Too Much Too Fast
This has been about as ugly a couple of weeks in the market as you will ever see. On a closing basis, the market hit a low on February 28 and was down 12.5% from the February 19 highs. By total points lost, it was the fastest market correction in history. On an intraday basis, the market fell about 16%.
You can practically see the dip in the stock chart from space. What’s going on and what can we expect going forward?
The coronavirus is creating panic. It has spread to Europe and now it’s here. Nobody really knows what the extent of the spread will be and the market hates uncertainty. At the very least, the virus fallout will cause massive trade disruptions in the first quarter and crush global GDP growth in the process. And things might get worse before they get better.
That said, I believe the panic is overblown. We’re not talking about the Black Plague here. It’s like a flu, but not nearly as widespread. The flu kills tens of thousands of people in this country every year and it has no effect on the market. It’s also likely that the warmer weather stops the spread.
While there may well be more down days in the market ahead, I believe in a month or so this virus will fade from the headlines. When the fear wanes investors will again realize that money has no place else to go but stocks to fetch a decent return. By the end of the year it is likely that the market will be significantly higher than it is now.
The safe stocks in the portfolio, namely the REITs and Utilities, have delivered as advertised. After outperforming the market on the upside, for the most part, these stocks are significantly outperforming on the downside as well. Future months also look bright for safer, more defensive stocks as investors are reminded that the market can turn south at any time.
There are also particularly compelling buying opportunities in some of the more cyclical positions that have been hit the hardest. American refiner Valero Energy (VLO) has fallen more than 35% from the November highs as the virus hurts global demand for refined products. But this stock can be just as volatile on the upside and will likely come roaring back as the market recovers.
It’s also a good buying opportunity for 5G chip maker Qualcomm (QCOM). Semiconductor stocks are very cyclical and QCOM has a lot of exposure to China. But 5G should be a powerful story over the rest of the year and revenues should skyrocket for the company.
It may seem like the sky is falling. But the selloff also creates buying opportunities for the bold.
High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 4.1%) – The global infrastructure company had been one of the market’s safe-stock stalwart performers. Performance had been fantastic over the past year and BIP was forging to new all-time highs. Since the market selloff began on February 20, BIP has outperformed the market as well. While the S&P is down over 11%, BIP is just off a little more than 6%. It’s proving to be one of the better stocks to own in a down market and I expect the stock to benefit when the selloff abates and investors’ appetites for safety is renewed. HOLD
Community Health Trust (CHCT – yield 3.5%) – This small healthcare REIT has managed to stay even over the recent tumultuous 11% market drop. That’s an impressive performance considering the stock returned 53% over the past year and over 17% year-to-date. Although the stock has gotten pricey and is still rated a HOLD it continues to significantly outperform the market in good times and bad. The earnings report was great and there is no reason not to continue to hold on to this one. HOLD
Enterprise Product Partners (EPD – yield 7.3%) – Believe it or not, this stock has also outperformed the market since the downturn. But it’s probably because the stock hit 52-weeks lows before the market turned south. Operationally, this energy infrastructure giant is doing great. There are still insufficient pipelines and storage facilities to accommodate the American energy boom, and thus plenty of growth opportunities. New projects coming on line continue to boost earnings. With a safe 7.3% yield and valuations near an all-time low, this is one of the very best dividend opportunities on the market. At some point the market will wake up. BUY
STAG Industrial (STAG – yield 5.0%) – This industrial REIT has not fared as well as its peers during the market downturn. In fact, it’s down about the same as the market. As an industrial REIT it tends to be more cyclical than other types of REITs. That’s a negative in a down market. But the good news is that it should rebound rather quickly when the market recovers. 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. And it’s cheaper and high yielding now. HOLD
SFL Corporation (SFL – yield 10.5%) – The shipping stock has also outperformed the market since February 20. Of course, that’s probably because the stock was already sputtering in the face of global supply chain disruptions from the coronavirus before the selloff became violent. Half of the position was sold off last week ahead of a lot of the market carnage. However, going forward in the near term this stock should closely mimic the direction of the overall market, which I believe is likely to spring back. After that, I will reassess the rest of the position. But for now this cyclical global economy play appears to be on the cusp of a bounce back. HOLD
