Risks are Growing
The market rally is forging on. And the uptrend is still in place, for now.
I remain cautious about the market in the months ahead for several reasons. One is that the financial damage from the lockdowns is just now being realized. The damage assessments are coming in with second quarter earnings reports.
So far, earnings season hasn’t had that much of an impact on the overall market. I don’t think investors know quite what to make of this quarter. It’s bad. But everyone knows that going in. Also, unlike most earnings seasons, this one doesn’t really portend what lies ahead. It’s sort of a one-off disaster that the market seems to have moved beyond a long time ago.
But it’s early. The financial damage will result in bankruptcies and dividend cuts for many companies. While that is expected, it is still an open question whether the situation will be bad enough for investors to reevaluate the pace of the recovery.
Second, the stimulus is running out. The massive stimulus propped up consumer spending. Another stimulus is being debated but Congress is torn between offering the same $600 monthly unemployment benefits or cutting them to $200. On the one hand, it may be a bad idea to motivate people not to work. On the other hand, a lower payment could force people to seek jobs that won’t be there. There could be a very negative effect on consumer spending, which accounts for about 70% of the economy.
Finally, there’s the election. The massively divided parties offer very different visions for the future and the economy. And we don’t know who will win. That creates great uncertainty, which the market hates. The market has been whistling past this one for a while. But the election is about to get a lot more in-your-face going forward.
That said, most of the stocks in the portfolio are defensive and can likely endure another market selloff relatively well, and bounce back afterwards. Dividend stocks are also performing better on a relative basis as the high market makes investors more defensive. Many portfolio positions are on the move and are at or near the 52-week high or the all time high.
There is growing uncertainty. But this portfolio is well positioned.
High Yield Tier
B&G Foods (BGS – yield 7.0%) – This packaged food stalwart will report earnings tomorrow. The results should be awfully good. The company has already stated that earnings grew 58% in the first two months of the quarter versus the same period last year. While that’s exciting, the main reason to buy this company is that a greater level of demand for its products should persist after the lockdowns are over. The company has morphed from just a defensive play to a defensive company with a much higher level of sustainable growth. The stock is up over 8% since being added to the portfolio three weeks ago. BUY
Brookfield Infrastructure Partners (BIP – yield 4.5%) – This is a fantastic reliable cash generator that this market has not yet fully embraced. High dividend stocks have not really been in favor during this market rebound. But that may change as technology and high growth plays bounce around at nose-bleed levels. This infrastructure company will pay and grow the dividend regardless of the pace of the economic restart or who wins the election in November. It also sells at a good value, still 15% below the 52-week high. BUY
Enterprise Product Partners (EPD – yield 9.7%) – This energy infrastructure partnership this morning reported earnings for what the company called “one of the most challenging quarters in the history of the U.S. energy industry.” The pandemic has made this perhaps the worst quarter ever for the economy and a disaster in the energy industry. Enterprise reported that operating income fell 7.9% and distributable cash flow (DCF) fell 8.4% compared to last year’s quarter. That’s it. DCF of $1.6 billion provided 1.6 times distribution coverage. As well, the company reported that business is rapidly improving so far in July and two new projects are just coming on line this quarter.
