The Uneven Bull Rages On
This magnificent market rally from the depths of despair in March still has traction. The S&P 500 is now within 4% of the all time high. As of the close yesterday, the year-to-date performance of the three major indexes is as follows: DOW -5.57%, Nasdaq 19.32%, and S&P 1.06%.
Every week there’s bad new and good news. This week there is bad news about tensions with the Chinese and good news regarding a European Union stimulus and energy demand. Every week there’s bad news and good news about the virus. The spread of the virus is increasing but the market always seems to rally on some promising new treatment or vaccine that offsets the worry.
The market digests the good and the bad and moves higher. But the indexes don’t tell the whole story. Technology stocks are booming as people rely on it even more during the lockdowns. But a lot of the market is still struggling. In fact, of the 11 S&P 500 sectors, only 4 are in positive territory for the year.
The worst hit sectors are Energy and Finance. But many of the value-oriented high-dividend stocks are faring poorly as well. The REIT and Utility sectors in particular are stinking up the place. But while that is the situation for those sectors as a whole, the REITs and Utilities in the CDI portfolio are not only blowing away their peers, but kicking the overall market’s butt as well.
It matters which individual stocks you pick. That’s where CDI shows its value.
The CDI REITs and Utilities have special qualities that enable them to thrive even when the rest of the sector struggles. Crown Castle (CCI) has a portfolio of cell towers. Alexandria Real Estate (ARE) invests in niche research lab properties. Innovative Industrial Properties (IIPR) has marijuana farms. And the Utilities, NextEra (NEE) and Excel (XEL), both have a strong alternative energy presence.
The only eyesore in the portfolio are the energy stocks, Enterprise Product Partners (EPD) and Valero Energy (VLO). It appears that, unlike the overall market, these sectors will need to see tangible proof of a strong recovery before they rally. There is also uncertainty about how some of these companies will cope with the financial fallout into the recovery as well.
But like the REITs and Utilities, these are well-chosen Energy sector stocks. The businesses are more resilient and will turn around faster when the economy recovers then the rest of the sector. A strongly growing economy seems inevitable in the months ahead and should be good news for these stocks.
While EPD and VLO have ugly returns as of now, they represent great value with high yields and are well poised to benefit in future phases of the recovery and market.
High Yield Tier
B&G Foods (BGS – yield 7.4%) – So far so good for his packaged food company. It’s up about a buck since being added two weeks ago. The stock has returned over 50% YTD, causing some to believe it’s too expensive now. I disagree. It is still selling at valuation measures below its 5-year average. But beyond that, it’s now a different company. Because of the surge in at-home cooking that will likely last well beyond this pandemic, B&G Foods has morphed into a different company from past years. The slow growth company struggling to pay the dividend is now a solid growth company with a secure dividend. BUY
Brookfield Infrastructure Partners (BIP – yield 4.7%) – This infrastructure juggernaut still offers a compelling value, along with a high yield. It is not the kind of stock that has been embraced by the market recovery so far and it is still trading more than 15% below the 52-week high. Looking ahead, I believe investors will embrace a company that reliably generates growing earnings in any economy and pays a rock solid high yield. BIP is a great place to be going forward and it’s not too expensive. BUY
Enterprise Product Partners (EPD – yield 9.6%) – Energy stocks had a huge rally yesterday and global demand is normalizing. As a result, EPD was up about 5% on the week at the close yesterday. But I’m not sure this is a sustainable move in the near term. We’ll see. This stock still offers great value and business will recover very quickly as the economic restart gains traction. I’m a believer in the stock because the massive 10% yield is safe. Regardless of the near term ebb and flow of stocks in the sector, the stock should hold its own because of the yield and the already low price. You get a double digit yield while waiting for the stock to inevitably trend higher at some point. HOLD
STAG Industrial (STAG – 5.0%) – This monthly dividend paying industrial REIT has found its mojo. Although it has slightly underperformed the S&P YTD, it has performed better than the index over the past three months. That may not sound all that impressive, but for a REIT, that’s spectacular. The REIT sector (aside from the ones in this portfolio) has been a dog this year. STAG is benefitting because it is more cyclical and because demand for its warehouse properties is through the roof as online shopping has exploded during the pandemic. HOLD
