Dark Days Indeed
The Coronavirus situation continues to evolve, and not in a good way.Fear of the spread of a new virus has devolved into an economic disaster, at least in the short term. The announcement over that past week that bars, restaurants, businesses, gyms and large gatherings will shut down throughout the country is creating a massive economic disruption that will almost certainly thrust the U.S. and global economies into recession.
The shutting down of much of the American economy to this extent, and without a timeline, is unprecedented. The economy will take a massive hit. The events of September 11, 2001 pushed the economy into recession. And the economic disruption was nowhere near as widespread and long lasting as this one.
The lack of any kind of a timeframe is a huge problem for the market. Will these restrictions continue in place for a month, two months or five months? There is no answer. This didn’t start as a financial crisis but it may become one if this lasts long enough.
How many small businesses can afford to make no money indefinitely? What happens when the bar owner can’t pay the rent? What happens when the owner of the property can’t pay the mortgage?
The market hates uncertainty. I believe if the market learned an ugly truth it would be much better than this. If, for example, the market knew the disruption will continue through the end of April or even May and no longer, it would rally 5000 Dow points in a day. But it can’t assess the damage when it has no idea what the extent of that damage will be.
Until there is much more clarity on the length of the disruptions, the market will probably not be able to find a bottom.
That’s the grim reality as it stands right now. But, as ugly as things look now, this will pass. The Coronavirus won’t be the end of Western civilization. The bear market won’t be the “big one” that wrecks investing forever. We will move beyond this and the market will recover. It always does.
They are already back to work in China. They seem to have moved beyond the outbreak and the economic disruptions. The outbreak isn’t nearly as severe here and it could be that we beat it much more quickly that the market currently anticipates. It’s pricing in a nasty recession right now. If the market is surprised by good news it will spring back at warp speed.
Today is just a nasty snapshot of very dark days for the market. Days like this are part of investing. It is the price for higher returns over time. Nothing is free. Take heart, the market never stays broken.
High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 5.8%) – This is a leading global infrastructure company that operates high-quality, long life essential assets that generate stable cash flow with low maintenance expenses. Unfortunately, the defensive nature of the business has not protected it from the current selloff, so far. A business like this will likely be popular with investors on the other side of this virus emergency. As well, holders of record on March 20th will receive a special dividend in the form of 0.11 shares of a newly established Brookfield Infrastructure Corporation (BIPC). You will have the option to keep the new shares or exchange them back for more BIP shares prior to March 31. HOLD
Community Health Trust (CHCT – yield 5.8%) – Like BIP, the past tumultuous week has knocked the stuffing out of this previously solid performing small healthcare REIT. The market has taken many of these more defensive stocks down a lot over the past week as the selloff expanded to every sector. However, these stocks tend to climb back on days when there isn’t a violent selloff. This is still a top stock to own from this point forward. HOLD
Rating change “BUY” to “HOLD”
Enterprise Product Partners (EPD – yield 13.7%) – It doesn’t get much uglier than this. Energy has been decimated as oil prices fell on lower demand during the global virus emergency and then again as Russia and Saudi Arabia entered a price war. But this is a strong company that is making money backed by long term contracts. It isn’t commodity price sensitive. It is priced as if it is some speculative exploration and production company. The dividend is rock solid and has been raised every year for the past 20 years because it has reliable earnings in any market. This is a temporary aberration, and such things never last that long. In the meantime, you still get the same high income. However, until the market can find some semblance of a bottom the rating is reduced to HOLD. HOLD
STAG Industrial (STAG – 7.0%) – This industrial REIT is down more than any other REIT because it is more cyclical. It doesn’t make much sense though. It has a lot of in-demand warehouse properties for online distributors like Amazon. That business should boom as people can’t go out and are forced to shop online. Amazon just announced that it will be hiring a lot more people during this crisis. The market will figure it out eventually and STAG will move well beyond the fire sale prices. HOLD
Rating change “HOLD” to “SELL”
SFL Corporation (SFL – 14.5%) – The shipping stock is directly in the crosshairs of the slowing global economy that is barreling towards recession. It should also be slower to bounce back than the other stocks in the portfolio as it will take longer for the global economy and trade to get back up to snuff after the crisis wanes. For that reason I am selling the remaining half-sized position and will look to perhaps buy it back at a later date when prospects improve. SELL
