Oil Market Pain Interrupts Rebound
The market got its first taste of serious downside volatility in weeks as the oil market went crazy.
You may have read the headlines saying that the price per barrel of oil had gone negative. That’s a strange concept. That means that people have to be paid for the privilege of giving them oil. What’s going on?
It’s actually somewhat misleading. The contracts for May delivery of oil expired on Monday. But there’s a problem. There’s no place to put the oil. The country has run out of storage. Business can’t take receipt of oil and store it to sell at a higher price in the future. Therefore, they had to actually pay to have it taken off their hands.
But the negative pricing only applies to oil for immediate delivery. The price of future months is over $20 per barrel (except for June). It is a weird aberration that results from shutting down the economy. There will be other weird stuff ahead. This is all unprecedented.
That said, there is good news out there. The country is starting to reopen the economy. Sure, there is a political debate, and certain hot spots aren’t ready to reopen yet. But the urgent push to restart this economy is undeniable. A month ago, or even weeks ago, this seemed like a much-too-optimistic scenario. A month from now, the economy should be much further along and close to normalcy.
This is fantastic news for the economy and the market. It’s why the market has rallied over 20% from the lows. We may get through this in much better shape than previously thought. However, there can still be more downside volatility ahead.
The carnage from shuttering the economy for two months has yet to be fully realized. It will be ugly. The virus cycle may be ending, but the economic disaster cycle is just beginning. Earnings and economic numbers will be astounding. Companies will go bankrupt and many will cut dividends. There may be moments of panic as the market realizes the damage that has been done.
It’s also unlikely that the market will return to the old highs anytime soon as it will be a long time before the economy recovers to the level of pre-virus January and February. But the market’s worst fears of past weeks are not likely to be realized, and there is a good chance we have seen the bottom.
For now, the BUY-rated stocks in the portfolio are those that have minimal earnings disruptions or are even benefitting from the crisis, including BIP, VZ, CCI, and ABBV. The portfolio is also targeting V and SBUX at below-market prices in order to take advantage of a highly possible downdraft in the market ahead of its eventual recovery.
High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 5.8%) – This is a great company with defensive revenues from vital infrastructure assets. But it has been a rather disappointing down-market performer considering the defensive nature of its businesses. The problem is that it’s an MLP, which investors tend to shy away from in tough times and it also has some energy pipeline assets and business at its railways and ports have been disrupted. But those assets should recover relatively quickly along with the U.S. and global economies. For now, the dividend is safe and it should once again be a market darling in the post-coronavirus world. BUY
Community Health Trust (CHCT – yield 4.9%) – The small healthcare REIT was an overachiever in the good market and has been an underachiever on the downside. Considering most investors buy a stock like this for its high yield and defensive business, it has been a disappointment. But it is somewhat of a special case. Performance prior to the selloff had been spectacular, too good. In the boom times, two-thirds of the position was sold. The down market is ringing out some of the excesses. But that process is completed and the market should love this stock again when things get more normal. HOLD
Enterprise Product Partners (EPD – yield 11.4%) – The energy sector has been an unmitigated disaster and this stock has been crushed. However, recent behavior is encouraging. While the energy sector was once again pulverized over the past week, EPD barely budged. That suggests that there isn’t much downside left in the stock, even with terrible news in the industry. I consider the dividend to be very safe and the combination of the yield, the low price, and the newfound downside resiliency make this stock well worth holding. HOLD
STAG Industrial (STAG – yield 5.8%) – This industrial REIT is a situation similar to CHCT is that it had overperformed in the good times and is underperforming in the bad times. The primary reason for the thus far unimpressive down-market performance is that the price got overextended. However, its industrial warehouse properties are booming as online shopping is exploding thanks to all the stay-at-home orders. The high yield paid on a monthly basis and the resilient business should make this one a solid relative performer going forward. HOLD
Verizon Communications (VZ – yield 4.2%) – Unlike the overwhelming majority of companies on the market, Verizon has a business that is actually thriving during the shutdown. People are using their phones, the internet and watching TV more than ever. I know I am. The relative value of the business is soaring during this crisis and horrible earnings quarter. As well, the rollout of 5G will add a new growth catalyst to the stock in the quarters and years ahead. That’s why the stock price is the same as it was at the market highs before the bear market began. BUY
Dividend Growth Tier
