Here Come the Value Stocks
Dividend stocks are great right now. The overall market is just okay.
The market seems to want to move higher, albeit slowly and with rude interruptions from the headlines. The S&P 500 is within less than 1% off the all-time high set in July, although the index has been somewhat range-bound since June.
We have a trade war truce (of sorts), a lousy global economy, another likely rate cut before the end of the year and a still solid U.S. economy. The biggest risk to the market and the U.S. economy right now is the global economy. It’s holding U.S. growth down but not out. It’s still okay that the global economy stinks but if it tumbles into recession it will screw up things here. That said, assuming things don’t take a surprising turn for the worse, the market should trend higher through the rest of the year.
But individual stocks, most notably dividend stocks, are looking much better than the overall market. The safer, dividend-paying stocks in the REIT and Utility sectors continue to perform strongly, as they have for some time. But now, long neglected value stocks are really starting to take off.
The performance of previously struggling value portfolio positions is really turning around. Over the past month AbbVie (ABBV) is up 6.8%, Valero (VLO) is 11.9% higher and Altria (MO) is up 13.4%. The market has been flat over the same period. While there are some unique factors with each company, the fact that they are all significantly higher is suggestive of a larger market rotation towards value.
The Cabot Dividend Investor portfolio is very well positioned right now. We have several positions in REITs, Utilities and other defensive plays that continue to have strong momentum that are complemented by value plays that appear on the cusp of making up for lost time.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 49 – yield 4.1%) – I mistakenly said BIP was going to announce earnings last week but the announcement won’t be until November 7. The stock looks great. It had a strong move higher at the end of September and has since been consolidating, which is normal for recent behavior. The infrastructure partnership is still a great fit for the current market with its defensive business and high yield. And earnings should be strong as newly acquired holdings should boost profits.
HOLD – Community Health Trust (CHCT 46 – yield 3.6%) – 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 more than 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 on November 6. But for now, let it ride.
BUY - Enterprise Product Partners (EPD 27 – yield 6.4%) – This energy company has been the only value stock in the portfolio to have a lackluster month. The recent rotation into value has not included energy stocks, and the reason is likely the fall in oil prices. Although EPD doesn’t depend on energy prices, falling oil prices cause a drag on the entire sector in the near term. But I’m still bullish on the sector and EPD in particular. Hopefully the stock will get a bump from earnings next week, which should be strong as new projects should lift revenue and profits. In the meantime, you get a stellar 6.4% yield.
HOLD – STAG Industrial (STAG 31 – 4.6%) – This monthly dividend payer announces earnings next week. There is high demand for industrial properties as online shopping increases the need for warehouse space, and STAG should continue to produce steady profits. The performance of this REIT has not been lighting the world on fire but it has held very steady in down markets. Hopefully it can get a bump from earnings.
Dividend Growth Tier
BUY – AbbVie (ABBV 77 – 5.5%) – Hallelujah. The stock is finally showing some life! It’s up 5% in the past week, 9% in the last month and over 20% from the lows in August. It looks promising going forward as the stock is breaking through key resistance points. This was always a fantastic longer-term hold as it offers cutting-edge drugs and treatments to a rapidly aging population. But it was uncertain when the stock would finally move higher from an absurd discount. It looks like the market rotation into value is helping the stock in a big way.
HOLD – Altria (MO 46 – 7.4%) – The market has been so good for value stocks that even Altria has been kicking butt. The negative headlines for e-cigarettes still keep coming. But several analysts have come forward with an improved outlook. They are realizing something I have said all along: If people move away from vaping, they will smoke more cigarettes. Cigarette volumes are falling less than expected amid all the negative news for e-cigarettes. Either the 35% investment in e-cigarette company JUUL works out and Altria profits that way, or e-cigarettes struggle and people smoke more. Altria has them coming and going. The stock has likely bottomed and is up 13.4% over the last month. And it still yields 7.4%.
BUY – Cheniere Energy Partners (CQP 44 – yield 5.5%) – The LNG terminal operator, just recommended in the September issue, has been one of the best performers in the energy sector, up 56% over the past two years. The stock should be strong as revenues should continue to soar amidst the LNG export explosion. Whatever else happens in the market, the rapid profit growth in CQP should propel the stock higher.
BUY – Crown Castle International (CCI 141 – yield 3.3%) – The 5G infrastructure REIT reported earnings last week that beat expectations with funds from operations (FFO) growth of 12% and revenue growth of over 10% compared to last year’s quarter. The company sited high demand for its cell towers amidst the 5G build out—go figure. The stock was up over 3% the day of the announcement and almost 6% for the week. The good news is partially offset by an SEC probe into its business practices. But the market isn’t too worried about it and the strong earnings growth is likely to continue in the quarters and years ahead. As well, CCI also announced a 6.7% hike in the quarterly dividend to $1.20 per share, payable at the end of December.
BUY – Valero Energy Corp. (VLO 94 – yield 3.9%) – This refiner is on fire. The stock is up 5.6% over the last week, 10% for October and 30% since late August. What’s more, the stock has broken out of the range in which it has traded since its fall from grace late last year. That said, Valero announces third-quarter earnings today that should be lousy as the quarter is likely to reflect the old paradigm. Since the end of the quarter, crack spreads (the difference between the cost of producing refined product and the price it is sold for) have dramatically increased. The improving conditions reflect what is expected going forward in 2020 and the stock price is reflecting that.
Safe Income Tier
BUY – Alexandria Real Estate Equities (ARE 157 – yield 2.6%) – The stock had a strong week as it continues to slowly forge ever higher. 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. It’s also a REIT in a defensive business which is right in the market’s wheelhouse these days.
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 and the monthly payout is icing on the cake.
HOLD – NextEra Energy (NEE 237 – yield 2.2%) – This utility/alternative energy juggernaut announced earnings yesterday and it was all good. NextEra beat estimates with earnings growth of 10.1% year over year. It also reiterated its target of 6% to 8% annual earnings growth (from the 2017 base) through 2021 and dividend growth of 12% to 14% per year through at least 2020. The market liked it and the stock is again at new all-time highs, with no signs of a break in upward momentum from a technical standpoint despite lofty valuations. Sure, the stock is expensive but it keeps producing and giving Mr. Market what he wants.
HOLD – Xcel Energy (XEL 64 – yield 2.5%) – NextEra’s smaller twin announced earnings this morning and missed estimates with a third-quarter loss. However, the earnings loss was likely driven by a one-time event and top-line growth soared 42% from the same quarter last year based on higher revenue from alternative energy sales. The stock appears to be trading flat in pre-market trading. I’ll offer a more in-depth analysis next week after I’ve had time to digest the numbers.