Verizon Communications (VZ – 4.4%) – This wireless giant will report second quarter earnings on Friday before the bell. The wireless business has been rock solid during the quarter as people rely on mobile cellular technology more than ever. But it will be negatively affected by the lockdown in terms of lower handset sales and such. It is just short term gibberish though. Those sales will roar back as the economy recovers. And the rollout of 5G will provide a sorely lacking catalyst for solid growth in the future. I know the stock has floundered of late. But it’s still a great place to be, all things considered. BUY
Dividend Growth Tier
AbbVie (ABBV – 4.8%) – I tend to slobber all over this stock as much as NEE. It has everything going for it right now. Healthcare is a great place to be because it offers defense as well as growth, and it should be solid whichever way the market goes from here. Performance has been great. It has returned about 50% over the past year and 23% over the past few months. It’s just made a new 52-week high. Yet despite that performance and sector desirability, the stock is still remarkably cheap. ABBV is still trading more than 20% below the 2018 high and selling at just 10 times forward earnings. BUY
Altria (MO – 8.2%) – The stock continues to wallow around in this miserable low range. It isn’t justified. MO has historically been one of the very best dividend stocks on the market. Earnings are still growing and the company has easily enough free cash flow to pay that titanic dividend yield. The company will probably have to show some needle-moving growth in its non-cigarette businesses to really get the stock moving higher. And it will eventually. In the meantime, you get a huge income from a stock with not much downside left. BUY
Crown Castle International (CCI – yield 2.9%) – Cell tower properties are a good business now and in the future. Demand is strong as cellular technology becomes much more widely used. And the rollout of 5G will greatly accelerate the process. Look at the results. So far this year the stock price has outperformed the REIT group by 26% and the S&P 500 by 18%. Over the last year, CCI has bested REITs by 35% and the S&P by 25%. It’s a little pricey, but for good reason. HOLD
Innovative Industrial Properties (IIPR – yield 4.7%) – This high-growth marijuana farm REIT is rolling again. It’s up 34% in the last three months and is near the 52-week high. It recovered from a bad selloff in 2019 as the marijuana sector fell out of favor after rising to dizzying heights. But Innovative has been growing earnings consistently at a fever clip regardless of the short term market gyrations. The stock tends to bounce around in a steep upward longer term trajectory. Over the past three years the stock has returned an average of 82% per year. Hang on and ride it higher over time, while collecting a sweet dividend yield. HOLD
Qualcomm Inc. (QCOM – yield 2.8%) – The rollout of the 5G smart phones has been delayed by the pandemic, and so has the exciting performance of this stock. But it’s coming. 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 6.8%) – Fortunes of this refiner are directly tied to the strength of the economic recovery. And, unlike the overall market, it will need concrete and tangible evidence of a strong recovery to really move higher. Energy in the form of gasoline, diesel and jet fuel will power the recovery. Demand is already spiking higher. But it will need a sustained recovery to get back to where it was before the pandemic. This stock can move higher very fast when conditions are right. We’ll see how things play out. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.6%) – This life science and research lab niche REIT is not only vastly outperforming its peer group, it’s besting the S&P 500 YTD. It has also outperformed its peers and the overall market in every measurable period over the last five years. Defense has a place in every portfolio. And ARE is one of the best of the best. It should do well in any market. And the stock is moving near an all time high. 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%) – Utilities have had a lousy time of it this year, but not NEE. This regulated and alternative energy superstar is still blowing away the market. After stumbling somewhat during the selloff, the stock has caught fire again. It has moved up 14% in the last month and is now in bad breath distance of the all-time high. It’s outperforming the market by about 15% YTD. It also has kicked the market’s butt in the last 15 year, 10 year, 5 year, 3 year and one year periods. Defense with growth is a winning formula. What can I say? HOLD
Xcel Energy (XEL – yield 2.6%) – This smaller and lesser known alternative energy utility has been solid, but not as good as NEE for the last year and YTD. But the longer term performance is just as impressive as that of NEE. That’s okay. Investors typically are not as quick to embrace this smaller and more alternative energy oriented utility amidst the volatility. But if history is any judge, they will come around. The recent performance of NEE is a very positive harbinger of things to come for XEL. HOLD
