Hope Arrives in the Bear Market
This market is testing the faith of every investor.
After Monday’s close, the S&P 500 had fallen 33% from the high in February. It is the fastest such downward move in history. Is this an incredible opportunity or will things continue to get worse?
Nobody knows. But let’s take a look at what we’re dealing with.
In response to the Coronavirus, all but the most essential businesses have been shut down throughout the country. People are on lockdown in their homes for an indefinite period. The magnitude of the economic disruption is staggering. In the worst recession, some businesses go under and economic activity slows down. But nothing on the scale we’re experiencing now.
Speaking from a purely economic point of view, you can’t shut down the economy like this without devastating effects. If the shutdown lasts a month or so, we might be able to recover relatively quickly. But if these drastic measures persist for many months it will cause an economic disaster that will take a long time to overcome.
The market doesn’t know how long this will last. And that’s why it hasn’t been able to find a bottom. But there has been some very encouraging news in the past week.
Congress passed a $2 trillion economic stimulus package to offset some of the economic damage. That’s a good thing. And the market had its biggest one day rise in almost 90 years on the news. But no amount of stimulus will save us if the economy is shut down until well into the summer.
Most credit yesterday’s rally on the stimulus package. But I think it was at least partially something else. After all, everybody knew there was some kind of stimulus in the offing. The bigger news is that the government is hinting at a timeframe for the first time.
President Trump said that he wants things to be reopened by Easter, April 12th. That may prove to be unrealistic, but the conversation has begun. Many are starting to voice concern that an economic calamity caused by a longer term shutdown could cause more death and suffering than the virus itself.
A relatively brief shutdown combined with the stimulus may lead to a quick recovery and great opportunity in the market. A longer term shutdown will cause a financial crisis. The stakes are huge.
An end to this economic shutdown is the light at the end of the tunnel that the market is looking for. This past week, the odds of just a short term shutdown increased exponentially. That’s the very best news the market can hear. And it reacted.
It is still an open question how all of this will unfold. But there is now some reason for optimism about the market. The news this week is much better than it was last week.
Please listen to this week’s podcast as well as reading this. There is too much going on to cover in just a brief write up. Tune into the podcast for a discussion of what you should be doing investing-wise right now.
High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 6.50%) – This is a leading global infrastructure company that operates high-quality, long life essential assets that generate stable cash flow with low maintenance expenses. It’s has one of the most stable and defensive businesses in the market with assets like toll roads, cell towers and utilities that continue to function and generate cash in any economy. In the darkest days of a bear market, the market doesn’t care. Everything gets creamed. But investors will care again, and maybe sooner than you think. When the market stabilizes, BIP will be a favorite once again. It was up almost 22% on the historic rally yesterday. HOLD
Community Health Trust (CHCT – yield 5.5%) – The small healthcare REIT is also a favorite on days without a violently crashing market. It’s a defensive, high dividend paying REIT that has solid growth. It is one of the best stocks to own in this market and will likely recover quickly when the market stabilizes. I’m not against picking up a few shares if you’re not yet in, though officially I’ll stay on hold. HOLD
Enterprise Product Partners (EPD – yield 12.8%) – It doesn’t get much uglier than this. Energy has been decimated as prices fell on lower demand due to the global virus emergency and then again as Russia and Saudi Arabia entered a price war. But the American energy industry isn’t going away and this is a strong company that is making money backed by long term contracts. It isn’t commodity price sensitive. But it’s 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, even through the financial crisis and the oil price crash. HOLD
STAG Industrial (STAG – 7.2%) – This industrial REIT is more cyclical than the other REITs by conventional wisdom. But it has a lot of in-demand warehouse properties for online distributors like Amazon. Such a business should prove much more resilient than most in this Coronavirus economy. 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 these fire sale prices. HOLD
