The Pandemic Rally Forges On
What virus? What 33% GDP contraction? The market has staged an epic rally for the ages amidst the economic carnage. The rally is continuing and the S&P 500 is now within just 2% of the all-time high, which it seems destined to break through in short order.
New virus cases appear to have peaked and are falling. The odds of a vaccine being available to end this mess by later this year seem to be increasing. Earnings have been better than expected so far. A new stimulus package from Washington could be coming soon. And investors have no place else to invest but stocks to get a decent return.
The horrible second quarter is behind us and a rapidly recovering economy with a very accommodative Fed lies ahead. There are a lot of reasons for the rally and unless investors get scared straight the rally seems destined to continue.
I’m loving it. Several stocks in the portfolio are breaking out and many have moved near or beyond the 52-week highs. But I remain cautious.
There is still lots of risk out there. I don’t know what will happen with the course of the virus or a vaccine. It is very possible that events will not unfold as pleasantly as the market expects. There’s also the election. It’s about to get in our faces. There’s the uncertainty about who will win along with the probability of a very ugly situation if the results are close.
But it’s the dog days of summer. Investors will increasingly be in slacker mode in the weeks ahead. We’ll see where all this goes when the rubber hits the road after Labor Day. But the market looks good for now.
The majority of the positions in the portfolio should thrive as the economy recovers but also have resilient business models that will support the stocks if things get ugly again in the fall.
High Yield Tier
B&G Foods (BGS – yield 6.3%) – This packaged food company still has solid momentum. It up 7% over the past week and more than 16% since being added to the portfolio last month. It reported earnings last week that were spectacular. Net sales climbed 38% and earnings per share soared 87% over last year’s quarter. Not only is demand for their food soaring during the pandemic but is likely to remain at a higher level than before for a while. B&G has morphed into a different company that now offers solid growth and a safe dividend. The market is repricing it accordingly. BUY
Brookfield Infrastructure Partners (BIP – yield 4.6%) – This owner of infrastructure assets all over the world reported second quarter earnings before the open this morning. Adjusted funds from operations were up 3% over last year’s quarter. The reason for the lower rate of growth is diminished revenue from the transportation segment during the lockdowns. But that’s as bad as it gets during an economic catastrophe; earnings are only up 3%. The company is proving its resilience and the transport sector should pick right back up as economies continue to restart across the globe. The stock is up over 1% on the day following the earnings report. BUY
Enterprise Product Partners (EPD – yield 10.0%) – In the worst economic quarter ever recorded and one of the worst ever for the energy industry, Enterprise reported earnings that were down less than 10%. As well, the company still had cash flow that covered the massive distribution by 1.6 times. They can easily afford the distribution even under the worst of circumstances. The resilient business should also rebound quickly as the economy gains traction. HOLD
STAG Industrial (STAG – 4.4%) – This monthly dividend paying industrial REIT is on a roll. It reported better-than-expected earnings last week, the stock is up over 10% in the past month and very close to the pre-pandemic all-time high. The performance is not only blowing away that of its REIT peers but also beating the market. The stock has strong momentum as well. HOLD
Verizon Communications (VZ – 4.3%) – The stock of this wireless giant has been sort of range-bound, bouncing around in the 50’s over the past several months. Earnings were solid and it is still a great defensive stock to own as the high market makes investors a little more cautious. The stock should also benefit on a more permanent basis in the years ahead from the 5G technology and more and more devices require a cellular mobile connection. VZ is good for now and later. BUY
Dividend Growth Tier
AbbVie (ABBV – 5.0%) – AbbVie reported solid earnings last week that beat expectations on both revenue and earnings. The company is being affected by the lockdowns as people postpone doctor and hospital visits. As a result, earnings were only up 3.5% from last year’s quarter. But that situation is very temporary and AbbVie will get that business back very soon. The main thing is that its new drugs are killing it. They should easily be able to overcome the Humira slippage and that makes the stock still very undervalued at 10 times forward earnings. After a strong run higher the stock looks to be consolidating a bit. That’s fine. It’s still a great value and poised to move higher over time. BUY
Altria (MO – 8.1%) – The cigarette maker is a fantastic income play right now. It has already absorbed the consequences of the rotten acquisitions of JUUL and Cronos (CRON) both through write downs and stock performance. The company also has resilient earnings and growth potential in heated tobacco product IQOS as it goes national. The dividend continues to be well covered by cash flow and is rock solid. The very cheap price and safe high yield make this stock great to own right now. BUY
Crown Castle International (CCI – yield 2.9%) – This cell tower REIT has performed well, returning about 20% YTD. It has a great niche of cell tower properties that are in high demand as people rely more than ever on internet service during this pandemic. The rollout of 5G is a big growth catalyst that is being somewhat delayed but the growth from 5G should be reflected in future quarters. HOLD
Innovative Industrial Properties (IIPR – yield 4.0%) – The marijuana farm REIT announces earnings after the bell today. There’s no reason not to expect good things and the company continues to acquire additional properties at a breakneck pace, priming the pump for high earnings growth. The stock is looking strong. It’s up over 40% YTD and is right about at the 52-week high. HOLD
Qualcomm Inc. (QCOM – yield 2.3%) – The chipmaker had an incredible week in which the stock soared about 20%. Earnings were better than expected but the bigger news was that it settled a licensing dispute with Chinese technology company Huawei. As a result, Qualcomm will receive a $1.8 billion settlement and will receive royalties of about $1 billion per quarter going forward. It is estimated that this settlement alone will account for $1.00 or more in extra earnings per share every quarter. The company beat on revenue and earnings but the 5G phones have been delayed. They are on the way though and should provide robust growth in the quarters ahead. HOLD
Valero Energy Corp. (VLO yield 7.5%) – The refiner reported earnings last week that were frog ugly. The company lost $1.60 per share for the quarter as demand for refined product plummeted during the lockdowns. But that was expected and already in the stock. It’s the future that counts and the company had mixed things to say. On the plus side the company said that demand is rapidly returning. Demand for gasoline and diesel is back to about 85% to 90% of pre pandemic level, from a low of 50% in April. Valero also said it expects demand to continue to improve this quarter. However, it will take a while to go through all the excess inventory that has built up and the company doesn’t see earnings getting back to pre-pandemic levels until sometime next year. But things are going in the right direction and the stock is dirt cheap. It should benefit mightily from the recovery in the quarters ahead. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.4%) – This life science and research lab niche REIT keeps on rolling. The stock is just about at the all-time high after recovering everything it lost in the selloff. Earnings were stellar with 16.9% revenue growth and a projected 5.1% earnings growth for the year. 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 2.3%) – 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 5.7%) – 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 2.0%) – This regulated and alternative energy utility continues to get the job done. It has returned over 37% for the past year and about 16% over the last month, and is now very near the all-time high with great momentum. Steady and predictable earnings complimented by growth from the alternative energy business remains popular with investors. Analysts are also expecting earnings growth of 10% for the year. That’s10% per share earnings growth for a utility, in a pandemic. HOLD
Xcel Energy (XEL – yield 2.5%) – This smaller and lesser known alternative energy utility reported earnings last week that reflect 17.4% year over year earnings growth in the second quarter. They beat consensus on earnings and fell short on revenue as the pandemic has temporarily reduced business. The market liked the report and stock got a bump and is on its way back to the all-time high achieved before the pandemic. HOLD