In what may be one of the worst quarters the company will ever endure, key metrics of earnings and profitability fell less than 10%. The strong fee-based business and the utilization of extra storage capacity hedged some of the volume declines. In the trough of the recession, Enterprise is easily earning enough to not only pay the dividend but save a bunch of cash. HOLD
STAG Industrial (STAG – 4.5%) – This monthly dividend paying industrial REIT reported solid second quarter earnings yesterday that beat estimates. It reported 4.4% growth in core funds from operations per share over last year’s quarter. That’s not bad during a pandemic. The REIT reported a 97% occupancy rate and that it collected 98% of the rent due in the quarter. The stock was up 1% on the day and about 3% for the week. It is performing on par with the S&P 500 YTD but it is blowing away the performance of its REIT peers, which has been lousy. This REIT is proving very resilient in an economic crisis. HOLD
Verizon Communications (VZ – 4.4%) – The stock has come alive a little bit recently. It’s up 4% in the last week and 9% for the past month. Better-than-expected earnings reported last Friday gave it a bit of a boost. While earnings and revenue came in slightly lower than the year ago quarter, it beat estimates as strong and growing demand for phone and internet service offset lower store visits and handset sales during the pandemic. The company also issue guidance of earnings growth of -2% to 2% for the full year. The company is holding its own during the recession and paying a nice dividend. That’s okay. But it still has a growth catalyst from the 5G rollout coming in the future. It’s still a good safe way to play this uncertain market with reason for optimism beyond. BUY
Dividend Growth Tier
AbbVie (ABBV – 4.9%) – The drug maker reports earnings on Friday. The expectations aren’t that high for this pandemic quarter because fewer doctor and hospital visits are expected to dampen sales of its drugs and treatments. But that is a very temporary situation. The main thing investors will look for is the growth of its new drugs and the performance of recently acquired Allergan’s drugs. Although the stock has returned over 13% YTD and about 50% over the past year, it’s still cheap at just 10 times forward earnings. This is still a great drug stock to own with a high dividend. BUY
Altria (MO – 8.3%) – Altria reported earnings yesterday that were above expectations. Cigarette volumes slid 8% despite the fact that nationwide slippage was only 2% to 3.5% as cash strapped smokers opted for cheaper brands. There was also good news as the company raised the dividend and still has $3 billion in cash on hand. It’s also full speed ahead with heated tobacco product IQOS as the FDA approved it to be marketed as a “modified risk” product and a nationwide campaign for distribution is underway. The sales growth should offset some of the tobacco volume slippage. It also issued earnings guidance of 0% to 4% for the full year. Altria is holding its own by growing slowly and paying the dividend for now. And the IQOS news provides more growth potential going forward. BUY
Crown Castle International (CCI – yield 2.8%) – This cell tower REIT has performed well, returning 23% YTD. The REIT will report second quarter earnings after the bell today. Regardless of what is reported, Crown Castle remains in the right place at the right time as demand for internet is soaring during the lockdowns and the rollout of 5G is continuing in haste. It’s been a strong stock but it is a little pricey at the moment. For that reason we sold half of the position and the remaining half is rated a HOLD. At the same time, you can’t fight the tape and this stock is up over 6% over the past week and making a new all time high. HOLD
Innovative Industrial Properties (IIPR – yield 4.7%) – Legal marijuana is a huge growth industry. And Innovative is one of the very few companies that is cashing in on the situation and making a lot of money right now. It continues to grow earnings and the dividend like crazy. The stock has already returned over 30% so far this year and just broke 100 to make a new post-pandemic high. The stock could be breaking out but it is volatile and somewhat at the mercy of the movement of the general market in the near term. Since I am cautious on the overall market, the stock is still rated a HOLD.
Qualcomm Inc. (QCOM – yield 2.8%) – The chip maker reports earnings after the bell today. The wild card this quarter will likely be China. Earnings estimates have been rising ahead of the report as investors are anticipating higher than previously expected sales in China. I don’t know what will happen but the main catalyst for this stock is the 5G rollout. The rollout of 5G smartphones has been delayed by the pandemic but the sales are on the way in the quarters ahead. And that will provide a big revenue boost that should drive the stock price higher. HOLD
Valero Energy Corp. (VLO yield 6.9%) – This best-in-class American refiner reports earnings for the second quarter tomorrow. They are expected to be frog ugly. Everybody already knows demand for refined products fell off a cliff this quarter. That’s why the stock is down so much. What matters is how quickly demand and earnings recover. That will be the main take from the quarter. Refined products will power this recovery and Valero will benefit. The only question is how long it will take. We’ll see. But I think the stock is absurdly undervalued ahead of what will inevitably be a huge earnings boost in the quarters ahead. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.4%) – This life science and research lab niche REIT is burning hot. It’s up over 5.5% this past week and is making a new all time high. The market liked its earning report earlier this week which showed 16.9% revenue growth over last year’s quarter and a projected 5.1% growth in funds from operations per share for the full year, versus the industry average of -3.7%. It’s holding up very strong during the pandemic and its properties are gaining popularity as the COVID-19 debacle reminds people of the importance of research. 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%) – This regulated and alternative energy utility is on fire. It’s up 20% over the past month. Analysts are expecting earnings growth of 10% for the year. That’s 10% per share earnings growth for a utility, in a pandemic. It provides the steady and predictable revenue in any economy and makes sense during times of uncertainty. But it also offers strong growth from the alternative energy side that should make this continue to be a sought after stock even after the pandemic. HOLD
Xcel Energy (XEL – yield 2.5%) – This smaller and lesser known alternative energy utility will report earnings tomorrow. Performance 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
