The Market Proves Its Resilience
This market is making a believer out of me.
I had been skeptical that stocks could hold their incredible, rapid gains from the March bottom. The market was pricing in a booming economic recovery in the quarters ahead as well as low interest rates and an accommodative Fed. While I agreed that the recovery would be very strong, there were risks to the market’s rosy scenario.
A major risk was the unpredictability of this virus. There was always the possibility of another outbreak that interrupts or stalls the economic recovery. Well, that’s happened. That risk has come to fruition. The virus outbreak is resuming across the country and many states have pulled back or delayed economic restart measures.
But the market is holding strong anyway. Not only has the market held recent gains, but it’s moving higher. The S&P 500 is back to the June high and less than 5% from the all-time high. It sees a rapidly growing economy with low interest rates in the future and it doesn’t seem to be all that concerned if there is a stumble or delay on route to the Promised Land.
The market is also having a stronger reaction to good news than to bad news. The indexes soared yesterday on news of potential Fed asset purchases, like quantitative easing, to support the economy and the market. Today the market is loving news of positive trial results for a coronavirus vaccine.
It appears that the market is resuming an uptrend that only some horrible development will stop. Of course, uncertainty regarding the election could temper the upside as that event comes closer into focus. But the market looks strong for now.
High Yield Tier
B&G Foods (BGS – yield 7.4%) – This packaged food company is killing it. Business has exploded during the pandemic and is likely to stay better in the aftermath as well. Despite the stock being up 48% so far this year, it is still relatively cheap with several valuation measures well below the five-year average. The stock is still trending higher and appears poised to break through the 52-week high of 26.25. BUY
Brookfield Infrastructure Partners (BIP – yield 4.7%) – With a portfolio of reliable income-generating assets like cell towers, pipelines and ports, this is a great stock to own during a bad economy. After a strong bounce off the March bottom, the rally has petered out and BIP is at the same price it was back in May. It’s still a good value and the dividend is high. It’s solid if the market turns south and should rally again if the market remains strong. BUY
Enterprise Product Partners (EPD – yield 10.4%) – Despite the fact that this resilient energy company is not suffering operationally like the rest of the sector, the market continues to mistreat it. It offers great value and a safe double-digit yield. Maybe a solid earnings report at the end of the month can change the course of this stock. In the meantime, the price has some technical support around the current level and the distribution is safe. In fact, the company recently announced the same distribution, payable in August. HOLD
STAG Industrial (STAG – yield 5.0%) – This industrial REIT continues to be in a solid uptrend. Despite the fact that it is somewhat cyclical, the REIT is doing well in this economy and pandemic because it has a lot of in-demand warehouses for online retailers. The stock is also outperforming the S&P 500 this year while the REIT sector is underperforming the market. STAG just made a new recent high and looks poised to keep moving higher. HOLD
Verizon Communications (VZ – yield 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 – yield 4.8%) – This most actively traded big pharma stock is still in an uptrend. It has been slowly dabbling with the 52-week high recently. ABBV was going gangbusters before the bear market and has found its mojo again. Investors are increasingly confident that its new drugs and pipeline along with the recent Allergan merger will enable the drug market to overcome generic completion for Humira. Despite the fact that the stock has returned 47% over the past year, it’s still cheap at more than 30% below the 2018 high. BUY
Altria (MO – yield 8.4%) – Here’s an important thing to remember about the dividend, along with the fact that it has been raised every year for the last 50 years. In 2019, cash from operations was $7.8 billion and dividends paid totaled $6.1 billion. Cigarettes are a cash-rich business and the company has always paid out most of it in dividends. Dividends were easily covered last year and this year more money is coming in as people are smoking more during the pandemic. You get a very high yield that is safe with a stock price that offers great value. I like those terms in this market. BUY
Crown Castle International (CCI – yield 2.9%) – Cell towers are a great business. The use of cellular technology continues to increase and the new 5G will escalate that increase going forward. Just look at the performance of this cell tower REIT. While REITs have significantly underperformed the overall market during this pandemic, CCI has vastly outperformed the market. It has returned about 20% YTD, versus a negative-1% return for the S&P 500. It is a special niche REIT with properties in high and growing demand. HOLD
Innovative Industrial Properties (IIPR – yield 4.7%) – Demand for legal marijuana is rapidly rising in this county, and so is the demand for growing it. In the latest quarter, revenue more than tripled from last year and earnings grew 249%. As REITs are required to pay out 90% of earnings in dividends, the dividend has grown over 600% in the last three years. The stock is still cheap for having that kind of growth. Sure, IIPR can bounce around with the market in the near term, but the price should follow earnings sharply higher in the future. HOLD
Qualcomm Inc. (QCOM – yield 2.9%) – Later this year and into next year, the new 5G smartphones will start hitting the market. With the only good 5G chip for smartphones, Qualcomm has contracts with more than 30 OEM manufacturers, including Apple (AAPL). When those phones start hitting the market, Qualcomm will get additional royalty revenues. The future looks very bright for QCOM. That’s why it has been outperforming the market despite being a cyclical company during a recession. HOLD
Valero Energy Corp. (VLO – yield 7.2%) – After a distinct turn for the worse after the post-bottom market high in early June, VLO may be on the rise again. It’s up over 12% in the past week. Refining is a very cyclical business and the stock tends to exaggerate moves made in the overall market. That said, things are improving dramatically. Despite some setbacks, the economic restart is underway. Demand for refined products will increase right along with economic activity and VLO will benefit. I believe there is a strong chance that earnings, reported at the end of this month, will reflect sharply improving conditions and the stock will get a boost. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.6%) – This life science and research lab niche REIT is vastly outperforming its peer group. So far this year, the Vanguard Real Estate Index ETF (VNQ) is down 17% while ARE is slightly higher. Over the past year, ARE has outperformed VNQ by 25% and is significantly outperforming the S&P 500. Defensive and reliable earnings are a winner, even when the stock’s sector is out of favor. The stock should not only hold up relatively well if the market turns south again, but it should continue to be a solid performer if the market stays strong. 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 risk and uncertainty abound. BUY
Invesco Preferred ETF (PGX – yield 5.5%) – 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 a serious yield from an asset class that is diversified from the stock and bond markets. HOLD
NextEra Energy (NEE – yield 2.1%) – Like REITs, Utilities have been an underperforming sector in the pandemic. But NEE, with its steady regulated revenues and growth from the alternative energy business, is bucking the trend. While the Utilities Select Sector SPDR Fund (XLU) is down about 5% over the last year, NEE is up 26%. The stock is also outperforming the S&P 500 YTD by double digits. NEE is in an uptrend that could test the old high of 282 (currently 265). 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 has not performed nearly as well as NEE over the past year and YTD, but it’s still beating the stuffing out of XLU over those periods. The stock is in a more sideways trend than NEE but I believe it is only a matter of time until the market embraces it again. HOLD
