Virus Trouble Now, a Booming Economy Later
This year continues to amaze. The market had another big rally this week on news of very positive late-stage trial results for a coronavirus vaccine from pharmaceutical company Moderna (MRNA). The S&P 500 soared to a new all-time high, the first since early September.
Wait a minute. Wasn’t there just a big rally last week on news of another vaccine from Pfizer (PFE)? Why the big rally? How many vaccines do we need?
It’s good news because you never know. The Pfizer vaccine could stumble. The fact that there is another one in the wings makes it more likely that a vaccine will indeed be available in short order. That means a full economic recovery sooner rather than later. And that’s good for stocks.
It may seem odd that the market is rallying in anticipation of the end of the pandemic while the virus is getting worse. Cases are skyrocketing. More lockdown restrictions are being put in place. Politicians are running around canceling Thanksgiving. But the market loves it.
Remember, the market anticipates. It typically looks ahead six to nine months. By then, it sees the pandemic finally being over or close to it, and a full economic recovery that incorporates Main Street companies, not just technology and consumer staples. In six months when the economy is booming, the market will probably be looking to 2022 and fretting about higher interest rates or something. That’s the nature of the beast.
The post pandemic rally may be upon us now, and for the rest of the year. That’s great news for the underperforming energy stocks in the portfolio, Enterprise Product Partners (EPD) and Valero Energy (VLO). The vaccine rallies have brought these stocks back to life as the market anticipates a full recovery. And they are moving higher.
That’s fantastic news because the rest of the portfolio is doing great. Certain stocks are absolutely killing it. The revival of the downtrodden stocks bodes very well for portfolio performance going forward.
High Yield Tier
B&G Foods (BGS – yield 7.1%) – The packaged food company stock has not benefited from the vaccine rallies. The reason it’s being shafted is that the market sees it as a stock that benefited from the pandemic. BGS has returned 58% YTD and 76% over the past year. Such stocks are being cast aside in favor of beaten down stocks that are seen to benefit from the next phase of the recovery. But this stock should be in demand again after this market phase fades because it is now a better company that’s still cheap with a high dividend. BUY
Brookfield Infrastructure Partners (BIP – yield 3.7%) – This operator of infrastructure assets (natural gas pipelines, high-speed data networks, toll roads, and ports) has moved bigly during the recent market rallies. It’s up over 22% in November to a new all-time high. But unlike most beneficiaries of the recent rally, BIP had not suffered in the recession. Sure, it underperformed the market a bit, but it had been slowly trending higher since March. It wasn’t really shunned when the market hated dividend stocks, but the market is loving the stock as it looks ahead to the post-pandemic environment. A pick-up from business in the ports and toll roads as well as recent acquisitions should provide solid growth going forward. BUY
Rating change “HOLD” to “BUY”
Enterprise Product Partners (EPD – yield 10.7%) –The midstream energy company has been undervalued and neglected for so long I can scarcely believe my eyes. It’s up 16% so far in November. It is moving higher with the energy sector, but earnings have been much better than the overall sector. At just over 19 per share, the stock still has miles to go to get to the pre pandemic high of over 30. Hopefully, this strong momentum continues through the rest of the year and beyond. In the meantime, the distribution is safe. Given the strong operation performance, still obscenely low valuation, safe yield, and recent momentum; I am raising the rating to a BUY. BUY
STAG Industrial (STAG – yield 4.7%) – This monthly paying industrial REIT has been range-bound since peaking at a new all-time high in early August. But the business is well positioned with a great supply/demand dynamic for its properties. Also, it has been the historic pattern for this stock to trend higher in fits and starts. I like this stock and believe it will make another upside move in the coming months. HOLD
Rating change “BUY” to “HOLD”
Verizon Communications (VZ – yield 4.1%) – This stock is really the same story since it was added to the portfolio in February. It’s a terrific income stock. It pays a high dividend that is well supported by regular fees. And, like a utility, it has little growth. But the changes coming with 5G could be a catalyst to more robust growth, making this a much better stock. The 5G catalyst timeline has gotten pushed further into the future by the pandemic. That revenue boost may not be realized until 2022. In the meantime, the stock is near the top of its historic price range. It’s not a great entry point for the stock until it proves it can break out to higher level. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 5.3%) – The biopharmaceutical company has shot up over 18% in less than a month. Terrific earnings and a post election rally in the sector have injected momentum into the stock. ABBV has strong fundamentals and the right stuff going forward. It’s defensive in case the rally peters and it offers solid growth for the post-pandemic market. It’s in the sweet spot. Hopefully, the newfound momentum continues for the rest of the year. BUY
