Too Much Risk to Ignore
The anticipated market tumult has arrived.
The S&P 500 is down over 5% in less than a week. It’s also down over 8% from the high. The high market combined with the mounting risks is finally spooking investors.
The chief culprit appears to be the rising number of Covid cases, both here and abroad. The pandemic is still with us. And the virus remains unpredictable. More states are imposing further lockdown restrictions, which is not good for the recovery.
As well, there’s an election in less than a week. Ordinarily, that isn’t a big deal for the market. In fact, it usually rallies the week before an election. But this one is more troubling. While the market typically doesn’t care who wins, it worries about the strong possibility of a contested result and the ensuing mess.
The market may be funky for a while longer as these risks play out. It’s not unexpected under the circumstances, especially for a market that had rallied 60% in a short time. But, hard as it is to believe now, we will get past this election and even the pandemic.
The economy is already growing beyond expectations and it should be poised to take off once we get past this rough patch. I believe this is a longer term secular bull market that should resume its uptrend on the other side of the current troubles. Markets like this are the price you pay for higher returns over the longer term.
In the meantime, I will surely keep you posted as events unfold.
High Yield Tier
B&G Foods (BGS – yield 6.8%) – This packaged food company is one of the few stocks that is perfect for the current environment. The business is thriving during the pandemic and with the defensive nature of the business and low beta it should perform well amidst the likely volatility of next several weeks and possibly months. Also, as a high paying dividend stock with solid growth it should continue to thrive in the post pandemic world as people seek yield in a low interest rate environment. The company is expanding and just purchased the powerful brand Crisco, which is expected to be a significant boost to earnings in 2021 BUY
Brookfield Infrastructure Partners (BIP – yield 4.3%) – We are finally seeing a break in this stock’s long and slow slog ever higher. BIP has pulled back nearly 4 points from the recent high of over 48. There hasn’t been an interruption of this magnitude in many months. There is no fundamental reason for the pullback. And BIP is still above the longer term moving average. The stock is also a good fit for the current environment because of its defensive revenues and strong growth prospects beyond the recession. It’s most likely a long overdue breather. But I will keep a watchful eye on the performance in days and weeks ahead. BUY
Enterprise Product Partners (EPD – yield 10.4%) – Enterprise announced rock solid earnings that showed resiliency and growth in this tough energy environment. Earnings rose slightly over last year’s quarter as did distributable cash flow. In a sector taking a beating in the recession, Enterprise actually grew earnings. Its cash flow also covered the distribution by a fabulous 1.7 times, further solidifying the safety of this double digit yield. But the market doesn’t care and the stock is down today. The disconnect between operational performance and stock performance can’t last forever. But it might last a while longer. In the meantime, EPD is paying you to wait. HOLD
STAG Industrial (STAG – 4.5%) – After a rapid rise from the March bottom, STAG has leveled off over the past three months. Industrial properties are a cyclical and growth business with a favorable supply/demand dynamic. It is defensive enough to hold its own during the recession but is positioned to benefit when the economy booms on the other side of this pandemic. It’s solid for now and good for later. HOLD
Verizon Communications (VZ – 4.4%) – Here we go again. After an impressive rise from late June until mid September, the stock petered out again. Since mid September, it has fallen from over 60 per share to the current 57. It remains above the long term moving average, which this is typical behavior for VZ—and I still like the stock. It is resilient through the recession, as recent earnings proved, and it could see much greener pastures on the other side of this recession and pandemic as 5G likely becomes a much bigger attraction in the market. BUY
B&G Foods (BGS – yield 6.8%) – This packaged food company is one of the few stocks that is perfect for the current environment. The business is thriving during the pandemic and with the defensive nature of the business and low beta it should perform well amidst the likely volatility of next several weeks and possibly months. Also, as a high paying dividend stock with solid growth it should continue to thrive in the post pandemic world as people seek yield in a low interest rate environment. The company is expanding and just purchased the powerful brand Crisco, which is expected to be a significant boost to earnings in 2021 BUY
Brookfield Infrastructure Partners (BIP – yield 4.3%) – We are finally seeing a break in this stock’s long and slow slog ever higher. BIP has pulled back nearly 4 points from the recent high of over 48. There hasn’t been an interruption of this magnitude in many months. There is no fundamental reason for the pullback. And BIP is still above the longer term moving average. The stock is also a good fit for the current environment because of its defensive revenues and strong growth prospects beyond the recession. It’s most likely a long overdue breather. But I will keep a watchful eye on the performance in days and weeks ahead. BUY
Enterprise Product Partners (EPD – yield 10.4%) – Enterprise announced rock solid earnings that showed resiliency and growth in this tough energy environment. Earnings rose slightly over last year’s quarter as did distributable cash flow. In a sector taking a beating in the recession, Enterprise actually grew earnings. Its cash flow also covered the distribution by a fabulous 1.7 times, further solidifying the safety of this double digit yield. But the market doesn’t care and the stock is down today. The disconnect between operational performance and stock performance can’t last forever. But it might last a while longer. In the meantime, EPD is paying you to wait. HOLD
STAG Industrial (STAG – 4.5%) – After a rapid rise from the March bottom, STAG has leveled off over the past three months. Industrial properties are a cyclical and growth business with a favorable supply/demand dynamic. It is defensive enough to hold its own during the recession but is positioned to benefit when the economy booms on the other side of this pandemic. It’s solid for now and good for later. HOLD
Verizon Communications (VZ – 4.4%) – Here we go again. After an impressive rise from late June until mid September, the stock petered out again. Since mid September, it has fallen from over 60 per share to the current 57. It remains above the long term moving average, which this is typical behavior for VZ—and I still like the stock. It is resilient through the recession, as recent earnings proved, and it could see much greener pastures on the other side of this recession and pandemic as 5G likely becomes a much bigger attraction in the market. BUY
