Looking Good
Things are looking good. It’s amazing how things have changed since the dark days of March.The stock market rally is now more than two months old. The S&P 500 has rallied 35% since March 23 and is now just about 10% below the all-time high. It’s hard to believe that after everything that has happened with this pandemic, the market is at a minimal correction level from the all-time historic high.
The market sees bright days ahead. It sees an economy that will absolutely boom and make up for lost time in the third and fourth quarters. It makes some sense. After all, the recession is self inflicted. The economy didn’t unravel on its own. Unlike normal recessions where it can take many years for the economy to overcome fundamental problems, it may recover very quickly from this weird pandemic-induced crash.
At least that’s what the market seems to think. And it’s well worth noting that the market usually gets it right. That’s great news. I am still cautious, however. I have a hard time seeing the market making new highs, and it doesn’t have that far to go. There is a risk that the lightning recovery doesn’t pan out, or gets interrupted.
But it sure looks like a market that wants to go up. Even energy stocks are rallying. In fact, Energy is the top performing S&P 500 sector over the past month. Portfolio positions Enterprise Product Partners (EPD) and Valero Energy (VLO) have been moving higher. Over the last month, EPD has rallied 16% and VLO is up more than 34%.
Innovative Industrial Properties (IIPR) has also had a nice move, up over 20% since it was upgraded to a BUY rating just a few weeks ago. And it’s been another good week for other portfolio positions…
High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 4.9%) – So far so good. The infrastructure partnership’s transportation businesses are taking a little bit of a hit as traffic is reduced during the lockdown. But the other businesses in utilities, energy and data infrastructure are humming along just fine. It is also possible, if not likely, that Brookfield will be able to acquire new assets on the cheap during the global recession. The stock had a strong 38% rebound from the low but it’s still 17% from the February high. It’s still a good buy and the dividend is safe. BUY
Community Health Trust (CHCT – yield 4.5%) – This fast-growing small healthcare REIT is getting its mojo back after a significant dip in the heat of the market selloff. The main reasons it went down that much were that it had gotten overpriced before the bear market, and it’s a little bit too much of a sexy REIT for a panic-stricken market. Now, the stock is not only growing fast but it’s reasonably priced as well at 23% below the February high. All the things that made this an attractive holding before the bear market are kicking in again. HOLD
Enterprise Product Partners (EPD – yield 9.6%) – Like just about everything else, EPD has made a nice move off the bottom. But it had a lower bottom than just about anything else. The stock was undervalued before the selloff. Now it’s silly. The energy sector is taking the worst of the bear market. There are two things about EPD to keep in mind. One, it is involved in piping and storing of oil and gas and isn’t very exposed to commodity prices. Two, it has a very strong balance sheet and can easily endure the downturn and pay the dividend. It may be too early to buy EPD, but it should be a big winner longer term, and it pays an incredible 9.63% yield. HOLD
STAG Industrial (STAG – yield 5.7%) – Normally, a cyclical REIT like this isn’t a great place to be in a recession. But STAG’s warehouse properties are booming as online shopping is exploding and the need for warehouse storage of properties is surging. And so far the company has been minimally affected by tenants who miss rent payments. Earnings were solid and the excesses have been flushed out of the stock price. The stock should be solid from here. HOLD
Verizon Communications (VZ – yield 4.5%) – Over the past month, the relative performance of VZ has faltered. The S&P 500 is up 4.2% and VZ is down 6.3% over the period. Prior to that, VZ had been a standout performer during the downturn. The most likely explanation is that when investors regained confidence they ditched VZ for sexier plays. But it is probably just an aberration. The Verizon story is the same. People are using cell phones and services like crazy during this pandemic, and business is solid. VZ also has a strong catalyst for growth ahead as 5G rolls out. BUY
Dividend Growth Tier
AbbVie (ABBV – yield 5.2%) – The pandemic-driven recession isn’t even a speed bump for this biopharmaceutical giant. That’s a big deal. This company won’t have to recover. Meanwhile, its new drugs and pipeline continue to excel and they just closed the deal to buy Allergan (AGN), further diversifying the company away from Humira. While ABBV is actually making a run toward its 52-week high of over 97 per share, it is still a long way from the 2018 high of 140. Meanwhile, it pays a huge 5.2% yield. BUY