Verizon Communications (VZ – 4.9%) – This stock has held up better than any other stock in the portfolio. It’s down but much less than most. It’s marching to a different drummer as it was the only stock that wasn’t up in yesterday’s epic rally. Cell phones have become more of a necessity than a luxury and people use them more than ever when they’re stuck at home with nothing to do. Then there is 5G, which will roll out virus or no virus. This is a good safe pick in this market with limited downside that should also benefit when the market recovers and beyond. HOLD
Dividend Growth Tier
Rating change “HOLD” to “BUY”
AbbVie (ABBV – 7.0%) – Nothing has really changed for this healthcare giant just because the world around it is collapsing. People won’t stop taking their medicine. And healthcare will likely emerge as the hero of this crisis. Everything this company had going for it (the pipeline, the merger, better than expected earnings, the safe and high dividend) is still intact, only the stock is a lot cheaper now. Maybe it’s now less special because everything is cheap, but few companies have such a defensive business along with extremely powerful demographic headwinds from the aging population. I think this is one of the few stocks you can buy here with the remaining uncertainty. BUY
Altria (MO – 10.4%) – Tobacco is a strange animal. While most business suffer when everything falls apart, tobacco sales tend to be strong in times of crisis. It’s cynical I know. But while I’m at it, it’s also true that regulation of this industry should take a back seat while there are more urgent matters to contend with. Meanwhile, the company will grow earnings and pay the huge dividend. It is now a relatively safe way to earn a double digit annual income. Such an investment hasn’t been available in many years. HOLD
Rating change “HOLD” to “BUY”
Crown Castle International (CCI – yield 3.9%) – 5G is still an urgent national priority. It’s actually a national defense issue considering what’s at stake. Business for this cell tower property owner will continue to be strong. It is a safe business with growth that investors will continue to love. While there are other stocks that are down more and may bounce back faster, this is a consistent performer that will likely not be this cheap again for many years. Because of its defensive and growth qualities this is one of the few stocks that is okay to by is this still highly uncertain market. BUY
Innovative Industrial Properties (IIPR – yield 6.0%) – Like tobacco, medicine and getting high don’t go out of style in times of crisis. It’s just that investors temporarily lose their appetite for the sexier stocks in times of crisis. Say what you will about marijuana. Say what you will about exotic stocks at a time when everything else is cheap too. Earnings don’t go out of style for very long. Making money always wins out eventually. This company is on pace to more than double earnings this year and next. The market will surely care about that again. HOLD
Qualcomm Inc. (QCOM – yield 3.8%) – It may be hard to believe right now, but this virus crisis will pass. Things will get back to normal and this will all seem like a bad dream sooner than you probably think. We will then find ourselves in a world where there is a 5G revolution taking place. And Qualcomm is one of the main beneficiaries. I think this stock is a beaten down hero of the post crisis world. HOLD
Valero Energy Corp. (VLO yield 10.0%) – I don’t think this Coronavirus will be the end of Western civilization. The need for energy will not go away. And this is perhaps the very best refiner in the world. The world will move past this 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 3.2%) – 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 than priced in that issue. In the meantime, revenues are very dependable. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.8%) – This safe and short term bond fund is even taking a small hit. But on a relative basis it’s still rock solid. A holding like this may seem like an overcautious bummer in boom times, but it’s proving its worth now. BUY
Invesco Preferred ETF (PGX 15 – yield 6.6%) – 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 it is still a lower risk investment than the stocks in the portfolio. BUY
NextEra Energy (NEE – yield 2.7%) – Not you NEE! The market isn’t even sparing this regulated utility and alternative energy juggernaut. It’s down over 20% in the past month. Demand for heating and air conditioning will only grow as people stay home. Alternative energy will not be scrapped because of this virus either. NEE was a market darling before the virus and investors will fall in love again after the virus. I would raise this to a BUY as well, but it had gotten overpriced and may have a little bit more to fall. HOLD
Xcel Energy (XEL – yield 3.2%) – Ditto everything I said about NEE. Being a smaller utility, XEL is taking a little bit more of a hit than NEE. But it will probably bounce back faster when the market stabilizes. HOLD