Verizon Communications (VZ – yield 4.3%) – So far, this telecommunications stock is coming as advertised. During the market bloodbath, the stock held up very well. VZ is down less than 4% since February 20. 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 5.3%) – This stock was killing it. After a positive earnings report, ABBV soared to over 95 per share, up more than 40% from the August lows. But even after a recent run like that, the stock is down less than the market in the downturn. 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 of this coronavirus hysteria. BUY
Altria (MO – yield 8.0%) – At a five-year low with a safe 8% yield, MO represents one of the very best income opportunities on the market. Although MO has sold off with the market, albeit less so, the story hasn’t changed. It’s still lousy. Negative fallout from the disastrous purchase of the JUUL stake will continue. But let’s look at the situation rationally from here. This is a company that continues to grow earnings and hasn’t cut its dividend in a half century. Now, you get a huge yield on a stock with little downside left. HOLD
Crown Castle International (CCI – yield 3.0%) – The 5G infrastructure company actually disappointed investors with the latest earnings announcement. Apparently the Sprint/T-Mobile merger hurts things in the short term as duplications are eliminated. CCI actually sold off over 10% in the days following the announcement. But it has since recovered nicely despite the down market. It’s only down about 3% since the selloff began and just 4% off its all-time high. This is still a company in the middle of the 5G rollout, which will continue to provide as much growth opportunity as the company can handle. It’s also a REIT, which I believe will be a favored sector of the market going forward. HOLD
Innovative Industrial Properties (IIPR – yield 4.1%) – All the coronavirus did was interrupt this stock’s breathtaking ascent. IIPR surged about 40% in just a couple of months. That pace couldn’t last anyway. But the story is still intact. This is a REIT in a brand new industry that is growing earnings annually by more than 100%. It never deserved to sell off with the marijuana sector last year and investors are realizing this. The market selloff was a break because the stock hasn’t run away and is still a good investment for new money. BUY
Qualcomm Inc. (QCOM – yield 3.1%) – Speaking of opportunities created by the market selloff, QCOM is at the top of the list. It pulled back almost 20% from the highs. That’s not surprising because semiconductor stocks are very cyclical and this company does a lot of business with China. However, QCOM is a huge beneficiary of the 5G rollout, which will continue in haste regardless of what the market does. Any lost business will be made up later. As fear in the market wanes, 5G will become one of the biggest stories of the market. The 5G storyline combined with surging revenues should propel the stock price a lot higher in the months ahead. BUY
Valero Energy Corp. (VLO – yield 6.1%) – No stock in the portfolio has taken it on the chin worse than Valero. It’s down 35% from the November highs and 20 since the coronavirus selloff began, much worse than the overall market. Refiner stocks are volatile and fragile. It doesn’t take much to disrupt commodity prices and ruin profit margins in the near term. The global slowdown in refined product demand will undoubtedly wreak havoc with first-quarter earnings. That said, this stock is just as volatile on the upside. Since I believe this selloff is overdone and the market will recover, VLO stands to be a prime beneficiary. Global demand will come back and make up for lost time. This is a truly great company and refiner that should fly back when things return to normal. BUY
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.6%) – This normally consistent-performing research lab REIT had a stunning pullback from the recent highs. It pulled back more than 13% from its high in just two weeks. But the stock has since recovered about half of what was lost. There is no fundamental or operational reason for the selloff. Earnings were stellar. The main problem is that the stock was flying too high and at its highest just when the market got whacked. It rose too far too fast and then fell too far too fast. But it is still a solid defensive REIT that should thrive going forward as investors will be scared with uncertainty after this coronavirus experience. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.6%) – The coronavirus news is increasing investor appetites 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 has 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%) – You know the market has had a serious pullback when NEE stops going up. As it is, the stock is down about 3.5% from the high, much less than the overall market. And part of the reason it’s even down that much is that it was flying so high when the market tanked. The stock is still on a strong upward trajectory despite the recent turbulence. I still love this dependable regulated utility that is also the world’s largest producer of alternative energy. But it didn’t go down enough to put it back into the BUY range. HOLD
Xcel Energy (XEL – yield 2.6%) – Despite the high recent returns, this alternative energy utility has outperformed in the down market. After a brief pullback it has recovered nicely and is only down about half as much as the overall market since February 20. The market will likely continue to love utilities as investor insecurities just got a big renewal. And it always loves alternative energy. Like NEE, the stock has gotten expensive but the upward momentum will likely resume when the smoke clears. I will continue to hold the entire position. HOLD
