The Bull Market Includes Value Stocks
The year is starting out great! There was some volatility associated with the Iran thing but it looks like that, along with trade issues, has faded from the headlines, for now.
The change in calendar is really an arbitrary date in terms of the market. We are still in the midst of a bull run that started on October 8th. In the past three months, the S&P 500 has run up about 14%. That’s a strong pace. If that pace lasted, which it won’t, the market would be up 56% in a year.
The bulls are firmly in control right now. The economy is solid, interest rates are low and rally-disrupting headlines have abated. For now, momentum is strong. But earnings season is upon us and it is likely that in the weeks and months ahead, earnings will drive the next leg of the market.
Performance over the last three months has been telling. The top performing S&P 500 sectors over the period are Information Technology, Healthcare, Communications Services and Finance. Technology always leads in a bull market because there is so much growth in the sector and the Communications Services sector is sort of an offshoot of Technology as it has three of the FANG stocks.
But the outperformance of Healthcare and Finance is interesting. These sectors had been dogs for a long time. Market laggards have become leaders. For years, growth and momentum stocks had all the fun while value stocks continued to flounder. But now these sectors are coming alive again.
Change of leadership is healthy for the market. Much of the current rally isn’t about expensive stocks getting even more overpriced but rather undervalued stocks becoming more fairly valued. You can see the resurgence of value stocks reflected in the recent performance of portfolio positions AbbVie (ABBV), Altria (MO) and Valero (VLO).
I’ll be watching closely to see if value stocks continue to outperform. A stronger trend in that area may start to incorporate energy stocks, the most undervalued sector of the market, and portfolio position Enterprise Product Partners (EPD).
It’s also worth noting that REITs have risen off a consolidation and are strong performers over the last month. As well, 5G stocks Crown Castle International (CCI) and Qualcomm (QCOM) as well as marijuana REIT Innovative Industrial Properties (IIPR) have also been very strong, reflecting a likely 2020 theme in those areas.
High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 4.0%) – After pulling off its high (52.83) in late November, the global infrastructure partnership appears to have resumed an upward trend. I still like the way the stock is positioned as demand for safe, revenue-generating companies should remain strong. As well, infrastructure is a growing subsector that is increasingly popular with investors, almost like a utility on steroids. The stock is still rated HOLD because it has had a solid run up and this might not be the ideal entry point. HOLD
Community Health Trust (CHCT – yield 3.8%) – This small healthcare REIT has had a significant pullback from the highs in late October. CHCT went from a high of over 49 at the end of October to under 42 at the beginning of this month. That’s a significant 14% retraction. Fortunately, two-thirds of the position was sold during the heady days of the high 40s. As for the remaining one-third position, it has regained some momentum in the past couple of weeks. The down move is not unusual for a stock that had been flying so high, up over 50% in 2019. We’ll see if the renewed strength propels it back near the highs. HOLD
Enterprise Product Partners (EPD – yield 6.2%) – This underappreciated blue-chip energy company has acted better of late. After a disappointing year where it significantly underperformed the market, EPD has moved 15% higher since late November. Hopefully, investors are done neglecting this gem. It has everything going for it: valuation, growing earnings and a rock solid dividend payout with a massive 6.2% yield. The market will figure it out eventually. In the meantime, you get very well paid to wait and have limited downside if the market turns south. BUY
STAG Industrial (STAG – 4.5%) – 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. However, recent news may rock the stock a little bit. The REIT announced a new offering of 8.75 million shares. Investors typically don’t like this as it dilutes shareholdings, as I mentioned last week with ARE. This, along with borrowing money, is how REITs typically raise money for new investments. It shouldn’t dilute holdings much because there are already 133 million shares outstanding and the better REITs can invest money in a way that outweighs the negative effect of dilution. Like ARE over the past week, I expect STAG to rebound quickly from any selloff. HOLD
SFL Corporation (SFL – 9.7%) – As I mentioned in last week’s monthly issue, SFL is a strong player that has a proven ability to earn consistent profits in any environment. A likely continued recovery in the shipping industry should also add nice support to this very high dividend payout. This is one of the very few places to get a huge dividend with an acceptable level of risk. BUY
Dividend Growth Tier
