The Market Soars Back
Coronavirus Shmoronavirus. That’s so last week. The market is up big this week and sprinting right back to new all time highs.
Reports are that the spread of the virus is being contained. The panic and pandemic worries are abating, for now. It’s looking like this thing won’t be that big a deal after all. The spread is under control and it’s only a flu anyway. As well, good manufacturing news came out this week, indicating renewed strength in the economy.
Yesterday, there was a positive reaction to the Democrat troubles in Iowa. The market, with its penchant for short term overreactions, rallied on hopes that President Trump’s reelection is more likely and pro market policies will continue. Of course, there is no guarantee that the current narrative on the Coronavirus or the election won’t change. And that adds headline risk to an already pricey market.
But the market is rising back faster than it fell. The solid economy and low interest rates are continuing to drive stocks higher, for now. While the story for the overall market has improved, earnings season is making this market very much about individual stocks and stories.
There are four ratings changes in the portfolio this week. I explain the reasons in the write-ups. Some changes have to do with pricing. Some have to do with earnings and recent news. But, overall, I do have a greater sense of caution.
The market looks good right now. The indexes are moving back to all time highs, as are several positions in the portfolio. This kind of situation makes me nervous. While I’m generally positive about the market outlook and I certainly don’t have a sense of doom, this seems like a prudent time to pull back on the throttle a little bit.
Let’s protect some profits and make sure we don’t overpay for stocks when things look rosy.
High Yield Tier
Rating change “HOLD” to “SELL 1/3”
Brookfield Infrastructure Partners (BIP – yield 3.7%) – The global infrastructure company is still within pennies of the all-time high. It reports fourth quarter earnings next Monday, which makes me nervous. Apparently, the Coronavirus isn’t hurting the stock but maybe earnings can. That said, the company mentioned in last quarter’s report that new higher margin properties should boost earnings. However, given the 40% rise in the stock since being added to the portfolio and the fact that it is at an all-time high, I will err on the side of caution and protect a third of the profits by selling one third of the position. SELL 1/3
Community Health Trust (CHCT – yield 3.5%) – 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 performance has been great so far this year and it didn’t even miss a beat during the recent volatility from the Coronavirus. The stock is pricey but the upward momentum really hasn’t shown any sign of weakness yet. HOLD
Enterprise Product Partners (EPD – yield 7.0%) – The midstream energy giant announced good earnings for the fourth quarter and the year last week. Earnings for 2019 increased 9% over 2018 and distributable cash flow (DCF) increased 11% over the same period. In 2019, $5.4 billion in new organic growth projects came on line, with almost half coming in the fourth quarter. The company stated there will be $3.2 billion in new projects coming in 2020, and the company increased the dividend for the 62nd consecutive quarter. But the stock fell toward its 52-week lows during the week. Fears that the Coronavirus will weaken global demand for oil and gas outweighed earnings, despite the fact that 86% of revenues are fee-based and unaffected by commodity prices. The operational and fundamental soundness of the company continues to be shunned by this market. Hopefully, the market will come around in 2020 while you get a 7% yield on your money. BUY
STAG Industrial (STAG – 4.5%) – This industrial REIT is still looking good. It has a great niche in the under-supplied industrial space market at a time when online shopping is creating growing demand for warehouse space. The profits have been slow and steady as has been the performance. It’s not winning any races but it’s like a tortoise that just keeps on going in the right direction. It’s a little pricey but momentum is still solid. And it pays a dividend every single month. HOLD
Rating change “BUY” to “HOLD”
SFL Corporation (SFL – 10.3%) – Unfortunately, the timing on this pick turned out to be bad because of the development of the Coronavirus. 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 has taken a bit of a beating since the crisis erupted. The stock has started to bounce back with the overall market this week and we’ll have to wait and see if this rally is just a blip or the realization that the economic impact of the virus will be limited. Right now, the stock is a hostage to the coronavirus story. I will continue to HOLD the stock but the rating will be reduced from a BUY until there is more certainty regarding the damage from this crisis. HOLD
Dividend Growth Tier
AbbVie (ABBV – 5.7%) – The biotech giant took a bit of a beating during the Coronavirus selloff but has been bouncing back nicely with the market this week. It also will announce fourth quarter earnings on Friday. While overseas sales of Humira will predictably slip, the damage may be offset by the performance of promising drugs launched in 2019, Skyrizi (psoriasis) and Rinvoq (arthritis). But even if results fail to impress, the negative affect should be mitigated by anticipation of the closing of the merger with Allergan (AGN) in the next quarter. The stock still offers good value, a bright future and a high dividend. BUY
