A Very Interesting Week
On the surface, the market had a ho-hum week. The indexes were up ever so slightly without any big news. But a deeper look suggests a possible dramatic shift might be just beginning.
The overall market appears to be largely pricing in a continued trade war with China and a slowing global economy. It’s also pricing in a rate cut this month and more to follow. The indexes appear to want to forge higher provided trade frictions don’t get worse, the global economy doesn’t crash and the Fed comes through on the rate cuts.
But individual market sectors are telling a more interesting story. For a long time this has been a market where stocks that are already working continue to work and stocks that haven’t worked continue to languish. That long running dynamic dramatically reversed over the past week.
The best performing sectors of the market over the past year (Real Estate, Utilities and Consumer Staples) were the worst performing stocks over the week. And the worst performing sectors over the past year, most notably Energy, were the best performing stocks over the past week, by far.
Of course, one week doesn’t establish a trend. It could be an aberration, understood. But post-Labor Day is a time of year when such things more commonly occur. A rotation toward the more cheaply priced, out-of-favor value stocks has been long, long overdue. Such a reversal could have major implications for the market going forward.
Cabot Dividend Investor is positioned for such a shift with energy infrastructure giant Enterprise Product Partners (EPD) and refiner Valero Energy (VLO). Of course, several of the safe holdings in REITs and other places could face pressure. I will be on top of it and keep you informed. And I will closely monitor the situation to see if recent market behavior becomes an actionable trend from which you can benefit.
I also want to encourage you to tune into my free Cabot Dividend Investor webinar tomorrow (Thursday September 12th) at 2 p.m. The topic will be “High-Yield Dividend Stocks to Boost Your Income Now.” It will be great information and I promise to make it worth your while.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 48 – yield 4.2%) – This infrastructure stalwart has been great lately. The stock has had an impressive 7.3% up move over the past month and has vastly outperformed the market in every measurable period over the past year. And that’s after a slight pullback from its high of 49 last week. It’s still near its all-time high and looks like it wants to go higher. It also helps that new assets coming on-line should continue to boost earnings in the quarters ahead.
HOLD – Community Health Trust (CHCT 42 – yield 3.9%) – This small healthcare REIT stock finally had a bad week, down 5.5%. It’s had a phenomenal year and a small pullback was inevitable at some point. There is no cause for alarm so far, although the selloff was more abrupt than expected. I expect somewhat of a bounce back over the next week or so, but if there is further weakness I may reconsider.
BUY – Enterprise Product Partners (EPD 29 – yield 6.1%) – Buying great stocks at cheap prices has been a money making strategy historically. This is a great stock in a beleaguered sector. Energy is the worst performing sector of the market for the last 10 years, 5 years, 3 years, 1 year, year-to-date and 3 months. That will change. It always does. But EPD has been performing anyway, vastly outperforming the energy indexes and performing largely on par with the market. Think how well it could do when things turn around. Meanwhile, it’s performing okay with a monster 6.1% yield that’s rock solid.
HOLD – STAG Industrial (STAG 29 – 4.9%) – This industrial REIT, and monthly dividend payer, should continue to hold its own for the foreseeable future. While the stock has outperformed the market over the past year, it has underperformed its REIT peers. The reason is likely because it’s in a more cyclical REIT sector, which should give it more upside than its peers if the market rallies. It also pays a sizable 4.9% yield.
Dividend Growth Tier
BUY – AbbVie (ABBV 69 – 6.5%) – The stock is down as investors worry about AbbVie’s top selling drug Humira. It faces biosimilar competition in Europe and will in the U.S. in 2023. But the drug maker has a lot of fire power to offset the slippage. Two drugs that just received approval are considered in the top five of highest potential new drugs this year. Several newly launched drugs are already doing gangbusters. And the merger with Allergan should provide additional revenue and diversification from Humira. Meanwhile, the stock is dirt cheap, selling at 7 times forward earnings with a 6.5% yield. It should also have limited downside from here if the market turns south.
