The Worst is Probably Over
Market volatility in this Coronavirus stricken world will likely continue for some time.
After falling over 30% in record time, the market has had a nice rebound. In less than a week the market jumped 15% from the lows. It has since stabilized somewhat with less volatility. While the worst may be over, I don’t think we’re out of the woods yet.
During the panic selling in the earlier part of March, the market couldn’t seem to find a bottom. The news improved about ten days ago when the $2 trillion stimulus plan was likely to be passed and the government expressed concern about the length of this economic shutdown.
To reiterate something I have said in past updates, the timeline of this economic disruption is critical. The extent of the current shutdown with everyone staying home and many businesses completely closed is massive. Several of the nation’s largest banks issued estimates on second quarter GDP growth ranging from -8% to -30%. Those are Great Depression numbers.
If things start to return to normal in May, or June at the latest, the economy could recover relatively quickly. The short timeframe of the economic crash along with the stimulus should result in a strong spring back for the economy and the market in the second half of the year.
However, if the current situation lasts until well into the summer, we could have a financial crisis that could damage the economy for a long time. Right now, the market is factoring in an end to this shutdown in May or June at the latest. If that scenario holds, the market has likely already seen the bottom. But if this severe economic disruption lasts longer, we may not yet have seen the bottom yet.
I believe it is likely that this situation ends at least partially in May. But there are still no guarantees. And even with a limited shutdown, we are likely in for more ugly days ahead. The White House is currently projecting the virus to peak in about two weeks. That means two weeks of bad news. All bad new prompts projections of still worse news. The market is likely to bounce around for a while.
There is reason for optimism. But we’re still not out of the woods. At this point I am only buying very selectively with certain stocks in the portfolio. These are stocks that have a safe dividend and solid earnings through the crisis and beyond.
High Yield Tier
Rating change “HOLD” to “BUY”
Brookfield Infrastructure Partners (BIP – yield 6.0%) – This leading global infrastructure company had a huge upside move over the past week. It was up over 46% from the lows of 3/23 and 3/30. It has pulled back about 10% in the last few days but that is to be expected after such a big upside move. The selling was clearly overdone, which can happen in a panic laden market selling frenzy. But when the smoke clears this company has some of the most dependable revenue-generating assets on the planet that support the high payout. That’s why BIP benefits when investors sober up and realize which companies will continue to deliver results in this crazy environment. This is one stock you can start to buy with a longer term perspective. BUY
Community Health Trust (CHCT – yield 4.4%) – The small healthcare REIT had an enormous 74% bounce back in the past two weeks. This too is a resilient business in any economy as people need their healthcare facilities regardless of the economic disruption. Two thirds of this position was sold during the good times and the stock is once again a compelling value at 25% below its high. But after such a huge run higher in such a short time it is likely to consolidate over the next week or so. HOLD
Enterprise Product Partners (EPD – yield 12.4%) – The entire energy sector has blown up. Not only is it a cyclical industry at a time when the economy is being shut down, but it is also contending with an oil price war. Enterprise has been decimated despite the fact that it is not reliant on commodity prices and the overwhelming majority of revenue is backed by long term contracts. It’s down 50% from the high, and it was undervalued at that price. At this point, holding the stock is a bet on whether it can continue to pay the dividend. I think it is a good bet that it will, considering EPD has raised the dividend every year since its IPO in 1998, including through the financial crisis and the oil price crash between 2014 and 2016. HOLD
STAG Industrial (STAG – 7.2%) – This industrial REIT is more cyclical than the other REITs. There are some consequences from the economic disruption. Some of the smaller tenants could go bankrupt if this situation lasts much longer. Some tenants have requested rent relief, but only 5% so far, accounting for just about 1% of earnings. As well, the REIT has suspended acquisitions. But it has a lot of in-demand warehouse properties for online distributors like Amazon, where business is booming. The lack of acquisitions will suspend earnings growth, but the 50% fall from the high already discounts that. In the meantime the money saved will be freed up to pay the dividend. HOLD
Verizon Communications (VZ – 4.6%) – This wireless giant has held up much better than most stocks. It’s down less than 14% from the 52-week high. The new stay-at-home culture is only increasing people’s use of cell phones and wireless technology. Virtually all stocks are revalued in this environment, but Verizon’s relative value is increasing, as business is actually booming. Plus the 5G rollout, which will continue in haste despite the virus, remains a catalyst for earnings growth in the quarters and years ahead. But the stock hasn’t been hit that hard and it isn’t as undervalued as most. It probably isn’t poised to move up a lot in the likely choppy trading of the next several weeks, so, it will remain a HOLD for now. HOLD
Dividend Growth Tier
AbbVie (ABBV – 6.2%) – 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 – 8.7%) – Most businesses take a huge hit during an economic shutdown like this. Tobacco isn’t one of them. It has historically been one of the most resilient sectors in a bad economy as people probably smoke more during troubling times. As well, the complete domination of the virus crisis will likely get regulators of their back for a while at least. Meanwhile the company continues to grow earnings and is selling at a ridiculously cheap price. It is now a relatively safe way to earn a huge income with limited downside from here. HOLD
Crown Castle International (CCI – yield 3.3%) – 5G is still an urgent national priority. It’s actually a national defense issue considering what is 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 buy in this still highly uncertain market. BUY
Innovative Industrial Properties (IIPR – yield 5.3%) – Like tobacco, medicine and getting high don’t go out of style in times of crisis. And this company is growing earnings like crazy. It is expected to more than double earnings this year. The stock got creamed during the panic selling as investors lost their appetite for anything remotely exotic. But after the panic selling ended, investors realized the value and this marijuana REIT rallied 80%. The stock is a great value here and the dividend is solid and growing. But there are likely several more ugly selling days ahead for the market. HOLD
Qualcomm Inc. (QCOM – yield 3.7%) – Qualcomm is in the volatile semiconductor sector and has a lot of exposure to China. But in the post-virus world 5G will likely be a big market driver and QCOM will benefit. As the company with the best 5G chip for cell phones at a time when new 5G enabled cell phones are rolling out, earnings will grow strongly. It may continue to get knocked around a bit in these still volatile markets, but there should be a big reward on the other side. HOLD
Valero Energy Corp. (VLO yield 8.6%) – Energy stocks have been decimated, but refiners are somewhat different animals. The company will suffer as demand for gasoline and other refined products falls during the shutdown. However, the low crude oil prices should somewhat offset those falling sales. The highest cost for refiners is crude oil and that cost will plummet. As well, the demand for refined products should return when the severe quarantine ends, but crude oil should remain relatively cheap because of the price war. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 3.0%) – Even this safe life science REIT has gotten creamed. 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 2.7%) – This safe and short term bond fund took a small hit in the worst of the selloff. 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 – yield 5.7%) – These preferred stocks are more volatile than most investment grade bond funds during rapidly declining markets. That is the price of the higher relative yield. However, PGX holds up much better than stocks and tends to bounce back quickly when stability returns. BUY
NextEra Energy (NEE – yield 2.3%) – This regulated utility/alternative energy superstar is one of the best stocks to own in a market like this. People will continue to use the heat and air conditioning in any economy. The company is cutting rates to provide aid to customers in this time of crisis. So, earnings will be impacted more than they otherwise would be in the near term. But that will build good will with customers and regulators alike. If the market takes another significant dip from here, I will likely raise NEE to a BUY. HOLD
Xcel Energy (XEL – yield 3.2%) – Ditto everything I said about NEE. This solid alternative energy utility is holding up well and will likely bounce back very quickly when the market regains traction. With solid revenues and strong financials this is a great stock to hold onto in this market. HOLD
