Not Bad but Not Good
In the midst of an uncertain environment, the market has been holding its own.
The furious market uptrend since the lows of March has experienced its rudest interruption so far. The S&P 500 got to within a whisker of a correction, falling 9.6% from the high on a closing basis. But it has since recovered nearly half of the downside.
Where do we go from here?
It’s hard to see how the market takes off into the next leg of the bull market in the next couple of months. Sure, the economy is coming back strong and will likely continue to do so. Interest rates are low and money has no place else to go to get a decent return. And there may be another stimulus package. But risks abound.
The election is now in everybody’s face. It is now becoming widely expected that the results will not be known on Election Day, and the confusion could drag on for weeks or months afterwards. Then there’s still Covid. The market is expecting a vaccine and a winding down of lockdown restrictions, but there’s no guarantee.
But the market seems to be handling things well so far. The near-correction isn’t much of a comeuppance after rising 60% in five months. It still looks like a market that wants to go higher when it isn’t be pelted with negative headlines.
As of now, it looks like it will be a choppy market in the months ahead. It doesn’t appear that a major downmove is in the cards unless an unexpected negative event of significant scale occurs. That’s not so bad. There could also be powerful upside when we move past the election and the virus.
High Yield Tier
B&G Foods (BGS – yield 6.7%) – After a big move higher over the last several months the stock has pulled back. Some consolidation was inevitable at some point after such a big move; it’s natural and healthy. It’s still a great holding if the pandemic drags on, as people continue to eat at home more. And beyond that, people are expected to continue to eat at home more after the pandemic than they did before. That fact should make this more of a growth company and secure the high dividend. Yet, despite having become a better company, BGS still sells at valuations well below the five year averages. BUY
Brookfield Infrastructure Partners (BIP – yield 4.2%) – The stock has been relentless forging slowly higher since the low of March. But the relative performance is changing. The overall market had been outperforming BIP until the last month. While the market topped out and pulled back, BIP kept right on ticking. It is showing great down market performance and is right near a post pandemic high. It has been holding its own in up market but still remains popular when things get dicey as investors seek out a defensive dividend paying company like this. BUY
Enterprise Product Partners (EPD – yield 11.2%) – Although this stock underperformed the market when it was rising, it is also underperforming it when it’s falling. This midstream energy company has a very resilient business that is rebounding strongly, much more so than the energy sector as a whole. That massive distribution is well-supported by cash flow and earnings and is safe. The market is behaving as though there won’t be demand for oil and gas anymore. Yet, the recovery the market has already priced in can only occur with strong demand for energy. HOLD
STAG Industrial (STAG – 4.7%) – This monthly-paying industrial REIT has pulled back right along with the market because it is more cyclical than most REITs. That said, there is a lot to like. The main thing as that demand for its properties is strong and growing. The E-commerce trend creates a great need for its warehouses. The other industrial properties are in high demand as well in a very fragmented market. There may be some ups and downs along the way. But STAG should continue to trend higher over time. HOLD
Verizon Communications (VZ – 4.2%) – Sure, this stock isn’t exactly lighting the world on fire but it is coming as advertised. It pays a high and safe yield with very little volatility and holds up well in down markets. It’s sort of like what utility stocks used to be. There is certainly a place for such a stock in a conservative portfolio. But things may well get better going forward. The arrival of 5G technologies should create a host of new growth opportunities that could make this stock a much better relative performer. It’s solid for the remaining pandemic, and promising beyond. BUY
Dividend Growth Tier
AbbVie (ABBV – 5.4%) – This biopharmaceutical stock has not been performing well of late. After soaring from the lows of March to a new 52-week high of over 100 per share in mid July, it pulled all the way back to the mid 80’s. The fundamental story remains excellent and intact. Its pipeline is outperforming expectations and the merger is going better than anticipated. But the technical story is deteriorating. The stock is dangerously close to the long term moving average, and a move below it will be a red flag. Because of the dirt cheap valuations and solid fundamentals I will maintain the BUY rating for now. But unless the stock stabilizes or turns around in the next week or so, I will reduce the rating. BUY
Altria (MO – 8.8%) – The cigarette stock had been on a solid upward trajectory since early July, but has sold off sharply with market selloff. But it is stabilizing of late. The recent underperformance is surprising because the stock was cheap already. But stocks that the market didn’t like before the selloff, it still didn’t like during the selloff. It should creep back up from here. The main thing is that the dividend is safe, making MO at least a strong income play. BUY