Rating change “BUY” to “HOLD”
Verizon Communications (VZ – 4.5%) – This stock has been one of the true strong down market performers, even amidst the indiscriminate selling of the past week. VZ is only down 7.4% while the market is down about 30%. It is also in the perfect spot for the stay at home culture being forced upon us and people will use the internet and watch TV like never before. And, beyond this disaster, there is 5G. The rollout of the new technology will continue in any economy and it will provide a growth catalyst for Verizon. That said, the market isn’t rational right now and until there is some grasp of the economic damage and stabilization VZ will stay on HOLD. HOLD
Dividend Growth Tier
Rating change “BUY” to “HOLD”
AbbVie (ABBV– 6.5%)– I like Healthcare and I like AbbVie. Healthcare is not only defensive in a faltering economy, but it is the solution to this whole mess. The sector would have rallied quite strongly as sweeping changes to the system are not likely as Joe Biden seems likely to be the Democrat nominee. I also believe AbbVie is one of the very best large companies in the business, selling at a cheap valuation. Of course, what isn’t selling at a cheap valuation now? But the stock will be reduced to a HOLD until the market stops hemorrhaging, HOLD
Altria (MO – 8.4%) – The tobacco giant has fallen less than half as much as the overall market over the past month. Typically, these stocks hold up very well during times of recession as people may even smoke more. The company was faltering all by itself. This market and economic disaster is improving this stock’s status on a relative basis. The stock should continue to pay a strong income though all this tumult. HOLD
Crown Castle International (CCI – yield 3.3%) – Remember 5G? The thing is that the rollout of this new technology is considered a national imperative and will continue rain or shine. This is one of the very best REITs on the market with a catalyst for more growth than it can even handle, in any economy. This stock is down less than half as much as the market over the past month. It holding up relatively well and should be quick to bounce back when the crisis abates. HOLD
Innovative Industrial Properties (IIPR – yield 6.8%) – Marijuana is still popular and becoming increasingly legal throughout the country and the world. In fact, the government will likely be on the prowl for more tax revenue to help pay for all this stimulus and legalizing pot will ring that register. The story of this company remains the same. It’s just that the world around it is going to Hell in a handbag. When the panic subsides, this one will spring back fast. HOLD
Qualcomm Inc. (QCOM – yield 3.6%) – This global chip maker is taking a direct hit from the virus fallout. Semiconductors are very cyclical. Qualcomm does a lot of business on China. You would think the stock would be getting killed but it’s actually down less than the market in this crash. The 5G story is showing power even amidst a market panic. 5G is coming fast, rain or shine. And QCOM will benefit mightily. HOLD
Valero Energy Corp. (VLO yield 10.0%) – As I mentioned earlier, I don’t think this Coronavirus will be the end of Western civilization. But VLO is being priced as if it will be. The world will move past it and recover. When the smoke finally starts to clear this stock will move up fast. The stock is in the worst sector of a crashing market. It is priced for a global depression. I think that is way overdone. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 3.0%) – Even this safe life science REIT is getting creamed, albeit less so than the market. The medical research properties are not cyclical and times like this show off their value. There is some concern that endowments and charitable contributions which support a lot of these properties could dry up in a recession. But that would only curtail some of the growth in the short term. The stock has more that priced in that issue. In the meantime, revenues are very dependable. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.6%) – This safe and short term bond fund is even taking a hit. It’s down about 6% from the highs. That shows that the market is truly panicking. But these bonds are solid and much less volatile than anything else in the portfolio. This fund is still a great port in the storm. BUY
Invesco Preferred ETF (PGX 15 – yield 5.5%) – These preferred stocks are also taking a hit in this market as the investors worry about corporate credit in an economy that seems to be spiraling downhill. This fund also got beaten up a little bit in the selloff in December of 2018. There is a price for the higher yield. But the fund should recover strongly in the months ahead. BUY
NextEra Energy (NEE – yield 2.1%) – The market isn’t even sparing this regulated utility and alternative energy juggernaut. It’s down over 20% in the past month. This is still a great stock to own and will be one of the first I raise back to a BUY when the crisis abates. But in the fastest bear market selloff in history, no stock is safe. HOLD
Xcel Energy (XEL – yield 2.6%) – Despite the high recent returns, this alternative energy utility has outperformed in the down market. It has only fallen about 10% in the past month. That’s good performance because everything is taking a hit amidst this panic. I also like how it will be positioned in the post coronavirus market as investors will still be attracted by safety. HOLD