Altria (MO – yield 8.9%) – The monstrous 8.9% yield is highly sustainable and makes this one of the very best income stocks on the market. Despite falling cigarette volumes and the trouble with JUUL, Altria expects to continue to generate high single-digit earnings growth in the years ahead. Earnings actually spiked over 18% in the last report as people smoke more during a recession. As well, the dividend has been raised every year for the last 50 years. The company compensates for falling volumes by raising prices and share buybacks. There are also solid growth prospects from marijuana and the joint venture with Philip Morris International (PM) for vaping product iQos. Meanwhile, the stock is dirt cheap, selling near a five-year low. HOLD
Crown Castle International (CCI – yield 3.0%) – Not all REITs are struggling. Cellular service is a main technology helping the country through this crisis as people depend on the service more than ever as they are stuck at home. As well, new 5G technology continues to roll out in haste, pandemic or no pandemic. For those reasons, the stock is only down slightly, and much less than the overall market, so far in this crisis. The company has a rock-solid communications infrastructure portfolio generating consistent revenues while 5G will provide all the growth prospects it can use. HOLD
Innovative Industrial Properties (IIPR – yield 4.8%) – This marijuana farm REIT has been in an uptrend since it was upgraded to a BUY, up about 20% in the past two weeks. I think it has to do with investors becoming more confident and renewing interest in this exciting and fast-growing stock. Innovative is forecasted to grow earnings by 88% this year. The dividend has grown at an average rate of 93% per year for the last three years. With just 56 properties, there is still a long runway for growth in the future. As well, more states are likely to legalize the stuff as they deal with budget shortfalls resulting from the lockdown. BUY
Qualcomm Inc. (QCOM – yield 3.3%) – It’s all about 5G. This company has the only good 5G smartphone chip. While phone sales have fallen during the pandemic and the rollout of new 5G phones will be delayed somewhat, a tsunami is coming. On the other side of this lockdown, booming revenue and earnings await this company. This is a cyclical company that does a lot of business in China, and the stock is down the same as the overall market since the February highs. But the post-virus economy will be much kinder to QCOM than it will be to S&P 500 companies in the aggregate. It’s a great stock to pick up on the cheap ahead of great times. I will target this company to buy if the market moves lower. HOLD
Valero Energy Corp. (VLO – yield 5.7%) – This refiner stock has been absolutely soaring. It’s up over 30% in the past month, compared to 4.2% higher for the S&P 500 over the same period. Valero was right in the crosshairs of the recession as demand for refined product crashed during the pandemic. But with the country opening up for business again, business promises to pick up. Spreads are already improving and the market sees demand for gasoline and other products booming six to nine months down the road. The company will likely report an ugly second quarter, but after that it’s off to the races. It’s also an extra bonus that crude oil, the number one cost, is likely to remain low priced even into the recovery. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.7%) – There’s not much to say about this life science and research lab REIT. And that’s the beauty of it. This is a defensive healthcare REIT with a fantastic niche. Guidance for the rest of 2020 was only lowered very slightly and the company has plenty of cash on hand as well. The defensive business in likely to be little affected by the recession and the dividend is safe. This is a great stock to hold through the crisis and beyond. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.6%) – 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 still has a yield that’s better than you’ll get in most traditional safe haven investments. BUY
Invesco Preferred ETF (PGX – yield 5.4%) – This preferred stock ETF continues to recover from its selloff during the market panic. It has a high yield but it does have downside if the market takes another plunge. That said, it is only down about half as much as the stock market in this downturn. The high dividend and diversification from the market should also bolster demand for this fund in the post-coronavirus market. HOLD
NextEra Energy (NEE – yield 2.4%) – A regulated utility is a beautiful thing during a recession as they generate steady cash flows in any economy. NEE is a particularly good regulated utility because it operates in Florida, which has a growing population and is a friendly regulator. The alternative energy business adds growth. NEE is the biggest producer of wind and solar in the world. Not only is there a long runway for future projects, but the costs to generate electricity from these sources continues to decline, which further boosts the bottom line. HOLD
Xcel Energy (XEL – yield 2.8%) – Xcel is like a smaller version of NEE. It also combines a conventional utility with an alternative energy business. And this stock has a long record of outperforming both the utility index and the overall market, and with significantly less volatility. On a year-to-date basis the stock is only down 3.83% compared to down 8.52% for the S&P. In the last earnings report management stated that Covid-19 was having a minimal impact on results and reiterated its previous earnings guidance for the year. This is still a great stock to own and I will upgrade it to a BUY if there is any significant move lower in the price. HOLD