AbbVie (ABBV – 5.3%) – Since rising 40% from the summertime lows, the biotech giant has more or less flat-lined over the last month. The upward move was aided by investors’ move toward value stocks, and particularly healthcare companies. Some of the excessively cheap valuation has been corrected and the market will again focus on the fundamental question; will Abbvie’s best-in-class pipeline and merger with Allergan (AGN) offset increasing completion for its blockbuster Humira drug? I believe Abbvie will do just that for reasons I’ve often stated. But it will take time to prove that to investors. In the meantime, you get a 5.3% yield on a stock that is still undervalued. BUY
Altria (MO – 6.6%) – The headlines for e-cigarettes, and Altria’s 35% stake in JUUL, aren’t getting any better and probably won’t in an election year. Can this stock overcome a mountain of bad press? I think it is likely because the stock has successfully done so for decades. MO offers great value and a massive dividend and probably has limited downside if the market turns negative. Meanwhile, the company continues to grow earnings and remains one of the few investments that offers great value and a safe, high dividend. BUY
Crown Castle International (CCI – yield 3.5%) – Similar to CHCT, this high-flying REIT took it on the chin during the consolidation in the REIT sector. But it has since regained traction and isn’t far from the all time highs. The 5G infrastructure REIT should continue to experience robust and growing demand for its properties as the 5G build-out continues in haste. I believe 5G related stocks should have a strong 2020. BUY
Innovative Industrial Properties (IIPR – yield 4.8%) – This owner of marijuana properties has been very strong out of the gate. It’s up around 15% since being added to the portfolio in the December issue. The timing is likely very good, and this REIT should continue to make money and grow earnings at a huge clip. It got knocked more than 40% from its highs in sympathy with the overall marijuana sector. The company has an expected earnings growth rate of 80% in 2020 and the beaten down sector is due for a rebound. I’m expecting continued strength in January as investors who sold for tax losses in December buy it back. BUY
Qualcomm Inc. (QCOM – yield 2.7%) – This is a relatively simple story. 5G is exploding onto the scene and Qualcomm has by far the best 5G cell phone chip. The company has some legal issues and the stock doesn’t have the best track record but I think an avalanche of increased revenues can fix just about anything. The stock is behaving well as it has trended distinctly higher over the past year and isn’t far from the 52-week high. I strongly believe that the 5G phenomenon will propel this stock significantly higher than it is now at some point in the year ahead. BUY
Valero Energy Corp. (VLO yield 3.7%) – This refinery stock had a great run, moving from just over 70 in late August to over 100 in the first half of November. It has since pulled back to about 95. It 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. Plus, the company has been investing in new projects that will come on line this year and boost the bottom line. 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 – yield 2.6%) – This life science and research lab REIT pulled back a little bit last week after announcing a new offering of 6 million shares. But the company has a proven track record overcoming dilution from new issuances and has resumed its upward momentum after just a couple of days. Demand for its rare life science and research lab facilities remains strong and investors are still attracted to the defensive nature of the business. The stock has been an all star performer for many years and I expect it to continue to behave well in this environment. On valuation reasons alone it is just a HOLD. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.7%) – The best thing I can say about this short-term, investment grade bond ETF is that there’s nothing to say. These bonds remain steady and predictable, just like they should. It’s comforting to have something in a portfolio that pays interest and is unaffected by market volatility. It tends to steady out portfolio performance and can help keep you invested in times of volatility. It also a nice yield for bonds that mature at the end of the year. BUY
Invesco Preferred ETF (PGX 15 – yield 5.3%) – 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 in the stock market continues to remain a factor. BUY
NextEra Energy (NEE – yield 2.1%) – This utility and alternative energy superstar has blown away the performance of both its utility peers and the S&P 500 in every measurable period over the last ten years. It’s the largest American utility by market cap which combines steady cash flow from its stellar Florida Power and Light division with growth from the alternative energy business. It’s a beautiful combination of steady cash flow and growth. It is also shareholder friendly, targeting 12% to 15% annual dividend growth through 2024.The only chink in the armor is a high valuation. But momentum is still phenomenal. HOLD
Xcel Energy (XEL 62 – yield 2.6%) – This alternative energy utility remains one of the very best of the sector and has returned over 100% since being added to the portfolio. Like NEE, Xcel is also a big player in alternative energy but less well known. The stock had stumbled for a month or so but seems to have regained momentum since. It looks on track to retest the highs. Everything is great about this stock except valuation. HOLD
