There is Great Value in This Pricey Market
This is a market that’s hard to love.
The indexes are near all-time highs in what is now the oldest bull market and recovery in history. And risks are mounting. There’s the trade war with China, the sputtering global economy, weaker growth at home and impeachment. The market is really struggling to muster the enthusiasm to forge higher from here.
But the market indexes aren’t telling the whole story. The fact is that only a very select group of stocks are high priced. For several years investors have only favored those stocks with strong momentum while neglecting stocks that offer great value, even under the current difficult circumstances. Only some of the stocks on the market are overpriced while many stocks are underpriced.
How long will investors continue to pay through the nose for momentum stocks while ignoring stocks that offer real value at cheap prices?
While stocks are still the only game in town to earn a decent return in today’s low interest rate world, there is a much better game within the market. And investors may be wising up already. The neglected value stocks are starting to outperform the overall market after years in the wilderness.
The CDI portfolio currently offers both stocks with strong momentum as well great value plays that are poised to benefit as investors rotate into undervalued names. Several great portfolio stocks formally shunned by the market are starting to come alive.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 49 – yield 4.1%) – I particularly like this infrastructure MLP. Even though it is considered a safe stock because of the defensive nature of its business, it is not overvalued. It’s up over 40% so far this year but it is following a rare down year in 2018. The stock had a nice bump a couple of weeks ago after the announcement that it will create a new corporation and distribute shares to BIP holders (see last week’s update). The stock looks good and has held like a rock in the recent volatility.
HOLD – Community Health Trust (CHCT 45 – yield 3.8%) – 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 6.3%) – The energy infrastructure MLP is floundering around the low point of the recent range because crude oil price have fallen about $10 is the last few weeks. While earnings are not tied to oil prices the stock tends to move in sympathy with the overall energy sector in the short term. It’s still a great value here and the recent slide presents a good buying opportunity. New projects should accelerate earnings growth for the rest of this year and next and the great 6% dividend is rock solid and should grow.
HOLD – STAG Industrial (STAG 30 – 4.8%) – 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. As a more cyclical REIT the stock has underperformed its peers in the scramble for safety. However, shares have held their own in down markets and should move higher when the market recovers.
Dividend Growth Tier
BUY – AbbVie (ABBV 74 – 5.8%) – This beaten up and left for dead pharma giant has been performing much better of late. It’s up 10% over the past month while the market is down. It’s also up about 20% from the bottom in August. 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. Analysts are increasingly realizing that this is a tremendously undervalued company. The stock also trades ex-dividend on Thursday.
HOLD – Altria (MO 42 – 8.3%) – The stock of this cigarette maker is trading more than 40% below the 2017 high. It hasn’t traded this low in more than five years. It is selling at a forward price/earnings ratio of 9, that’s the lowest ever and about half the five-year average. Meanwhile, the price dip has raised the current dividend yield to a stratospheric 8.3%. But the negative reports and headlines about E-cigarettes keep coming. I find it interesting that the stock has stopped falling despite the fact that negative headlines keep coming. It looks like the price has sunk as low as it is going to get and performance is likely to improve from here.
Rating change “HOLD” to “SELL”
SELL – American Express (AXP 113 - yield 1.5%) – I love credit card companies over the longer term. American Express has also reported solid operational performance so far this year and is a very shareholder friendly company with dividend hikes and share buybacks. But the stock has trended steadily downward since second quarter earnings when the failure to increase 2019 guidance disappointed investors. Now the stock is falling below its moving averages. It is also a significant risk that the global economy is sputtering and could get much worse, as this company has a lot of international exposure. The remaining one half position is still up 17% and I’m going to take that profit here.
BUY – Cheniere Energy Partners (CQP 44 – yield 5.5%) – The LNG terminal operator, just recommended in the September issue, is holding strong in a down market and terrible energy sector. I expect it to move higher in the near term unless the market really sells off and/or oil prices get weaker and sink the energy sector. But that’s just in the near term. Beyond that the stock should be strong as revenues should continue to soar amidst the export explosion. This stock operates under its own set of rules because of the special circumstances.
BUY – Crown Castle International (CCI 137 – 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 especially in the current market. 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 83 – yield 4.3%) – 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 70 and 90 since its fall from grace in late 2018. I’m hoping it breaks out of the range as we get nearer to 2020. I’m particularly encouraged by the stock’s strong down market performance lately. It’s up 5.5% in the past month while the market is down 2.6%.
Safe Income Tier
BUY – Alexandria Real Estate Equities (ARE 153 – 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 should. 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 is remaining 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.
HOLD – NextEra Energy (NEE 230 – yield 2.2%) – This utility/alternative energy company has been spectacular. Returns over the last five years have been fantastic and the stock is up 35% so far this year. It is a best-in-class stock that has consistently outperformed both the market and its peers. But last week I took a profit on half of the position. Returns have been too good for a utility stock and valuations are getting stretched. Erring on the side of caution I booked a 36% profit on one half of the position. We’ll hold the other half for now and see if it can continue to move still higher.
HOLD – Xcel Energy (XEL 64 – yield 2.6%) – 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. For that reason, I will continue to hold on to the remaining 2/3 position and not yet book profits.
