Not So Fast
The Surprise summer selloff of two weeks ago was well on its way to becoming a short-lived blip of a retreat. Then we got dunked again yesterday. This might not be over.
The market was very disappointed with news of a China trade war escalation at the end of July. The President announced 10% tariffs on an additional $300 billion of Chinese imports. China responded by devaluing its currency and banning agricultural purchases from the US. The Treasury Department then designated China a “currency manipulator”.
The news had the effect of taking the good news of a possible trade deal off the table and reinforcing market fears of a deteriorating global economy and a sooner possible US recession. Stocks tanked about 6% in a hurry. Then investors realized that the economy is still solid, there is still no recession in sight and money still has no place to go but stocks to earn a decent return. The market quickly gained back most of the selloff.
Yesterday, news of turmoil in Honk Kong as well as a financial crisis in Argentina renewed fears of a faltering global economy The Dow Jones fell 300 points. Despite our current solid economy, we are not an island. If the global economic situation gets much worse it will drag us down to at least more tepid economic growth. It’s a risk and the market is still delicate and sensitive to global news.
That said, I don’t believe the current rough patch will last. It could get worse before it gets better but it looks, at this point, as if stocks will resume an upward bias through the remainder of the year. The situation creates an opportunity to buy cyclical stocks, as well as stocks more severely punished by the recent pullback, on the dip. It also reinforces why defensive stocks have been so strong. Several defensive portfolio positions have actually risen in price amidst the recent tumult.
This week is a still familiar story in the portfolio, with defensive stocks thriving and moving still higher. There is also an opportunistic upgrade to a “BUY” in one beaten down position.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 44 – yield 4.6%) – The global infrastructure company announced solid earnings early this month. The quarter reflects nice earnings growth and a successful asset rotation strategy that should continue to serve the company well in quarters to come. The assets generate reliable income in any economy and make this a defensive play in an uncertain economy. The stock looks strong too as it is near all time highs and held up very nicely when the market sold off.
HOLD – Community Health Trust (CHCT 44 – yield 4.2%) – Nothing seems to stop this small healthcare REIT. The market loves REITs right now and this all operates in the defensive Healthcare sector that the market also digs. In addition, the smaller size than its peers gives it more upside. Despite the fact that the stock has returned over 50% year-to-date it continues to move higher every week, even in a down market. It’s the Energizer REIT right now. We’ll see how long it can roll on.
BUY – Enterprise Product Partners (EPD 28 – yield 6.0%) – Despite another stellar earnings announcement and beat the stock price is still wallowing at the high end of the trading ranges for the past three years. Earnings are much stronger than past visits to this 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%) – Sometimes great stock performance is all about being flat while the rest of the market goes down. Outperformance is just as important in a down market as it is in an up market. The operational performance of this industrial REIT 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
Rating change “HOLD” to “BUY”
BUY – AbbVie (ABBV 65 – 6.1%) – The market had overdone the selling in this stock prior to the selloff. The stock is now below where it was after it fell 16% on the Allergan merger announcement. This is no fly-by-night company riding off into the sunset. The is one of the best, most cutting edge pharmaceutical companies in the world as the population ages at warp speed. Consider this: the dividend grew 19% over last year, and has grown an average of 21% over the past five year. The company has just a 51% payout ratio. The massive 6.53% yield is very well supported. Earnings are expected to grow 12.14% this year over last year and likely accelerate to a higher level in 2020. The stock has one of the most impressive arrays of newly launched and pipeline drugs in the business and sells at just 7.5 times forward earnings. It might take a while for investors to truly rediscover this stock. You’ll have to be patient and think longer term. But it should get a bounce when the market sobers up.
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. I continue to believe that the recent stakes the company took in marijuana and E-cigarettes will likely pay off over time. As well, the strong pricing power of its Marlboro brand will likely compensate for lower volumes, as has always been the case. The upside of times like this is the knowledge that things can probably only get better from here. It’s still a HOLD because valuations haven’t gotten as ridiculous as AbbVie’s and there is more headline risk.
HOLD – American Express (AXP 124 – yield 1.2%) – The credit card giant has held up relatively well through the market selloff. In fact, falling a little over 3%, it is outperforming the S&P 500 through the turmoil. That’s impressive considering the trade issues and slowing global growth threaten this company. The strong operational performance of the company, along with its reasonable valuation, still makes this stock desirable. It should get a nice boost when the market bounces back. However, if the selloff deteriorates to more dangerous levels, the stock could get hurt. I’ll be watching closely.
BUY – Crown Castle International (CCI 142 – yield 3.4%) – This cellular infrastructure REIT is really showing some down market chops. The 5G infrastructure build-out will continue in haste regardless of the economy. As well, this particular REIT only operates in the US and has no exposure to China. The defensive nature of this REIT is paying off big time right now. While the S&P 500 is down about 5% since late July, CCI has rallied about 8%. It should remain one of the most solid holdings if the market weakness continues and also participate in the rally when the market recovers.
BUY – Valero Energy Corp. (VLO 77 – yield 4.3%) – I like American refiners right now and this one in particular. They still have a big advantage with cheap and abundant US crude oil feedstock. As well, there is a good chance profits rebound strongly in 2020. However, refiners are a different animal than the other stocks in this portfolio. There are by nature volatile. And they are not good in down market stocks. Valero has taken it on the chin in this selloff. It’s a selloff that has also been particularly cruel to stocks that were already not doing well. I still believe that the current selloff will be short lived. And the rebound will be kind to VLO. But things can change. If things get uglier I will change the rating on this stock.
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%)
This is the kind of market where you truly appreciate these bond funds. The prices never budge. The earth could be tragically struck by a meteor and the prices probably wouldn’t move. 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 turn ugly you’re happy you have these. Holdings like these add intangible effects as well like giving you more confidence to stay invested in the rest of the portfolio.
BUY – Invesco Preferred ETF (PGX 15 – yield 5.6%) – This preferred stock ETF has held up like a rock in the market decline so far. It is a high yielding, safe haven port in the market storm. The lack of correlation to the stock and bond markets makes this a fantastic portfolio holding in just about any market. The falling interest rates make it even more attractive on a relative basis.
HOLD – McCormick & Co (MKC 165 – 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 stock is up $10 in the past week and actually had a positive day yesterday. Such down-market resiliency is a big part of the reason it did so well in the strong market. Uncertain markets love this stock and it could continue to rise going forward.
HOLD – NextEra Energy (NEE 215 – yield 2.4%) – The market has certainly shown some weakness in the past couple of weeks as trade issues have deteriorated and there is growing concern about the state of the global economy. So what does this utility do? It makes new all time highs. It has all the properties of a safe, rock-solid regulated utility with the addition of strong growth in its alternative energy business. It offers everything the market is looking for right now and should continue to thrive.
HOLD – Xcel Energy (XEL 62 – 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.
