The Market Gets Picky
It’s been another crazy week in pandemic-land. After an interruption last week, the market seems to have resumed its ascent.
The Dow Jones Industrial Average fell about 7% in one day last week. It was the worst one-day fall since the dark days of March. It fell because of a combination of the Fed issuing downbeat and sobering news about the economy and evidence of increased spreading of the virus. The market has since recovered most of those losses on much-better-than-expected retail sales numbers and news of a promising coronavirus treatment.
So, the market fell because of bad economic news and bad virus news, and then rose because of good economic news and good virus news. That’s where we are. The market has priced in a booming third- and fourth-quarter economy and now it’s starting to get picky.
I’m highly confident that the economy will rebound strongly, even better than most people expect. But I don’t know what to expect from the virus. And even with a robust recovery, there is likely to be more ugly economic news. The full damage from the lockdown has yet to be realized.
While the market can be impossible to predict in the short term, there is an increasing level of downside risk. Sure, the market can continue to run higher, and it might. But last week is a warning that the market is becoming increasingly sensitive to bad news. Because of a deteriorating risk/return tradeoff in the near term, a portion of several portfolio positions were sold in last week’s monthly issue.
It is hugely important for this advisory to protect your downside. I will do so at the risk of missing some further upside. In the meantime, enjoy the strong market and I will, as always, continue to keep you posted.
High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 4.6%) – The infrastructure partnership had broken out into the 40s and appeared poised to continue running towards the old 50 high. BIP pulled back with the overall market last week but has since resumed its ascent. But I like this stock even if the market pulls back. Its crucial infrastructure assets generate reliable revenue in any economy, as about 95% of earnings are contracted or regulated. But it still has chops in a bull market as infrastructure is an increasingly hot sector. BUY
Enterprise Product Partners (EPD – yield 9.0%) – The economic restart should be kind to this stock. The energy sector got creamed. And oil and gas prices could remain depressed for a while. But Enterprise earns money from fees generated by oil and gas moving through its assets. The recovering economy may not deliver higher commodity prices for a while, but the flow of oil and gas is certain to resume, and quickly. Meanwhile, this stock continues to sell at a dirt-cheap price and with a rock solid 9% yield that is as safe as any dividend in the space. HOLD
STAG Industrial (STAG – yield 5.3%) – Last week we sold half our position in this industrial REIT. The primary reason for the sale is that STAG is more cyclical than most REITs and is vulnerable to downward moves in the market. The elevated market risk at this point warranted some profit taking in the stock. The remaining position should benefit if the market continues to run higher. In the meantime, you get monthly dividends. HOLD
Verizon Communications (VZ – yield 4.3%) – Similar to BIP, I like this wireless giant in both an ugly market and a good market. VZ is in the sweet spot of the current situation. It has very limited downside if the market tanks again, yet it can thrive in a rising market as well. People are using cellular service like crazy during the lockdown. This could also lead to higher usage on a permanent basis. And it has 5G as a catalyst in the post-pandemic market. In fact, there is speculation that a new stimulus package will include more 5G funding. You won’t win big with this stock, but you are also highly unlikely to lose. BUY
Dividend Growth Tier
AbbVie (ABBV – yield 5.2%) – The uncertain environment is good for Healthcare stocks. In fact, Healthcare has been the second-best performing sector of the market so far this year, next to Technology. The sector is relatively unaffected by an economic downturn and there is strong growth in the biotech arena. AbbVie is a combination of a big pharma and a biotech company. The stock is also cheap with a high and safe dividend. It is one of very few stocks that I am completely comfortable owning in this environment. The stock is also technically strong here and appears poised to make a new 52-week high, above 99. BUY
Altria (MO – yield 8.6%) – Let’s see: It has a dirt-cheap price, a stratospheric and safe dividend, and limited downside if the market turns south. I like the situation. Sure, there are continuing problems with e-cigarettes and the JUUL acquisition. But that is already built into the price. Meanwhile, the company continues to grow earnings, and at a faster clip during the recession. The market still doesn’t like this stock and it may not have too much upside in the near term. But it’s a great way to get an income in this low-interest rate environment. BUY
Crown Castle International (CCI – yield 2.8%) – Half of the position was sold last week for a strong profit in a relatively short time frame. While I’m very confident in the operational performance of the company as cell towers and the 5G buildout make its properties highly coveted, the price has run up very far and very fast in an uncertain market. It was making new all-time highs. I thought it was prudent to take some money off the table and protect profits. The remaining position is worth holding for the longer term. HOLD
Innovative Industrial Properties (IIPR – yield 4.6%) – This stock has great days ahead. The marijuana farm REIT is growing earnings at a fantastic clip. And further legalization of marijuana is getting a huge shot in the arm as states will likely seek new tax revenues to offset budget shortfalls resulting from the pandemic. But IIPR tends to exaggerate the moves of the market in the near term. As the risk/return tradeoff for the market has deteriorated in my opinion, a third of the position was sold last week. The remaining position should thrive over the intermediate and longer terms, and I will look to buy back the sold third position in the event of another market downturn. HOLD
Qualcomm Inc. (QCOM – yield 2.9%) – 5G is coming and this stock will thrive. It has the only good 5G smartphone chip at a time when the new phones are about to explode onto the market. It’s all about the pandemic and economic restart now, but 5G will be a huge story in the post-coronavirus market. That said, this is a very cyclical stock. As an act of caution, a third of the position was sold last week. I will buy it back if and when the market has another significant dip. HOLD
Valero Energy Corp. (VLO yield 5.9%) – As a refiner, VLO is uber-cyclical. The economy will recover. The economic restart is already underway. Demand for gasoline, diesel and jet fuel will continue to rise from here at a fever clip. All that bodes very well for VLO in the future. And the stock can move higher fast. But a down move it the market will surely take VLO with it. In order to reduce your risk level after a huge run up in the market, I took half the position off the table last week. I will also look to buy VLO back in the event of another selloff in the market. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.5%) – Alexandria’s life science and research lab properties are not only a defensive and growing real estate niche, but the pandemic has made them more in vogue than ever. The REIT just raised the quarterly dividend by 3% and has plenty of cash on hand for future dividends. The defensive business is likely to be little affected by the recession and the dividend is safe. This is a great stock to hold through a turbulent market 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. I will likely sell this ETF before it matures at the end of 2021, because you might get a slight dip in price when it’s liquidated. But I will hold for now in this still uncertain stock market. 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 2.3%) – This regulated utility and alternative energy giant continues to outperform both its utility industry peers and the overall market in the short, intermediate and long term. The problem is that the combination of steady income and growth from alternative energy is so popular that the stock is almost never cheap. I’m coming around to the view that I’ve been too prissy about the price. I will look to raise this stock to a BUY on any significant weakness in the future. HOLD
Xcel Energy (XEL – yield 2.7%) – There are certain megatrends out there, like the aging of the population, the technological revolution and the growth of the global middle class. The trend toward alternative energy is another one. This smaller alternative energy utility is a fantastic way for conservative income investors to play the trend. The stock performance in the portfolio has been fantastic. And I expect more of the same going forward. I’ll raise this to a BUY on any weakness. HOLD
