KaBOOM!
Since January, this market had been merrily whistling along through the coronavirus risk. It was enough to cause a selloff for a day or two but not enough to derail the bull move to new highs that had been in place since early December.This week that changed.
The virus is spreading in a significant way outside of China. It’s not contained. It is now in over 35 countries. News that it is spreading like crazy in Italy, and probably the rest of Europe soon, set off a chain reaction. The head of the Center for Disease Control said it is only a matter of time until it starts to spread in the U.S. and that we should prepare for major disruptions.
The market just endured the worst two-day point selloff in history and the largest percentage drop since 2015. With lightning speed, market indexes fell close to correction territory of 10% from the highs.
Stocks are bouncing back so far today. But what can you expect going forward? The short answer is, “I don’t know.”
There was always a risk that this thing could get bad. Well, it has. At this point, the virus doesn’t seem to be a dire health risk. In fact, the risks are much less that the average flu that circulates every year. But it is massively disrupting the global economy.
China, which accounts for one-third of global growth, is in tatters. Entire cities are shut down with nobody going to work. The impact to growth will be huge. Now, other continents may do the same thing. Even if it doesn’t become a big problem here in the U.S., it will kill the global economy in the near term. And the U.S. economy is not an island.
Stock prices were not accounting for the impact to economic growth. But now the market is making up for lost time. The market had been underreacting to the impact for so long that it is likely overreacting this week.
After a 7.5% fall in just four trading days, there is a better-than-even chance that the market gains some of that back over the next week. At this point, I am still not selling the most vulnerable stocks in the portfolio. Those are the stocks with the most international exposure, namely SFL, VLO and QCOM.
This is a weird Black Swan event that is unpredictable. As events unfold, I will continue to keep you posted.
High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 4.0%) – The global infrastructure company finally pulled back over 5% from all-time highs in this week’s rapidly declining market. The stock had been an incredibly resilient performer but with a decline of this magnitude it was bound to fall somewhat after rising so much in the past year. It’s still a great place to be as it has rising profits in a very defensive business and pays a great dividend. If the down market continues and the stock falls below 50, I will likely consider upgrading it to a BUY. HOLD
Community Health Trust (CHCT – yield 3.3%) – This small healthcare REIT just announced fourth-quarter earnings that beat on both earnings and revenue. Earnings (as measured by funds from operations) grew about 20% over last year’s quarter. The REIT continues to acquire new properties from which it successfully accretes earnings. Even though the stock pulled back slightly from the market selloff it has performed beyond already lofty expectation and has gone down far less than the overall market. Look for this one to bounce back quickly when the panic wanes. HOLD
Enterprise Product Partners (EPD – yield 7.4%) – The market’s worst-performing sector over every measurable period for the last 10 years is taking the brunt of the current selloff, along with technology stocks. The interruption of the global supply chain caused by the virus will hurt energy demand and prices, at least temporarily. Although EPD is affected very little by commodity prices, everything in the sector is taking a pounding, This stock is now at a 52-week low and is at the very low point of the range in which it has traded since 2016. The company’s operational performance is excellent and it is highly likely that things will improve for the sector in the months ahead. With a safe 7.4% yield, growing earnings and at a multiyear low valuation this stock is a steal here. BUY
STAG Industrial (STAG – yield 4.4%) – This industrial REIT announced earnings in line with expectations last week. The stock pulled back very slightly but is still very much in an uptrend. STAG 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 buy 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 from “HOLD” to “SELL HALF”
SFL Corporation (SFL – yield 10.5%) – The shipping stock announced solid earnings this past week. Why wouldn’t they? Roughly 90% of earnings are locked into long-term charters. The revenue has been dependable enough for the company to pay a dividend for 64 straight quarters through an industry depression. Unfortunately, none of that matters right now as the industry is right in the crosshairs of the panic selling over the coronavirus. There will be serious disruptions to the global economy, which directly affects shipping. Since I don’t know how long the selling will continue or how bad this virus news will get, I am selling half of the position in an abundance of caution. Given that there is a good possibility that the market bounces back over the next week, I will continue to hold the remaining one-half position for now. SELL HALF
Verizon Communications (VZ – yield 4.2%) – So far, this telecommunications stock is coming as advertised. During the market bloodbath this past week, the stock barely budged. It was chosen as a safe and high-dividend paying stock that now has a growth catalyst with the rollout of 5G and the new technologies it will spawn. While we haven’t seen the 5G growth hit the bottom line yet, the safe part of the story has shown its impressive colors. This stock is a good way to play defense and offense at the same time. BUY
