certainly increased and market equilibrium has tipped to the dark side.
That said, the selloff has not gotten to unhealthy levels, so far. After being up 20% for the year, a market pullback can be healthy. It’s also true that even after digesting the distasteful trade escalation, investors will realize that money still has no place else to go but stocks to earn a decent return, especially with interest rates falling.
I’m not hitting the panic button, yet. But it is certainly a situation I will closely monitor. And I will most certainly be in touch if market forces change my opinion. In the meantime, you should be happy to be invested in dividend stocks. Several portfolio positions actually enjoyed the past week and moved higher.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 44 – yield 4.6%) – This global infrastructure company announced solid earnings last week. Funds from operations (FFO), the key earnings measure for an MLP, was up 13% on a per share basis for the quarter. The results displayed success in its asset rotation strategy, whereby it’s replacing mature assets with higher margin ones. The stock didn’t really move up but during the market tumult it barely budged, showing nice resilience. The stock really looks strong here.
HOLD – Community Health Trust (CHCT 43 – yield 4.2%) – Nothing seems to stop this small healthcare REIT. Last week I sold a third of the position as a prudent profit-protecting measure since it had already returned 47% so far this year and earnings were coming up this week. Well, earnings beat expectations and, despite one of the worst weeks for the market this year, this stock continued to move higher. The recent display of down market resilience is impressive. I don’t regret the decision to sell under the circumstances, but the stock just continues to forge on through anything. The market loves this stock and it may continue to climb higher.
BUY – Enterprise Product Partners (EPD 28 – yield 6.0%) – The U.S. infrastructure giant had another impressive earnings announcement last week. Distributable cash flow increased a staggering 21.3% over last year in the company’s seventh consecutive quarterly earnings beat. The stock price is still stuck where it has been since March, but even the recent market selloff hasn’t knocked this stock off the high point of its trading range. The market hasn’t been rewarding EPD for the great results but it seems to refuse to punish it for being in the energy sector. Even though it isn’t breaking out right now, the high dividend and great operational performance make this stock a terrific holding in any market.
HOLD – STAG Industrial (STAG 29 – 4.6%) – The industrial REIT announced solid earnings last week, with an impressive 22.1% increase in funds from operations over last year’s quarter and a 13.1% increase in revenues. Everything looks great. The operational performance continues to be stellar and the market loves REITs right now, especially the best ones. If the market gets uglier, this should hold up well and if it recovers this stock should participate.
Dividend Growth Tier
HOLD – AbbVie (ABBV 64 – 6.1%) – Wall Street’s penchant for short-term shallowness is making this stock a near-term loser. Recent acquisition Allergan (AGN) reported solid earnings, but nobody cared. AbbVie could remain an undervalued steal for a while. That said, the high dividend and defensive nature of the business should limit the downside in an uncertain market. If you’re patient and long term oriented, this stock is a steal that pays you very well to wait around. Insiders are buying the stock. But if you want results in the near term, you’ll probably be better off elsewhere.
HOLD – Altria (MO 46 – 6.5%) – Ditto most of what I said about AbbVie. Although this company has been one of the most bankable and resilient performers on the market for decades, it’s really on the outs right now. The company can’t do anything right. Cigarette volumes continue to slide at an increasing rate. And new stakes in E-cigarettes and marijuana are having a tough time right now. Juul faces regulatory problems for its sales to youth and marijuana has been out of favor lately. The upside of times like this is the knowledge that things can probably only get better from here.
HOLD – American Express (AXP 122 – yield 1.2%) – Everything was going so well for this credit card company. Operational performance has been terrific and the stock has great momentum. Then the trade stuff happened. I’m not sure how the market will continue to absorb the bad trade news, but this stock will be directly affected. More than any other position in the portfolio, AXP is tethered to the global economy. The news could change tomorrow and, so far, the market selloff has not ventured into unhealthy territory. But things can change and I will be watching this stock very closely.
BUY – Crown Castle International (CCI 136 – yield 3.4%) – This cellular infrastructure REIT is showing strong resilience in a down market. As I mentioned, the 5G infrastructure build out will continue in haste regardless of the economy. As well, this particular REIT only operates in the U.S. and has no exposure to China. The defensive nature of this outfit is paying off big time right now. It should remain one of the most solid holdings if the market tumult continues. In this awful week for the market, the stock has actually moved higher.
BUY – Valero Energy Corp. (VLO 75 – yield 4.3%) – I love American refiners and Valero in particular. The company is coming off a bad stint and things are likely to get much better for refiners going forward. This is not a good stock in a down market, but I’m still not convinced that we are in the midst of a significant and lasting market selloff, though I’m keeping an open mind. I will be watching the situation very closely and if things take a turn for the worse I will change the rating on this stock, perhaps even in a special report. For now, the stock is still a great value on the cusp of a turnaround.
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%)
BUY – Invesco Preferred ETF (PGX 15 – yield 5.6%) – I’m impressed. This preferred stock ETF has held like a rock in the market tumult so far. It is a high yielding, safe haven port in the market storm. The lack of correlation to the stock and bond markets make this a fantastic portfolio holding in just about any market.
HOLD – McCormick & Co (MKC 156 – yield 1.4%) – The spice maker is a rock solid, defensive food company with better earnings growth than its peers. It was a great stock when the market was strong. Now, it’s an even better stock. The defensive nature of this food stock really pays off in markets like this. Sure, it’s a little high priced. But we’re seeing why that is justified.
HOLD – NextEra Energy (NEE 211 – yield 2.4%) – Utilities are the best asset class to own in this ugly market. And NextEra is the best of the breed. While the market fell precipitously in a short period of time this week, NEE actually moved higher. It also does well when the market is good. I slobber over this stock every week, so I’ll keep it short here. This is a stock every income investor should own.
HOLD – Xcel Energy (XEL 60 – yield 2.7%) – Just about everything I just said about NEE applies to this similar (but smaller) utility. It’s been a stellar portfolio performer and it should continue to thrive. Even if the current selloff abates, investors will be spooked back into defensive companies like this once again. The lower interest rates are also propelling utilities higher. Times like this really exemplify what a wonderful holding this stock truly is.
