Oh No, October
How do you like October so far?
October is a historically ominous month for stocks. After all, it is the month of the 1929 stock market crash and the 1987 crash. After a rough May and August we step into the mother of all jinxed months with a terrible start.
We’re looking down the barrel of a trade war and a lousy global economy, and now impeachment. Then yesterday, there was bad economic news in the form of a manufacturing report that was the worst since 2009. It set off concern that the U.S. economy is faltering. The naysayers are waking up again. Are they right?
I don’t know if this will be an ugly month on a par with May and September, or perhaps worse. But I don’t see any reason to panic about the economy or the market at this point. The bad manufacturing number is likely more of a product of the trade war and faltering global economy then a meaningful deterioration in the U.S. economy.
The market direction in October is likely to be driven more by third quarter earnings than ominous headlines. Analysts, according to Factset, are expecting an overall 3.7% decline from last year’s quarter for the S&P 500. That’s a gloomy forecast but it follows a phenomenal earnings year in 2018. The bar isn’t high and the market will likely judge stocks on whether companies can beat those low expectations.
I’m still positive on the market over the rest of the year because of a still relatively strong U.S. economy and the absence of investment alternatives. But it could stumble in October. That said, Cabot Dividend Investor positions in safe dividend stocks as well as undervalued stocks should be a great place to be regardless of whether the market has a good October or a bad one.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 48 – yield 4.1%) – Big news last week. Brookfield infrastructure Partners announced that it will create a Canadian Corporation, Brookfield Infrastructure Corporation (BIPC). It will be structured as a new share issuance in which every BIP shareholder will receive 0.11 shares of BIPC, one share for every nine shares of BIP owned. BIP shareholders will receive the new shares in the form of a special distribution sometime in the first half of 2020. The point of the new company will be to broaden appeal to investors that don’t like or can’t buy MLPs (including institutions) and to qualify for inclusion in several indices. Shares of BIPC and BIP will be considered equal with identical distributions. It’s a positive for shareholders in that BIP has a track record of successfully investing the new issuance money raised and it will broaden the appeal. The stock rallied strongly on the news.
HOLD – Community Health Trust (CHCT 44 – yield 3.7%) – This small healthcare REIT has returned about 60% so far this year. It’s a great REIT, but probably not that good. The market loves REITs right now and may continue to for a while. I believe the stock is overvalued at this point. However, it’s still technically strong and looks like it wants to go higher. I may consider selling ahead of the next earnings report. But for now let it ride.
BUY - Enterprise Product Partners (EPD 28 – yield 6.2%) – Everything seems to be going well for this company except the energy sector. While the stock has been stuck in the mud between $28 and $30 for some time, it has done so in a lousy market for energy stocks. The blue chip energy company continues to grow earnings at an increasing clip as new projects come on line. The stock price is still 30% below the 2014 high while earnings have grown 11% per year over those five years and should accelerate going forward. It represents great value here with growth as well, with a 6% yield that is rock solid and will grow.
HOLD – STAG Industrial (STAG 29 – 4.9%) – The industrial REIT announced a public offering of 11 million new stock shares last week, to raise about $319 million. This can be a bad thing because new shares dilute existing shareholdings. However, when a company has a record of successfully investing proceeds at a high return it can be good. There is high demand for industrial properties as online shopping increases the need for warehouse space, and STAG will take advantage to the benefit of shareholders as it has in the past.
Dividend Growth Tier
BUY – AbbVie (ABBV 72 – 5.7%) – Before yesterday (down 3.31%) the stock had been performing much better. It was up 20% from the bottom in mid August. Yesterday appears to be a healthy consolidation in sympathy with the overall market. As of now, this could still be just a bounce off the bottom. But analysts are increasingly realizing that this is a tremendously undervalued biopharmaceutical company. It’s a cutting edge drug maker at a time when the population is aging at warp speed. It has more than enough drugs in its industry leading pipeline to offset falling Humira sales over time and the merger with Allergan is better than most think. The market can only see the short term uncertainties while the stock is poised to move much higher in the years to come.
HOLD – Altria (MO 41 – 8.2%) – The good news is that the stock has stopped falling. There were a couple of major announcements over the past week. Last Wednesday, the company announced that it no longer plans to merge with Philip Morris International (PM). I thought the deal offered strong long term opportunities. But the market never seemed to like it as the stock was down nearly 8% since the announcement. Also, there was a change in CEO at newly acquired (a 35% stake) E-cigarette maker JUUL, presumably to better deal with the regulatory issues. The vaping regulatory challenges remain, as do falling smoking volumes. But bear this in mind. This is a company forecast to grow earnings 8% this year selling at just 9 times forward earnings, about half the five year average. It also pays an 8% yield that is rock solid.
