Here Comes Earnings Season
The market is once again flirting with all time highs. The good week was driven largely by the announcement of a partial trade deal with China. But the main event will be earnings going forward.
First, let’s look at the trade deal. I believe it is insignificant. They basically packaged the things that have always been easily agreed to as “phase 1” of a bigger deal with more phases to follow. But the main sticking points, namely enforcement, appear no closer to a resolution. That said, the announcement reflects a distaste by both parties for further escalation in the near future. That potentially takes a major near term market risk off the table.
But the main event going forward is likely to be third quarter earnings. In general, I don’t expect earnings to drive the overall market significantly higher or lower. While expectations are fairly low, Wall Street is very good at setting a low bar that companies can clear. At this point I still expect the market to forge slowly higher over the rest of the year. Earnings will be more important on an individual basis for each portfolio position.
There also continues to be a rotation into value. Growth and momentum stocks have been king for too long and the market is starting to wake up. We are also at a point where the growth expectations for high-priced growth stocks are not much higher than those for the much more reasonably priced value stocks.
Value portfolio positions AbbVie (ABBV) and Valero Energy (VLO) are starting to behave much better. Energy stocks have not participated in the latest rotation into value because oil prices have simultaneously fallen. But I expect that sector to perk up as well in the weeks ahead.
The main story in future updates is likely to be earnings and the ramifications for the individual portfolio positions, starting with Crown Castle (CCI) tonight. I will of course keep you posted.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 48 – yield 4.1%) – The stock had a nice bump a few weeks ago after the announcement that it will create a new corporation and distribute shares to BIP holders. But the stock has since leveled off. There hasn’t been much news and earnings will be announced at the beginning of November. I still think this infrastructure player is in the sweet spot of the market. It’s defense in an uncertain environment and it is not overpriced. It also has solid momentum and a high yield.
HOLD – Community Health Trust (CHCT 45 – yield 3.7%) – This small healthcare REIT has really ridden the REIT train, but the turbo version. It has averaged a return of over 30% per year over the last three years and over 60% year-to-date. It’s a great REIT, but probably not that good. The stock is definitely 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 27 – yield 6.4%) – This energy giant with over 50,000 miles of pipeline servicing the American energy boom just raised the distribution again, for the 61st consecutive quarter. It has not moved up significantly in a while and is still trading near the top of the recent range. It sells at valuations that are half that of the overall market while paying a yield of better than 6% while earnings are in a growth cycle. It has many billions of projects coming on line this year that should boost earnings and about $6 in projects under construction. It’s a fantastic value that pays you to wait.
HOLD – STAG Industrial (STAG 30 – 4.7%) – 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, the stock has held its own in down markets and should move higher if the market continues to run.
Dividend Growth Tier
BUY – AbbVie (ABBV 75 – 5.8%) – While there has not been any news of consequence recently for this beaten down biopharmaceutical company, the stock performance has been encouraging. It’s also up about 20% from the bottom in August. And let’s not forget AbbVie is 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 as there have been several recent upgrades.
HOLD – Altria (MO 43 – 7.9%) – The stock has been behaving better of late, rising about 8% in the past couple of weeks. It may be because the stock finally bottomed at the under $40 level. It could also be that the news for E-cigarettes has been so bad that it might be helping tobacco sales. A recent report suggested that tobacco sales are falling slightly less than expected and Altria’s Marlboro prices have been strong. Of course, the main thing watch in the near term will be third quarter earnings at the end of the month.
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. 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 134– yield 3.3%) – The stock of this 5G infrastructure REIT has struggled lately, down from a high of about 150 in early September. But the pullback is well in the range of past consolidations and the stock is still well above the longer term moving average. The company announces earnings today after the market close. There is no reason to expect they won’t be solid. Perhaps the announcement will get the stock going again. We’ll see.
BUY – Valero Energy Corp. (VLO 89 – yield 4.0%) – 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. The stock is acting much better, up over 25% since late August. The stock has still not definitively broken out but it’s close and things are looking good.
Safe Income Tier
BUY – Alexandria Real Estate Equities (ARE 155 – 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 continue to 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 229 – yield 2.2%) – A few weeks ago I took a profit on half of the position of this utility/alternative energy company. Returns had been too good for a utility stock and valuations got stretched. Since then the stock has pulled back somewhat. It’s still a best-in-class company in a sector that the market loves right now so I will continue to hold the remaining one half position right here. The company reports third quarter earnings next week and we’ll see what happens.
HOLD – Xcel Energy (XEL 63 – yield 2.6%) – This is a similar story to NEE. Valuations are getting stretched but the market continues to favor the stock. But it isn’t all that overvalued and it’s a much smaller company. The fact is that, until things change, this is still a market willing to pay up for a superior-growth utility. Until that changes and the stock starts showing weakness, I will continue to hold it in the portfolio.