Dividend Growth Tier
AbbVie (ABBV – yield 5.1%) – The panic stricken market has put this biotech giant into a better buy range. While just about everything has been indiscriminately sold, especially a stock that ran up 20% in the first half of February, AbbVie still has great value and a high dividend. Remember, healthcare is still a very defensive business that is quite resilient in a lousy economy. I think ABBV is a buying opportunity amid this coronavirus hysteria. BUY
Altria (MO – yield 7.7%) – These remain terrible times for this stock. Even when the coronavirus news dominated everything over the past week, Altria managed to attract headlines bad enough for the market to take notice. Yesterday, a group of 39 state attorneys general announced an investigation into the marketing practices of Altria’s recent acquisition from hell, JUUL Labs. That said, tobacco stocks typically outperform in down markets and, operating almost exclusively in the U.S., Altria is not negatively affected by the virus fallout. At this point, it is still a solid play in a highly uncertain market with a huge 7.7% yield. HOLD
Crown Castle International (CCI – yield 2.9%) – Okay, after rising nearly 30% since December the stock has stopped going higher in this market. Over the past week the stock pulled back 1.4% while the S&P 500 sold off 7.5%. The company will announce earnings after the close today. I welcome the prospect, because robust earnings amidst the 5G phenomenon is why we bought the stock. 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. HOLD
Innovative Industrial Properties (IIPR – yield 4.2%) – The down market has put out the fire in this stock for now. The meteoric rise was bound to slow anyway. It was up 30% in less than a month and even after a 10% selloff in the past week, IIPR is still up about 30% so far this year. The pioneering marijuana farm REIT will report fourth-quarter earnings after the close today. Earnings for the year are expected to more than double and that could be very welcome news in this struggling market. I believe the stock has significantly more upside left, but it can also be quite volatile in the near term. BUY
Qualcomm Inc. (QCOM – yield 2.8%) – There is a drawback to semiconductor stocks, and we’re seeing it now. They are volatile. The coronavirus news hits it right between the eyes. Demand will falter as the global economy slows and Qualcomm also does a lot of business in China. As a result, it’s down over 11% in the past week. However, the stock is still in an uptrend that began at the beginning of last year and 5G will be a huge force regardless of the virus. The company has by far the best 5G smartphone chips in the world and will for some time. The current market is a near-term blip that creates a great buying opportunity for a company that should thrive this year and beyond. BUY
Valero Energy Corp. (VLO – yield 5.0%) – This world-class American refiner is also getting pounded by the coronavirus. The troubles in China and the global economy will reduce demand, and consequently prices, of refined products. That will hurt crack spreads and profit margins for Valero. That’s why the stock is down over 20% in the past six weeks. But beyond the virus, margins will likely significantly rise from last year’s levels. When the ugly headlines finally fade, this stock too should make up for lost time. As well, the fact that this stock and the energy sector as a whole are being clobbered by the virus is creating an opportunity to still get into a stock that is likely to go places over the remainder of the year at a cheap price. BUY
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.5%) – This research lab REIT has been on fire and has dropped less than half as much as the overall market over the past week. If anything, this past week should increase investor appetite for safety going forward. As well, the fact that this stock has finally taken a breather bodes well for it in the weeks and months ahead. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.6%) – The coronavirus news is increasing investor appetite for safety. Interest rates are falling as well. 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%) – Ditto on what I said about BSCL. 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 current market. BUY
NextEra Energy (NEE – yield 2.1%) – The market has been frog-ugly this week, with the S&P down 7.5%. But it will have to do a lot better than that to put a dent in this stock. NEE fell a little over 2% over the last week but I think it will gain that back quickly when the market stabilizes. This safe and growing regulated and alternative energy utility continues to offer the right stuff in this market. Recent volatility will probably bolster investor demand for the stock going forward. It’s expensive but it will likely run higher in a rebounding market and outperform if the market continues to struggle. The company also approved a 12% dividend hike. HOLD
Xcel Energy (XEL – yield 2.5%) – This smaller alternative energy utility is up over 10% this year and significantly outperformed the market over the past week. The market loves utilities right now and alternative energy always. Like NEE, the stock has gotten expensive but the upward momentum will likely resume when the smoke clears. I will continue to hold the whole position. HOLD
