Trade Jitters
This has been a good year for the market. With only weeks left in 2019, the S&P 500 is more than 23% higher for the year. Some of that is the undoing of the overselling at the end of last year. But the market has trended consistently higher all year and is close to the all-time high.
The market has moved sharply higher since early October but has pulled back in the last week or so. The chief culprit is trade news. It’s not that trade news is everything to the market. It’s that it is the swing issue. Recession talk has abated. The global economy is at least stable. And momentum is good. Trade tips the balance.
The market sold off steeply yesterday on President Trump’s statement that he was in no rush for a deal. It’s up a lot so far today on news that things are still on schedule. And the dance continues. I believe yesterday’s statement was bluster and negotiation posturing. It is highly likely that in an election year the trade war will not escalate and at worst maintain status quo, with a higher probability of some sort of a deal or an excuse for progress.
The market still has good momentum that is likely to continue into the New Year. The recent volatility has awakened some of the safer sectors and stocks. Utilities and REITs have been the worst performing market sectors over the past three months as a more “risk-on” mood captured investors. But I believe investors will only have one foot on optimism going forward and these stocks will regain traction.
In this update, I am selling a recently added position, Cheniere Energy Partners (CQP). The stock is down about 10% since September and the news is not positive going forward. This advisory has a small tolerance for downside, especially when it doesn’t seem like an aberration. Well chosen dividend stocks will win over time provided you avoid losing big. I will remain extra cautious to make sure that doesn’t happen.
In the meantime, the portfolio is well positioned for the year ahead.
High Yield Tier
Brookfield Infrastructure Partners (BIP 52 – yield 3.9%) – The global infrastructure company continues to hover around all-time highs, seemingly no matter what the overall market does. It’s a defensive company with a high yield in the increasingly popular infrastructure subsector. The market loves this stock right now. The company also has an additional $1.1 billion in new investments that should come on line in future quarters. The stock is still rated HOLD because it is already up over 60% on the year and valuations are a little high for new money. But the momentum is marvelous. HOLD.
Community Health Trust (CHCT 47 – yield 3.5%) – This smaller Healthcare REIT still has good momentum and holds up very well in down markets. The valuation is getting stretched which is why two-thirds of the position was sold over the past couple of months. I will continue to hold the remaining third as this has been an all-star performer (up over 60% for the year) and the stock should hold up well if the market volatility continues. HOLD.
Enterprise Product Partners (EPD 26 – yield 6.8%) – The energy sector continues to be unloved. It looks like the global energy markets still haven’t found any equilibrium with all the additional U.S. supply. But Enterprise continues to grow earnings. The company has more new projects coming on line in the quarters and years ahead that should boost earnings. The distribution is rock solid with 1.7 times coverage and hikes every quarter for the last 20 years. EPD is a great bargain here and you collect 6.8% while you wait for the market to realize it. BUY.
STAG Industrial (STAG 31 – yield 4.6%) – The industrial REIT is a low-drama, steady performer that pays dividends every single month. The stock just slowly trends higher with less volatility than the overall market. It’s not going to win any appreciation awards but for an investment that provides a high 4.6% yield with monthly payments, it’s more than thick and rich enough. Valuations are not out of whack but not cheap either. HOLD.
Dividend Growth Tier
AbbVie (ABBV 87 – yield 5.4%) – Since rising 40% from the summertime lows, the biopharmaceutical giant is catching its breath. That is normal and healthy. ABBV still sells at a ridiculously cheap valuation and is overcoming the slippage in Humira sales. The company has a superior pipeline of next generation immunology and oncology drugs, such as Imbruvica and Venclexta to treat blood cancer and Skyrizi for psoriasis. The Allergan (AGN) acquisition should go through early next year, providing further cash flow and diversification. It’s still a good entry point. BUY.
Altria (MO 50 – yield 6.8%) – The cigarette maker has been trending higher since the beginning of October and is the portfolio performer of the week. But it’s funny—nothing has really changed. Investors just suddenly realized that this company was selling at an absurdly cheap valuation and paying a massive dividend that is safe. Despite the problems with e-cigarettes the company continues to grow the bottom line. It’s also a cheap, high-yielding stock that should be strong in a market downturn and recession. BUY.