AbbVie (ABBV – yield 5.6%) – I like the stock of this biopharmaceutical giant right now, for several reasons. Drugs and treatments don’t go out of style in a bad economy. Health care is one of the most defensive businesses of all. As well, AbbVie is firmly established yet cutting edge in its products amidst the enormous tailwind of an aging population. Plus, the stock was cheap even before the crisis, although it had moved up a lot in the preceding months. It has a secure and high dividend and it should be a solid hold through the remaining uncertain market as well as the post-crisis market. BUY
Altria (MO – yield 8.2%) – Look, smoking continues to decline and the purchase of e-cigarette maker JUUL for over $4 billion to offset the slippage has proven to be a disaster. That’s why the stock is so cheap. But there are offsetting benefits. Smoking was declining at a faster rate because of e-cigarettes, which are now under siege. E-cigarette trouble will result in less volume decline of cigarettes. In the meantime, Altria is still growing earnings and paying the huge yield. It’s also true that smoking typically is even stronger during a recession. This is a stock that is still worth holding in a still highly uncertain market because of its resilient business, historically low valuation and high dividend. HOLD
Crown Castle International (CCI – yield 3.0%) – There is a very good reason why the price of this cell tower REIT is barely down since the beginning of the bear market. The cellular infrastructure business has become as defensive as a crucial utility, especially with the spike in demand for wireless technology during the lockdown. There is also a huge growth catalyst in 5G. The rollout will continue in haste regardless of the economy because it is strategically crucial for the country and related businesses. BUY
Innovative Industrial Properties (IIPR – yield 5.6%) – This was a great stock to own before the crisis. It’s a solid holding during the crisis. And it will likely be spectacular after the recovery. The reason is strongly growing and highly resilient earnings. Marijuana use is up in this crisis. States will have more reason than ever to legalize it after all this spending and lack of revenue puts them in a fiscal hole. Marijuana may be an investment that’s too sexy for its own good in a bear market, but earnings never go out of style. And while there could be more volatility ahead, this stock should handsomely reward you for the stress in the near future. HOLD
Qualcomm Inc. (QCOM – yield 3.4%) – Considering this stock is in the volatile semiconductor sector and has exposure to China, it has held up well during the bear market. In fact, it is actually down a little bit less than the overall market. The reason is that once this crisis fades into history, 5G will be the hot story in the market. Qualcomm will be smack dab in the middle of all the excitement as the company has the only great 5G smartphone chip on the market. Hang onto this one. Good things should be in store for this stock on the other side of this crisis. HOLD
Valero Energy Corp. (VLO – yield 7.9%) – Demand for refined product has fallen off a cliff. My family has three cars and we haven’t bought gasoline since February. The near-term earnings hit for this refiner will be massive. But demand for gasoline and jet fuel and other refined products will surely bounce back with the economy. Investors understand that. That’s a big part of the reason this stock hasn’t sold off with much of the energy sector this week. Cheaper crude oil is good for refiners. Looking ahead to future earnings, this stock is cheap. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.8%) – This defensive life science and research lab REIT had been a great performer in the bull market and is down a little less than half as much as the overall market during the bull market. Earnings should remain solid through the crisis and investors should continue to value this one in the recovery. As well, the pandemic is likely to make medical research more popular than ever. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.7%) – This short-term bond ETF has held up well through the crisis because it isn’t in the stock market, the bonds are short term, and they are investment grade-rated. It’s a great holding in times like these, and it is delivering as advertised. BUY
Invesco Preferred ETF (PGX – yield 5.9%) – The price of this preferred stock ETF is down about half that of the overall market since the highs of February. That may be disappointing for a fixed-rate investment that isn’t in high-yield bonds. But the high yield does come with a price. That said, the price will likely trend back to where it was in the absence of more panic in the market BUY
NextEra Energy (NEE – yield 2.4%) – This is one of the best stocks to own, period. It offers the income stability of a stellar regulated utility and growth from its world-leading alternative energy business. Despite the fact that the price had risen to historically high valuations in the bull market, it is only down 4% since the market high in February. If the market again turns south, I will recommend a BUY on NEE at a cheaper price. HOLD
Xcel Energy (XEL – yield 2.7%) – Ditto everything I said about NEE. This smaller, alternative energy utility came roaring back from the selloff. Even though XEL also got overpriced before the crisis, it isn’t all that far from the all-time high. With solid revenues and strong financials this is a great stock to hold on to in this market. And I will look to upgrade the stock to buy in another down leg in the market. HOLD
