The Market Looks Toward 2020
The market still has an upward bias, albeit less so than the past couple of weeks. Investors are starting to sniff out 2020. Here’s what they smell.
On the one hand, the economy is still solid with no recession in sight and the trade war situation unlikely to get worse. Rates are low and money still has no place else to go but stocks to earn a decent return. As a result, the market is near all-time highs and Financials and Industrials, the cyclical sectors, have been the best market performers over the past month.
At the same time, we’re heading into a very contentious election year, with impeachment in the background. There are still no guarantees on the trade stuff and the Fed rate cutting is running out of gas. Things are still good, but not that good. Investors are optimistic, but not that optimistic.
Lately the safe sectors have been taking a hit. REITs and utilities are the worst-performing market sectors over the past month and week. These sectors had been among the best performers over the past couple of years and many stocks have gotten pricey. Are we seeing a market rotation in which these sectors will continue to get clobbered? I don’t think so.
Despite recent investor optimism, there is still a lot of uncertainty out there. We are still in the very late stages of a recovery and bull market and a recession is looming somewhere on the horizon. Given the more sobering part of the investment backdrop, I don’t see investors abandoning the safe stuff. They really only have one foot on optimism and the other one on caution.
While REITs and utilities have pulled back, I don’t believe they will continue to fall from here. These sectors still provide income and safety to counter the stench of uncertainty. I believe these sectors will start to perform better in the weeks ahead. That is my view at this point. If things change I will, of course, keep you posted.
High Yield Tier
Brookfield Infrastructure Partners (BIP 51 – yield 3.9%) – The global infrastructure company announced earnings last week that were solid and the stock has since gained about 3%. The bottom line, as measured by funds from operations (FFO), increased 15% over last year’s quarter, boosted by new higher margin investments in North America energy pipelines, North American railways and Indian telecom towers. The company also has an additional $1.1 billion in new investments that should come on line in future quarters. The business looks good and the stock is still solid. HOLD.
Community Health Trust (CHCT 45 – yield 3.6%) – The stock has leveled off since its earnings miss last week. The REIT sector continues to be under some pressure as safer stocks have been underperforming in the flight to risk. I already took profits in two-thirds of the position. I will continue to hold the remaining third as this has been an all-star performer and I’m not convinced that the market has abandoned REITs beyond the near term. HOLD.
Enterprise Product Partners (EPD 26 – yield 6.8%) – This energy company is cheap with a sky high dividend that should be very safe, with 1.7 times coverage with cash flow and 20 straight years of dividend hikes. Earnings growth should continue to be solid as new investments continue to come on line to boost volumes. The company has a pristine balance sheet and has vastly outperformed the energy sector as well as its peers. The market still isn’t loving these energy infrastructure stocks but that could change. In the meantime, you get paid 6.8% to wait. BUY.
STAG Industrial (STAG 30 – 4.6%) – The industrial REIT has been rock solid in a challenging environment for the REIT sector. As an industrial REIT it tends to be more cyclical than its peers. That led to underperformance of its peers when safety was king. But in the more “risk-on” market environment the stock is outperforming the other REITs. Earnings were solid and this is still a reliable monthly dividend payer. HOLD.
Dividend Growth Tier
AbbVie (ABBV 87 – 5.5%) – Things are really turning around for this beleaguered healthcare company. After floundering badly amidst concern about competition for its top drug Humira, investors have apparently discovered the value and bright future. The stock is up 37% since mid-August, 18% since October 1 and 8.7% so far in November. The stock has also been aided by a rotation into value and positive news in the trial phase for a couple of its promising drugs. Yet despite the recent run up, ABBV still sells at a remarkably cheap forward price/earnings ratio of about 9. This is still a great stock to buy here, especially with a stellar 5.5% yield. BUY.
Altria (MO 47 – 7.2%) – The news is unlikely to get better for the e-cigarette maker JUUL, in which Altria agreed to a 35% stake almost a year ago. Vaping is under siege by the regulators and politicians and the situation is unlikely to improve in an election year. That said, the stock has already priced in a terrible scenario and has likely already bottomed. Meanwhile, it offers great value, positive earnings growth and a safe 7.5% yield and value investors are taking notice. Because of the dividend, value and limited downside Altria is still a solid investment in the current environment. BUY.
Cheniere Energy Partners (CQP 43 – yield 5.8%) – The energy sector is still being shunned by investors. Trade war concerns are dampening enthusiasm for global energy sales. But at the end of the day, this LNG terminal operator will continue to export more LNG in world hungry for the stuff as additional capacity continues to ramp up. Rapidly rising revenues fix just about everything. This company is in the right place at the right time, and if the market forgets that for a while it just creates a great accumulation opportunity. At 15 times forward earnings and a 5.8% yield, this is a great addition to a portfolio. BUY.
Crown Castle International (CCI 132 – yield 3.7%) – This 5G infrastructure REIT has been struggling of late. It’s down about 13% since early September and about 10% since mid-October. What’s going on? For one, REITs, which had been the best-performing market sector over the past couple of years, are taking a hit as the market hits new highs and investor risk appetites increase. As well, the other 5G REITs are taking a similar hit. Naturally, the best-performing REITs are experiencing a steeper pullback than the index. CCI is right at its 200-day moving average now. I suspect it will hold. After all, when you cut out all the nonsense this REIT will continue to enjoy robust and growing demand for its properties as the 5G buildout continues in haste. Of course, if there is further weakness in the stock I will reevaluate. BUY.
Valero Energy Corp. (VLO 100 – yield 3.6%) – I believe in American refiners. And Valero is my favorite because of its superior technology and high margins. Conditions are improving over a rough 2019. Crack spreads are rising and inventories are falling. A much better 2020 is fast-approaching and coming into clear vision. The stock has had a nice run, up over 20% since early October. Performance has flattened but the stock is holding its gains, which is a very good sign. Things are aligning for a good 2020 and I still like this stock even after the recent run. BUY.
Safe Income Tier
Alexandria Real Estate Equities (ARE 157 – yield 2.6%) – The life science and research lab REIT has had an ever-so-slight pullback over the past couple of weeks as investors shun defensive stocks. But the stock is still very much in a slow and steady upward trend. It has rare niche properties with strong and rising demand in a very defensive sector. I don’t see investors running away from that anytime soon. Alexandria is still a great place to be in this environment. 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. This is a place in the portfolio where you don’t have to worry about bad news or a faltering economy. BUY.
Invesco Preferred ETF (PGX 15 – yield 5.4%) – This preferred stock ETF is remaining solid. It is a high-yielding, safe-haven port 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 ETF has moved off the highs as stocks make new highs and become more bullish, which is to be expected. BUY.
NextEra Energy (NEE 227 – yield 2.2%) – This utility/alternative energy stock has one of the very best longer-term upward charts I’ve ever seen. The price has likely gotten a little above trend, which is why half the position was sold. It may continue to pull back a little bit as long as the bullish mentality in the market continues. But I don’t think investors are all that confident and will continue to have one foot on safety. And this stock is the best of the best. The upward bias has still not been broken and NEE is still a hold. HOLD.
Xcel Energy (XEL 61 – yield 2.7%) – Like its peers, this utility stock has been pulling back. It’s about 8% off the highs. It is more overpriced but with better momentum then most utilities. It is still above the longer term moving average and I’m still not convinced of a more meaningful move down in utilities and REITs. For now, XEL is still a hold. HOLD.