Dividend Growth Tier
Rating change “BUY” to “HOLD”
AbbVie (ABBV – 5.6%) – This all star biopharmaceutical company stock continues to deteriorate. From a recent high of over 100 in July it’s moved down to the current 81. And now, the stock has broken through the long term moving average, which is an ominous sign. There hasn’t been any declared change is the strong fundamental story, and the overall health care group is performing poorly ahead of the election. But earnings are coming up on Friday and the stock price might be telling us something. I still like the stock very much for the longer term. And I will raise it back to a BUY if and when upward momentum resumes. But there is sufficient evidence to pull back at this point. HOLD
Altria (MO – 8.9%) – Smoking is out. Value stocks are out. Stocks that hadn’t been working are getting hit in this latest market selloff. All these things are conspiring to bring MO near a five year low. The company announces earnings on Friday. But, unlike ABBV, this stock has been floundering for a long time and, in my view, recent behavior doesn’t portend a bad report. The massive dividend yield is safe and the stock is cheap. With a 10-year Treasury yield of 0.76% I believe it is unlikely that the stock can go much lower from here. BUY
Crown Castle International (CCI – yield 3.0%) – This cell tower REIT reported earnings last week that slightly beat consensus estimates and grew year-over-year funds from operations by 6%. The REIT also issued guidance for 2021 at 10% earnings growth and raised the dividend by 11%. The 6% growth isn’t that impressive on its face but this is a recession and earnings are still rising. The future growth prospects are solid as 5G continues to roll out and the dividend hike is encouraging. While the stock performance of late has been uninspired, the company is well positioned for the volatile market and beyond. HOLD
Digital Realty Trust (DLR – yield 3.0%) – This data center REIT is great in markets like this. The market is enduring the worst selloff in months, and DLR could care less. It has a beta of just 0.25. The company reports earnings tomorrow and there is no reason not to expect solid results; last quarter was stellar. But we’ll see. Digital is in a growth business that is particularly strong on a relative basis during this recession. DLR has returned a strong 28% YTD and a great long term average return. I like for the near term and beyond. BUY
Eli Lilly and Company (LLY - yield 2.2%) – The stock took a sizeable 6% hit yesterday when the National Institute of Health halted the trial of its most promising Covid treatment. Lilly had been in news as the promising new treatment created some excitement. This is what headline and market hype begets. I didn’t buy Lilly for this drug, but rather for the fact that it has so many promising drugs. Of the 11 new drugs Lilly has brought to market since 2014, 10 of them are growing sales by double digits. The company announced earnings growth of 5% for the third quarter even after writing off the investment for this Covid drug, and it has others.
You can never bank on one drug no matter how promising it is. And drug disappointments and the selloffs that accompany them are common in the life of any pharmaceutical stock. The market reaction creates a great entry point for this stock. Even after the selloff the stock is up over 20% YTD. BUY
Innovative Industrial Properties (IIPR – yield 3.8%) – This rapid growth marijuana farm REIT has finally pulled back from its meteoric rise from midsummer to mid October, from a high of 136 to the current 120. It is still holding relatively strong considering the state of the market. It mostly just lost the big pop it had in October. The fantastic growth story is still intact and I like the relative performance so far in this market. But I will keep a close eye on the performance in the days and weeks ahead. HOLD
Qualcomm Inc. (QCOM – yield 2.1%) – Considering semiconductor companies are cyclical and can be quite volatile, I find the recent performance very encouraging. In all the recent tumult, QCOM has pulled back from a high of 130 to the current 122. It is particularly impressive that QCOM is holding its own in a down market ahead of the 5G launch of Apple (AAPL) and other smart phones, which just boost earnings and likely the stock. So far so good, but I will keep a sharp eye on this one in the weeks ahead. HOLD
Valero Energy Corp. (VLO yield 9.9%) – The beleaguered refiner announced third quarter earnings which, as predicted, stunk. While refining margins for gasoline and diesel have vastly improved, there was a huge excess inventory to work off. The bright spot was renewable diesel where earnings nearly tripled from last year. This has been a heavy investment for Valero and it bodes well for the future. While fortunes should rapidly improve for Valero in the quarters ahead, the market doesn’t care right now. The energy sector continues to get clobbered as Covid cases rise and the election approaches. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.7%) – This life science and research lab niche REIT has been disappointing of late. It has gone sideways since the spring. And it frankly isn’t holding up on a relative basis during the recent selloff as one might expect for a conservative dividend payer like this. Business remains solid during the recession as earnings came in as expected with 4.6% EPS growth. The stock should also be popular post pandemic like it was before. But REITs have not performed well this year and the market is punishing underperformers in this selloff. ARE should prove well worth holding through the tumult. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.4%) – 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 5.1%) –This preferred stock ETF is rock solid in all but the most tumultuous market selloffs. PGX has been consistently trending back toward the high and the uncertain market will probably edge it over the top. 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 1.9%) – The four-for-one split has taken affect. You should have four times as many shares at one quarter of the price. I believe the split will help stock performance going forward as more investors will be able to afford it. Alternative energy will continue to be popular no matter who wins the election. But stocks in the sector could get a boost if Biden wins. Even after running up to all time highs while the sector floundered, NEE is very strong in this down market so far. HOLD
Xcel Energy (XEL – yield 2.4%) – The alternative energy utility will report earnings tomorrow. I expect solid results that may lift the stock even in this market. It’s a defensive business that also owns the future, which is why the stock is still trading near the all time high. Although the stock is still pricey, I like it in this market. HOLD