Crown Castle International (CCI – yield 2.9%) – This cell tower REIT has outperformed the market both YTD and over the past year. It outperforms it by a lot over longer time frames. But it has been moving sideways since June. The stock got ahead of the market and then the market caught up. But I like CCI during these uncertain times because earnings generated from cellular infrastructure are reliable in any economy. Although CCI has outperformed the market over the past week and month, it still hasn’t yet resumed an uptrend. We’ll see how it behaves in the coming weeks. HOLD
Digital Realty Trust (DLR – yield 3.0%) – This data center REIT is vastly outperforming the market YTD. And the stock still remains in a longer term uptrend. That aside, it’s in a great business. Its data centers are crucial technology infrastructure at a time when innovation and technology are poised to grow at an even stronger clip than in the past. This is a solid REIT that invests in the growth properties of the future. It should continue to do well. Plus, DLR performs with far less volatility than the overall market and should be a strong holding even if the market turns south from here. BUY
Eli Lilly and Company (LLY - yield 2.0%) – The performance of this health care giant is killing the market YTD, over the past year, and over the past two years. But it does so in a way that can require some patience. It tends to break out and move sharply higher and then go sideways for a long time. That’s okay, especially considering the fact that it has been a stupendous down market performer, not to mention the most well-run big pharma company on the market. It’s rock solid through the uncertain market and a great holding beyond. BUY
Innovative Industrial Properties (IIPR – yield 3.6%) – Go baby go. Growth is good. And this company has it in droves. It’s growing earnings more than any other company in a high growth industry. As well, earnings have been remarkably resilient during the pandemic. It’s trading very near the 52-week high but it doesn’t look like it’s done. IIPR is normally volatile with the market, but this latest downturn has not stopped its march higher. HOLD
Qualcomm Inc. (QCOM – yield 2.2%) – This stock is still in a powerful uptrend and has held up very well through the latest market selloff. Qualcomm had the wind at its back ahead of the proliferation of 5G phones, from which it will earn large royalties. But it recently became a much better company and stock with the legal settlement with Huawei. The favorable legal ruling changes the narrative on an issue that had been holding the stock back. It still looks strong from here. HOLD
Valero Energy Corp. (VLO yield 9.0%) – The stock was actually a little higher for the past week. It’s a phenomenal value with a business that will grow sharply unless the recovery fails to materialize. That said, the stock is unlikely to get any love until the current market narrative inevitably turns. I believe earnings next month will be a catalyst, as the pandemic losses will be in the rearview mirror and there will be rapid earnings growth ahead in the next quarters and beyond. It’s hard to stick with this one but I believe it will be worth it in the months ahead. In the meantime, you still get a great income. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.6%) – This life science and research lab niche REIT has been a solid performer. True, it was a superstar until the end of July and has since pulled back. But that behavior is consistent with the normal ebb and flow of the stock’s trend higher. It’s also important that this defensive company should hold up well in any economy. If the current uncertainty continues, investors should increasingly gravitate towards a reliable stock like this. It should also be solid when we move beyond the recession and pandemic. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.5%) – This short term bond ETF is a beautiful thing in markets like this. It’s nice to have something in the portfolio that you don’t have to worry about. 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 is rock solid in all but the most tumultuous market selloffs. And it’s been great during the latest pullback. It is less volatile than the market in general and provides a high yield and excellent diversification from both the stock and bond markets. HOLD
NextEra Energy (NEE – yield 2.0%) – There is breaking news on this stock today. It is being reported that NextEra made a bid to buy utility giant Duke Energy (DUK) and was rebuffed. So far DUK is up 8% on the news and NEE is down 5%. The story is brand new and the information is still sketchy. I’m not sure why there is such a powerful market reaction to the fact that a deal that wasn’t known about is not going to happen. It could be that it reflects badly on NextEra’s ability to make large acquisitions in the future. As the story unfolds, I will continue to keep you posted. But I don’t see anything at this point that interrupts the positive story for NEE. HOLD
Xcel Energy (XEL – yield 2.6%) – The alternative energy stock has been moving sideways for a couple of months now but it’s still in a longer term upward trend. XEL deserves to sell at a higher multiple because it’s a great way to play the alternative energy trend. The cost of producing alternative energy is getting cheaper while demand continues to grow. Clean energy also captures the imagination of investors as it is the energy source of the future. HOLD