Rating change “BUY” to “HOLD”
Altria (MO – 7.1%) – It has been a bad week for the cigarette maker as the stock fell more than 7%. Earnings are the culprit. Altria took another $4.1 billion impairment charge on its JUUL stake after the $4.5 billion impairment it took in October. Altria took a disastrous $12.8 billion 35% stake in the E-cigarette maker a little over a year ago. Since then, JUUL has been under relentless scrutiny from regulators for marketing to teens. Aside from that, fourth quarter earnings and 2020 guidance were in line with consensus expectations. The company also failed to offer three-year projections for cigarette volumes, revealing uncertainty in that important metric. I expected periodic bad news but this is worse than expected. The stock still offers value and a safe dividend but I will reduce the rating to a HOLD until it can reestablish upward momentum after this punch in the face. HOLD
Rating change “BUY” to “HOLD”
Crown Castle International (CCI – yield 3.2%) – The 5G cell tower REIT has soared back to new all time highs. The stock has lifted about 14% since mid-December and held up quite nicely during the recent selloff. The REIT is in a favorable sector right now and is especially well positioned as the 5G rollout will continue in haste, providing as much opportunity for growth as the company can handle. I’m still very positive on the stock going forward but it has returned over 22% since being added to the portfolio a little more than seven months ago. That’s a big move for a REIT and, while I believe the stock is still in an uptrend, it is a little too pricey to initiate a new position at the current level. HOLD
Innovative Industrial Properties (IIPR – yield 4.5%) – Despite the fact that this stock is up 30% since just mid-December, I still think it is well worth buying at the current level. The marijuana farm REIT had fallen 50% from the midsummer high by late October. It fell in sympathy with the overall marijuana sector that was taking a beating. But IIPR has more than doubled earnings and will continue to do so for a while. It really had no business selling off to that extent. Now, the marijuana sector appears to be moving higher after a huge down move. I believe that, given the earnings growth and the recovery in the sector, this stock could make a run at the old highs of about $140. Earnings will be reported in a few days, but there is no reason not to be optimistic. BUY
Qualcomm Inc. (QCOM – yield 2.9%) – The chip maker will announce first quarter fiscal earnings after the close today. Look, you never know how an earnings report will go. But, under the circumstances, I welcome it. The main reason the stock was added to the portfolio was because the 5G chip sales should really boost the top and bottom lines. Well, here it is. Let’s have it. The stock has also gotten knocked around with the Coronavirus thing. It’s also true that fellow chip makers have already announced impressive earnings. Expectations are high but the company should be able to deliver. We’ll see. BUY
Valero Energy Corp. (VLO yield 4.9%) – This is another stock that got slapped around by the Coronavirus headlines, but it’s moving up nicely this week. The refiner announced very good earnings last week. Profits were up 11% over the last quarter and blew away consensus expectations of $1.60 per share with $2.13. That’s great. But the real story should be in 2020 as the company expects a 90% bump in earnings from last year as fundamentals in the refining business are expected to improve. In 2019, Valero had a rough patch in an otherwise positive environment for refiners. But I’m expecting a nice bounce back in the stock price this year. BUY
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.5%) – The research lab and life science REIT announced solid earnings on Monday and the stock jumped to new all-time highs. Funds from operations grew 5.4% in 2019 over the previous year and revenues climbed 15.4% as the company grew its property portfolio. The relentless slog higher for this stock just got a nice bump. With everything going so well for the stock I’m tempted to take profits on part of the position. But the momentum is still great and the stock is a trooper in down markets. So I will continue to hold the whole position for now. 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 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%) – The market is still uncertain. Therefore, defense is still popular. And Utility stocks are basking in the glory. This regulated utility and alternative energy is the very best of a favored sector. And the stock’s performance is reflecting that reality. NEE has moved off the all-time high just a bit but I wouldn’t be surprised if it makes a new one before too long. The stock has gotten overpriced but the momentum is great, and the stock should do well if the market suffers another rough patch in the weeks ahead. HOLD
Xcel Energy (XEL – yield 2.5%) – This smaller alternative energy utility announced earnings last week that beat expectations as revenues fell a smidge. The stock climbed nicely for the week. Like NEE, the stock has gotten expensive but the upward momentum still shows little sign of abating. I won’t fight the tape and will continue to hold the whole position as long as the getting is good. HOLD