HOLD – Altria (MO 45 – 7.6%) – More bad news this week. Altria’s recent stake in E-cigarette maker JUUL continues to face regulatory issues. This week there were reported deaths from vapors and complaints from regulatory authorities about JUUL’s claims of being a safer alternative to tobacco. One analyst downgraded MO as a result. As well, analysts are expressing skepticism that the PM merger deal actually happen. All of this pulled the stock to a 52-week low. But the stock is now pricing in a worst-case scenario for the JUUL acquisition, marijuana and the PM merger. It now sells at less than 10 times forward earnings and is forecasted to grow earnings 6.8% per year for the next five years. The stock is a steal for longer term investors’ that pays a monster 7.6% yield that is secure. But it’s still a HOLD until the technical behavior of the stock improves.
HOLD – American Express (AXP 117 – yield 1.3%) – This is a great company in a very profitable business and things have been stellar from an operational standpoint. But this is not a great down market stock. It also has a lot of exposure to the global economy. The stock is still up 24% YTD but it’s down over 7% in the past month as global worries persist. I am still positive over the rest of the year. But things can change. The stock is still well above the 200 day moving average but if it deteriorates technically or the news gets uglier I will take profits. For now it’s a HOLD as things could rebound in the near future.
BUY – Crown Castle International (CCI 139 – yield 3.2%) – This 5G REIT has had a rare bad week, down almost 6%. There is no news and a dip was likely in the offing as the stock soared over 35% so far this year. It’s also true that the safer plays that had performed so well in the turbulent market generally had a bad week. The 5G build out is huge and will continue rain or shine. Nothing goes straight up and the recent pullback is a healthy consolidation that represents a good opportunity to get into the stock.
BUY – Valero Energy Corp. (VLO 83 – yield 4.8%) – While the more conservative stocks have had a rough time of it this past week, Valero has been loving life. The refiner is up almost 10% in the last five market sessions. The stock of this largest independent refiner in the world can turn around fast and the energy sector soared over 6% this week. Valero is a prize pick in the sector as 2020 is shaping up to look like a much more prosperous year for refiners. The stock is still dirt cheap and over the last six months six analysts have upgraded the stock to a BUY rating with an average target price of just under $100. This is a good value and will be a superb stock to own if the energy sector stays in favor.
Safe Income Tier
BUY – Alexandria Real Estate Equities (ARE 151 – yield 2.6%) – It was a rough week in the market for REITs and Utilities, and most of those stocks took a gut punch just for showing up. But none of that seemed to bother this healthcare REIT. ARE was up for the week anyway. High occupancy rates for its in-demand unique laboratory properties make this stock a favorite in the current environment. It’s a highly defensive REIT that consistently grows earnings and the dividend. Even a rough week for the sector can’t seem to quell investor’s affections for this stock.
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.3%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.8%)
The prices of these short term fixed income stalwarts never budge. And that’s why you buy 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 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 5.4%) – This preferred stock ETF has been a rock as well. It is a high yielding, safe haven port in an uncertain market. The lack correlation to the stock and bond markets makes this a fantastic way to diversify. The falling interest rates make it even more attractive on a relative basis. If you’re looking for a stable price and a strong yield this is a great holding and it’s thriving in the current environment.
HOLD – McCormick & Co (MKC 156 – yield 1.5%) – Ouch. This defensive spice maker was not spared from the turncoat market over the past week, down 5%. MKC is a defensive stock that has gotten overpriced. Pick a number. It is certainly vulnerable to a correction if the recent market behavior becomes a trend. But until that is confirmed I will hold on to the remaining one-half of a position.
HOLD – NextEra Energy (NEE 219 – yield 2.3%) – Not you NEE! Even this market darling, safe utility with growth had a rough week. Ordinarily, I would worry that if recent market action continues this stock could be in trouble. After all, it’s a conservative utility that’s up over 25% already this year. But with predictable, rock-solid income from its regulated business and strong growth from its cutting edge alternative energy business, it may well endure even a shift in market leadership.
HOLD – Xcel Energy (XEL 63 – yield 2.6%) – The far-reaching utility correction this week even nicked up XEL a little bit. Ditto what I said about NEE. The utility pullback may only be a necessary consolidation. But even if it turns out to be more than that, this stock may well be the exception to the rule. Its cutting edge alternative energy business gives XEL growth properties that other utilities don’t have.