Rating change “HOLD” to “SELL”
Cheniere Energy Partners (CQP 39 – yield 6.4%) – There’s a problem. Over the longer term, the prognosis for CQP is great. LNG is the world’s fastest growing fossil fuel source. It’s cleaner and can now be exported from this country, which has an abundant natural gas supply. But there is a short-term global glut. New terminals in the U.S. and Australia have been cranking out liquid gas faster than global demand can keep up. Prices for LNG have halved in the last 14 months in Asia and fallen almost as much in Europe as well. There is concern that customers could opt out of delivery if prices continue to fall. Even though they have long-term contracts, they can opt out of delivery with 30 to 60 days notice and a fee. The speculation is that suppliers could opt out after the winter, in the second and third quarters of 2020. Even if it doesn’t happen, it will take a long time to realize it won’t. In the meantime, the stock will have a tremendous headwind in a market that isn’t kind to the energy sector. To be safe, I’ll take a relatively small loss here and sell the position with an eye toward perhaps buying it back at a future date. SELL.
Crown Castle International (CCI 134 – yield 3.6%) – This 5G infrastructure REIT has significantly outperformed the overall market over the past year, returning 22% versus 15%. However, the past three months has been a different story. CCI has returned negative 8.43% versus a 6.86% return for the S&P. A big part of the reason is that the REIT sector has been the worst performing market sector over that period. CCI has underperformed its REIT peers over the last three months because it had outperformed in the recent past. But I believe the sector will regain traction as market uncertainty will be a factor. And, going forward, CCI will continue to enjoy robust and growing demand for its properties as the 5G buildout continues in haste. BUY.
Qualcomm Inc. (QCOM 82 – yield 3.1%) – The 5G chip maker has moved lower since being added to the portfolio last week. It is a stock that is vulnerable to negative news about trade with China. But I regard it as mostly short-term volatility. I do not believe the trade situation with China will escalate in this election year. There is a higher probability of a deal. In the meantime, this company is set up for a sizable earnings and revenue boost in the quarters ahead. I believe the stock will trend higher in an ugly fashion and this is an even better entry point. BUY.
Valero Energy Corp. (VLO 95 – yield 3.8%) – The refiner stock had a great run, moving from just over 70 per share in late August to over 100 in the first half of November. It has since pulled back to under 94, but looks at this point like a natural consolidation after a strong move higher. The stock is still well above the range in which it had been trading all year. Valero is coming off a downtrend in a longer-term uptrend. Refiners have been one of the most profitable subsectors of the market over the past five years. Crack spreads have been improving and 2020 is shaping up to be a much better year than 2019. BUY.
Safe Income Tier
Alexandria Real Estate Equities (ARE 162 – yield 2.5%) – Of all the REITs in this portfolio, this had been the most consistent and solid performer though the recent more turbulent time for the sector. The stock is again at new highs as it continues its slow and steady slog ever higher. Demand for its rare life science and research lab facilities remains strong and investors are still attracted to the defensive nature of the business. Even if the overall market continues to move higher, there is still a lot of uncertainty out there and I believe investors will continue to demand a rock solid dividend payer like this. Alexandria is still a great place to be in this environment. BUY.
Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.3%)
Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.7%)
The best thing I can say about these short-term, investment grade bond ETFs is that there’s nothing to say. These bonds remain steady and predictable, just like they should. It’s comforting to have something in your portfolio that pays interest and is unaffected by market volatility. It tends to steady out portfolio performance and can help keep you stay invested in times of volatility. BUY.
Invesco Preferred ETF (PGX 15 – yield 5.4%) – This preferred stock ETF is a great way to get a high yield and diversify into an asset class that is not correlated to the stock or bond markets. It is a rare way to get a good yield in a low interest rate world without taking on much risk. The performance has been solid and it remains a nice position to have in the late stages of the market cycle where uncertainty continues to remain a factor. BUY.
NextEra Energy (NEE 234 – yield 2.2%) – This largest American utility by market cap combines steady cash flow from its stellar Florida Power and Light division with growth from the alternative energy business. NextEra is a huge player in fast-growing clean energy and is the world’s largest producer of wind and solar energy. It is also shareholder friendly, targeting 12% to 15% annual dividend growth through 2024.The only kink in the armor is a high valuation. But momentum looks good. HOLD.
Xcel Energy (XEL 62 – yield 2.7%) – Like NEE, XEL has a strong presence in alternative energy, which is driving a higher level of growth that its peers and also bodes well for the future. Despite subpar performance of late during the market rise, utilities are still a strong choice going forward as uncertainty continues to loom and investors are desperate for yield. The stock has returned over 100% since being added to the portfolio in October 2014, significantly outperforming both its peers and the overall market over that period. I believe the outperformance will continue in the years ahead. It is rather pricey at this point though, which is why it’s only rated a HOLD. HOLD.
