The Market Digests Bad News
It looks like the fast and furious rally from the March bottom is finally sputtering out. Where do we go from here?
The S&P 500 soared 46% from the March bottom in about 11 weeks, the fastest such rise in history. It couldn’t keep that up forever and it was bound to falter eventually. Since the post bottom high on June 8th, the market has pulled back somewhat and has been going sideways.
The main reason is that the virus cases are on the rise, and several states are pulling back on the economic restart. The market had been anticipating a booming recovery in the third and fourth quarters. This latest news puts a potential kink in that outlook.
Frankly, I’m a little surprised that the market is taking it this well. It had been banking heavily on a rosy scenario that has been disrupted. After rising so fast, a cranky market could have easily sold off a lot more with such news. The bad virus news is being partially offset by good economic news.
Key metrics like retail sales and payrolls grew far more last month than any economists were expecting. The market is seeing an even more powerful and quick recovery than expected that is being somewhat interrupted, most likely temporarily. It’s a market that still wants to go higher in anticipation of the glory days ahead when this virus mess is behind us and the economy is booming with record low interest rates and an accommodative Fed.
I believe those days will come. But there are some risks in the near term. This virus is still unpredictable. Will the increased spread get worse? Will there be a second wave later in the year? There’s also an election coming up in November that adds a lot of uncertainty to the mix.
I like the prognosis for the market longer term. But it may knock around for a while and be subject to headline risk in the weeks ahead. I don’t expect a big selloff. But I see more downside risk than upside potential in the weeks ahead. For that reason, I am being cautious. Several portfolio positions were partially sold two weeks ago. And I’m still being stingy with the BUY ratings.
Good days lie ahead, albeit with potential turbulence along the way. This portfolio is well designed to endure the rest of this crisis and thrive when we get to the Promised Land.
High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 4.7%) – The global infrastructure partnership has pulled off the recent high, like the overall market, but still remains in an uptrend. Although Brookfield’s vital assets that generate predictable income in any economy are a perfect answer for the uncertain environment, the stock is still almost 20% below the 52-week high. When we finally climb out of this pandemic mess, infrastructure will again be a hot market sector. With a solid yield, this is a great stock to hold through the crisis and beyond. BUY
Enterprise Product Partners (EPD – yield 9.8%) – The fundamentals of this midstream energy titan don’t match the cruel and unusual punishment the price has received. It’s being treated like any old energy stock while the earnings are far more resilient than the sector as a whole and will recover from the recession far faster than the overwhelming majority of energy companies. And, for reasons I’ve mentioned before, the distribution is very safe. I don’t know when the market will wise up. And the stock could get knocked around more before this mess is over. But the strong fundamentals will win out eventually, and you get 9.8% on your investment while you wait. HOLD
STAG Industrial (STAG – 5.0%) – The stock of this industrial REIT continues to be in a solid uptrend. It’s been outperforming the overall market and the REIT sector and is very close to a recent high. As a cyclical REIT, it will benefit in the economic recovery. It also has in-demand warehouse space as the surge of on-line retailing has accelerated during the pandemic. HOLD
Verizon Communications (VZ – 4.5%) – This wireless company has transformed into a down market stock of late. It significantly outperformed the market during the downturn and then underperformed as the recovery gained traction. It’s a good stock to own in case things get dicey again. It should also gain more growth stock appeal as the 5G rollout provides a catalyst for earnings growth and the 5G stocks increasingly become stars of the post pandemic market. I like this now and for the future. BUY
Dividend Growth Tier
AbbVie (ABBV – 4.8%) – I can’t say enough about this biopharmaceutical giant. Healthcare is a great place to be in this uncertain environment. Biotechnology is one of the hottest sectors of the market. And investors appear to be coming around to realizing that AbbVie has the new drug and pipeline firepower to overcome increasing competition for Humira. As the market bounces around, ABBV is in kissing distance of the 52-week high. But it’s also still cheap at 40% below the 2018 high and yielding 4.8% in a low interest rate world. BUY
Altria (MO – 8.4%) – Guess what? People are smoking more during the recession. Analyst expected cigarette volume to slide at just 1% to 2% in the second quarter, versus the average of 4% to 6%. Part of the reason is that sales of E-vapor products are down 25% from the 2019 peak. That may be bad for this JUUL acquisition, but that nightmare is already factored into the stock, and people switch back to cigarettes instead. Earnings growth was solid anyway, and now the growth is accelerated. Despite the headline abuse, this stock is way too cheap. And the dividend is rock solid as the company has more than enough free cash flow to easily continue to pay it and a 50 year track record of dividend hikes to defend. BUY
Crown Castle International (CCI – yield 2.9%) – What pandemic? This stock has been somewhat of a victim of its own success. The cell tower business has thrived right through the pandemic and has a strong growth catalyst from 5G that should enable the stock to continue to thrive in the post pandemic market. Despite the fact that the economy crashed as a result of the government shutting down the economy in fear of the pandemic, CCI is having a great year, up about 20% so far. The fact that the stock is not cheap in a market where so much else is cheap may limit its ascent for a while. HOLD
Innovative Industrial Properties (IIPR – yield 4.7%) – The rise of this moneymaking and fast-growing marijuana farm REIT has gotten temporarily interrupted. It was going about its business of forging to a new 52-week high when the market sold off. After that, it announced a 2.8 million share offering. Those offerings are to be expected from a REIT that it growing this rapidly; nevertheless, they always result in a temporary selloff. The stock now appears to be back on its merry way higher. HOLD
Qualcomm Inc. (QCOM – yield 2.9%) – Investors are a temperamental lot. One day the pandemic is going away, the next day it’s growing. The market can turn from euphoric to fearful on a dime, and vice versa. Who knows what it will do in the weeks ahead? But 5G is coming. You can take that to the bank. And QCOM will be a major beneficiary of that inevitability. The stock could get knocked around in the near term, but it will own the post pandemic world. Don’t forget that. Hang on and ride this bronco to big profits in the future. HOLD
Valero Energy Corp. (VLO yield 6.7%) – The stock of this refiner is uber cyclical. It rises and falls with the market and economic outlook in an exaggerated fashion in the near term. But there are two things to keep in mind with Valero. Its earnings are far more resilient than its peers, and demand for gasoline and the like will power the inevitable economic rebound. The stock falls fast but it rises just as fast when circumstances improve. It’s very difficult to say where this stock will be in a week or a month. But it is highly likely that it will be a lot higher than it is now in a year. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.6%) – A more sideways or down trending market is a great environment for this research lab and life science REIT to shine. Uncertain markets like defensive plays. Alexandria’s properties are not only a defensive and growing real estate niche, but the pandemic has made them more in vogue than ever. I expect this stock to trend higher, and bore the heck out of you while it does it. 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. BSCL is a safe port in a stormy market and owning it provides much needed comfort as the world goes crazy. BUY
Invesco Preferred ETF (PGX – yield 5.4%) – This preferred stock ETF holds up like a rock in all but the most tumultuous market selloffs. And even then it goes down much less than the market. At the same time, it provides an awesome yield from an asset class that is diversified from the stock and bond markets. HOLD
NextEra Energy (NEE – yield 2.3%) – Defense for the present—alternative energy for the future. This regulated utility and alternative energy giant has both sides covered and is one of the best stocks for conservative income investors to own. Because the steady income and growth is so desirable, the price had gotten very high during the bull market. And Utilities have not fared that well so far this year. Because of the increased risk of market volatility in the near term, I’m going to wait until this stock dips below 230 per share to raise the rating to a BUY. 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 significant weakness in the weeks ahead. HOLD
