The Coronavirus Infects the Market’s Upward March
Something always stops the market’s upward momentum eventually. In this case, it’s a brand new headline risk, the coronavirus.
The decks had cleared with trade war issues and Iran out of the headlines. There was nothing to stop the solid economy and low interest rates from propelling stock prices higher. But nothing spoils a party like an infectious disease.
News of the spread from China of a brand new virus roiled markets earlier this week. Although the market has bounced back somewhat, I don’t think we’re out of the woods yet by a darn sight. This disease news will likely hamper the market for a while. It will inhibit trade, slow the global economy and wreck the market euphoria to at least some degree in the weeks ahead.
It could be bad. It could blow over without too much disruption, or anything in between. We’ll see. But I think this latest upward leg, which began in October, was running on fumes anyway. It is also likely that earnings season will guide the market direction from here.
Regardless of the impact of the virus, earnings will be a big story going forward. It will be important to determine if after a period of declining earnings there is a rebound, which will be necessary to justify the market at current levels. Earnings will also have an impact on individual stocks in the portfolio, and I will certainly keep you posted in the weeks ahead.
The REIT and utility positions in the portfolio had already regained momentum and renewed market turbulence should enhance their relative performance going forward. However, more cyclical positions in QCOM, VLO and SFL will likely continue to be impacted by headline risk in the near term. There’s also positive news on the marijuana front.
High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 3.7%) – The global infrastructure company is still within pennies of the all time high. It has reliable assets like toll roads, cell towers and railroads that generate steady income in any environment. And the global infrastructure boom is creating lots of growth opportunities at the same time that BIP is taking advantage by trading up some of its assets to higher margin properties. Safety with growth is in the market’s wheelhouse these days and the stock’s performance is reflecting that fact. HOLD
Community Health Trust (CHCT – yield 3.6%) – This small healthcare REIT seemed like it was getting its overdue comeuppance after a huge run last year. It sold off more than its peers during the REIT pullback. But it is now soaring back with a vengeance, up about 12% so far this year. REITs are strong again and I won’t be surprised to see CHCT run to new highs. Momentum is strong. Let’s let it ride for now. HOLD
Enterprise Product Partners (EPD – yield 6.6%) – I don’t know what to say. This energy infrastructure company really is a great value. It has everything going for it operationally and fundamentally. But the energy sector just can’t seem to get out of its own way. When the market is up, it lags. When the market is down, it’s down more. It looks like the American energy boom screwed up the energy sector for longer than most thought. Hopefully rising earnings and a safe, huge and growing dividend will win out eventually. For now it pays a spectacular 6.6% yield and should have limited downside if the market turns south. BUY
STAG Industrial (STAG – 4.4%) – This industrial REIT is looking good. It’s up about 5% over the past month while the market is flat and it’s right near the recent all time high. STAG 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. The announcement a couple of weeks ago of a new share offering barely slowed it down. Like several other portfolio positions, the stock is too high priced to be a “BUY” at the current price. But the momentum looks good and the stock could move still higher in the months ahead. HOLD
SFL Corporation (SFL – 10.3%) – This China coronavirus stuff is bad news for the shipping industry. It will likely curtail trade volumes at least for a while and the sector will be directly affected. As a result, SFL is down about 5% since being added to the portfolio early this month. The company generates the bulk of revenue and earnings via long-term contracts that are not affected, but you can’t tell that to an emotional market. Coronavirus headlines will continue to be a near term risk for this shipper. If the situation deteriorates I will likely take action. But for now I will wait. BUY
Dividend Growth Tier
AbbVie (ABBV – 5.6%) – Since rising 40% in the last part of 2019, the stock had leveled off. But it has pulled back about 5% this week, representing the first significant contraction since the run-up. What’s going on? Well, the only AbbVie specific news was good. They divested some minor drugs to appease regulators for the upcoming merger. The market liked that news and the stock rallied. But the stock has pulled back along with the rest of the market and the Healthcare sector with the coronavirus news. ABBV did experience a steeper selloff than both probably because it had a sizable recent run-up. The story is intact with no game changing news. I will watch closely to see if the selloff continues. BUY