HOLD – American Express (AXP 115 - yield 1.5%) – The credit card giant continues to reward shareholders. After returning 41% of capital generated to shareholders in 2018, AXP just announced a 10% hike to the quarterly dividend to $0.43, payable on November 8th, following an 11.4% hike in August. The company also announced a buyback plan of 120 million shares. The company has been strong operationally and should have another solid quarter when it reports next month. That said, the stock has continued to trend downward since the highs of mid July. I won’t sell it now because it trades ex-dividend on Thursday. But if the pattern doesn’t reverse soon, I will consider selling the remaining half position to protect the profits.
BUY – Cheniere Energy Partners (CQP 45 – yield 5.4%) – The LNG terminal operator, just recommended last week, was having a strong week until yesterday. The stock was bouncing back nicely after a small consolidation, a familiar pattern. I expect it to continue to move higher in the near term unless the market continues to tank. Either way, revenues should continue to soar amidst the energy export explosion and the stock should do well.
BUY – Crown Castle International (CCI 136 – yield 3.3%) – Markets go up and down. Different sectors go in and out of favor. But the 5G infrastructure build-out continues in haste no matter what. Crown Castle will continue to have all the business and growth opportunities it can handle. It’s a great stock to own any time, but in this market in particular. It’s a rock solid REIT with steady income and good operational performance in a market that loves safer plays. It also provides strong growth.
BUY – Valero Energy Corp. (VLO 84 – yield 4.2%) – This refiner is what I consider a stock having a short term stumble in the midst of a longer term uptrend. As commodity prices better align and 2020 looks to be a much better year, several analysts are upgrading the stock. VLO is up 18% since late August. But that isn’t definitive as the stock has bounced between 90 and 70 since its fall from grace in late 2018. But I’m hoping it breaks out of the range as we get nearer to 2020. As well, I’m encouraged by the stock’s strong down-market performance. It generally moves with the market, but lately it has been holding its own in down markets.
Safe Income Tier
BUY – Alexandria Real Estate Equities (ARE 152 – yield 2.6%) – The stock continues to slowly forge to new all time highs no matter what the market throws at it. High occupancy rates for its in-demand unique life-science laboratory properties make this stock a favorite in the current environment. It has significantly outperformed both the overall market and the REIT index in every measurable period over the last five years. Falling interest rates should be a tailwind for the stock going forward.
BUY- Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.3%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.7%)
These bonds remain steady and predictable, just like they’re suppose to. They just keep rolling on at a steady price paying interest. These short term investment grade rated corporate bond ETFs don’t pay much yield but they come as advertised, with consistent income and virtually zero volatility.
BUY – Invesco Preferred ETF (PGX 15 – yield 5.4%) – This preferred stock ETF remains solid. It is a high yielding, safe haven port in a low interest rate world and an uncertain market. The lack of 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.
SELL – McCormick & Co (MKC 163- yield 1.4%) – All is good for this spice maker right now. The company announced fiscal third quarter earnings yesterday and soundly beat consensus estimates, with earnings per share of $1.46 versus $1.29, for a 14% year over year rise in adjusted earnings. It also raised 2019 guidance. The market loved it and the stock popped about 7% on a down day for the market. But I’m selling the remaining one half position. Here’s the rationale. The stock’s valuations are at the loftiest levels in recent memory and well above the five year averages. Sure, it can go a little higher in this defensive stock friendly market. But the overvaluation will correct at some point. In my view there is more downside risk than upside potential over the next year, and you’re only getting a 1.4% yield. At this point, I believe the prudent and wise course is to secure the 36% profit made in a little over a year.
SELL 1/2 – NextEra Energy (NEE 231 – yield 2.2%) – The market loves utilities and safe stocks right now but it is obsessively stalking NEE. This is a utility stock that has returned an average of 22% per year over the last five years, 26% for the last three, and 42% over the last year while the S&P 500 has only returned 1.93%. Sure, it’s the best big utility out there, but geez, it sure is overvalued at this point. I love this company and the stock. But it’s a utility not a tech stock. It is now venturing into nosebleed territory where the price is become increasingly hard to justify. While the getting is so good, I will take half of the position off the table, and book a 34% profit in about 10 months on half and let the other half ride for a while longer.
HOLD – Xcel Energy (XEL 64 – yield 2.5%) – Xcel offers a combination of steady and reliable earnings and a higher level of growth from clean energy. It’s also a darling of the regulators which makes a big difference. And the current market continues to treat it well. The only negative is that the stock is a little overpriced right now. It offers momentum and reliable earnings and growth but not great value. But the stock has not yet moved far above its moving averages like the previous two stocks. For that reason, I will continue to hold on to the remaining 2/3 position and not yet book profits.