Altria (MO – 6.7%) – The cigarette maker will report earnings on Friday. Despite a constant barrage of negative headlines about E-cigarettes, the stock has rallied about 25% since late September. The company is a proven veteran of regulatory scrutiny and the company continues to grow earnings. MO has likely benefited from a rotation into value stocks that began in the fall. The cheap valuation and high dividend yield have appealed to investors of late. Altria is expected to post earnings growth of 6.3% for the quarter, which is solid considering the current valuation. The dividend should also be safe as it has increased every year for the past 50 years. BUY
Crown Castle International (CCI – yield 3.2%) – The 5G cell tower REIT has soared back to new all time highs. Even in a down week for the market CCI continued its impressive climb that began in mid December after a fairly significant pullback from the highs of the summer. REITs are back and 2020 should be a big year for 5G. As a result, CCI is once again a market favorite. The stock is up about 6% for the year and returned over 36% for the past year. Despite the relatively high valuation, the stock is still a BUY because of the momentum and the major impact of the 5G rollout. BUY
Innovative Industrial Properties (IIPR – yield 4.3%) – It was a wild week for this marijuana farm REIT. The stock sold off over 3% last week when it announced a 2 million share stock offering. As I mentioned, REITs do this periodically to raise money. Investors typically don’t like it as it dilutes share holdings. But the good ones use the money to accrete share value over time despite additional shares. The stock then had a huge day yesterday, rising 8.74% on the day. It climbed 13% for the week. The whole sector was higher as the New York Governor proposed legalizing marijuana for recreational use. But I think the rally has more to do with the sector being oversold. I think the timing of this pick was just right, and is still very good. BUY
Qualcomm Inc. (QCOM – yield 2.9%) – The chipmaker had a rough week, down over 6%. The coronavirus scare is not good for this company because it does a lot of business with China. The trade disruptions that will inevitably occur will directly affect Qualcomm. It is likely that future negative headlines about the virus will continue to knock the stock back. That said, the main story is still intact. The furious rush to 5G will continue regardless and Qualcomm should see growing revenues and earnings as a result. Coronavirus shmoronavirus, the company will still sell chips as fast as they can make them and any selloff is a buying opportunity for anyone with a timeframe beyond a couple of months. BUY
Valero Energy Corp. (VLO yield 4.6%) – This is another stock that hates coronavirus headlines. The problem is that the trade disruptions weaken demand and price for refined products, and thus dig into profit margins for this refiner. After a sizable 30% rally between late August and late October, the stock has given about half of it back, and is down about 6% over the past week. But this headline trouble doesn’t change the fact that the refiner is still set up for a much better 2020, where it expects year-over-year earnings growth of over 90%. Sure, the near term prospects for the stock have been diminished. But the stock is still looking pretty for the rest of the year and has set up a better entry point. The company announced earnings on Friday and with the recent selloff a positive reaction is more likely. BUY
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.5%) – It’s easy to forget the magnificence of a defensive stock, until the market hits the skids. The seemingly relentless slog to still more new all-time highs has gone uninterrupted by contagious diseases. In fact, this is a company invested in medical research facilities. The stock has gotten a little pricey but the momentum is still good. And the stock is especially good to hold through a period where the likelihood of more market turbulence is high. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.7%) – The best thing I can say about this 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 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 next 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 1.9%) – Nothing seems to stop the relentless march of this utility and alternative energy superstar. Despite starting this year near an all-time high, NEE is up about 12% so far this year while the overall market is only up 1.41%. Utility stocks have swung back into vogue and NEE is the best of the best, offering reliable income and decent growth. The utility announced earnings last Thursday night that missed estimates but the company reiterated its guidance for the full year. The stock dipped a little bit at the next day’s open but finished the day significantly higher. The stock has gotten overpriced but the momentum is great, and the stock should do well if the market has more down days in the weeks ahead. HOLD
Xcel Energy (XEL – yield 2.5%) – This smaller alternative energy utility also had an up week despite a down market. The year-to-date performance has also been much better than the overall market. XEL announces earnings tomorrow and expectations for the company and the sector are for solid growth. Despite the fact that the stock is pricey, I’m not too nervous about earnings. This utility typically misses estimates and it doesn’t bother stock performance. It also has positive momentum and good down-market street cred. HOLD