Altria (MO – yield 8.3%) – Even this abused cigarette maker stock has rallied 14% in November. It still doesn’t have a notable technical uptrend, but I’ll take it. Despite having written off almost the entire investment in JUUL (which had already been baked into the stock price) Altria had excellent performance over the last quarter. The sky high dividend is safe, which should make MO at the very least a solid high income play. But it should also do better price wise in the broader participation of the neglected stocks that appear likely to accompany the waning of the pandemic next year. BUY
Crown Castle International (CCI – yield 3.2%) – This cell tower REIT moves to its own drummer. After impressively soaring back near the high very quickly after the selloff in March, the stock has been going sideways since May. With a beta of just 0.30, it doesn’t move with the market. That can be a good thing at times. Also, Crown Castle just bagged a new long term lease for 20,000 cell towers with DISH network and insiders have been buying the stock. We’ll see if the stock has another move higher in the near future. HOLD
Digital Realty Trust (DLR – yield 3.1%) – This data center REIT has been in a sideways pivot in the midst of a solid longer term uptrend. The stock tends to bounce around a lot on an upward trajectory. Recently, it has moved to the low point of a typical range. It’s worth watching in the event that the stock breaks the trend to the downside. But I believe another upward move is more likely in the weeks and months ahead. By the way, the company also has a great business in the growing technology infrastructure business. I’ll be watching this one closely. BUY
Eli Lilly and Company (LLY – yield 2.1%) – I like health care right now and I love LLY. Lilly has the most consistent pipeline in all of big pharma. It has vastly outperformed its peers of the past several years and I see no reason why it will not continue to do so going forward. After the election, the sector is likely to continue to be back in favor. While some of the other large pharmaceutical companies have sexy stories right now, Lilly is the one with a proven ability to actually execute. The stock just had a nice bounce off the recent low and we’ll see if the momentum continues in the weeks ahead. BUY
Innovative Industrial Properties (IIPR – yield 3.1%) – This marijuana farm REIT is making great money while other players in the burgeoning industry are still struggling in that regard. Innovative is also growing the earnings at a fever clip with no end in sight. The overall sector has also been up sharply since the election as more states legalized recreational marijuana. The stock has been up sharply in November but until the momentum shows signs of waning, the portfolio will continue to hold the remaining two thirds of the position. HOLD
Qualcomm Inc. (QCOM – yield 1.8%) – Despite fantastic performance of late, this chip maker still sells at a reasonable valuation of 19 times forward earnings. That’s cheap for a fast growing technology company like this. The company is reaping huge benefits as the 5G Iphones roll out and it gets royalties on the sales. It is also well positioned to benefit from the 5G proliferation in many other ways. It has a great fundamental backdrop and strong momentum. HOLD
Realty Income (O – yield 4.6%) – The story behind this retail REIT new addition is simple. It has historically been one of the very best income stocks on the market, and it’s still cheap after a market disruption that won’t last. Despite pain in certain retail areas, the vast majority of Realty’s portfolio is doing fine, and the company still grew earnings over last year in the first nine months of the year. As the pandemic inevitably fades next year, this stock is likely to come back in vogue with yield hungry investors. It’s a good price with a great dividend. BUY
Valero Energy Corp. (VLO – yield 7.0%) – This refiner has been in the crosshairs of the pandemic. It is also by far the worst performing stock in the portfolio. That said, things are turning around fast for the stock. It’s up over 40% in less than two weeks since the first vaccine announcement. It’s one ugly stock in a recession. But it recovers quickly on the other side. It could be that the market and the stock have gotten a little ahead of themselves in the near term. But we got a taste of what lies ahead on the other side of this pandemic. It may still be a bit of a ride, but this stock is highly likely to be a lot higher by the middle of next year. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.6%) – This life science and research lab niche REIT has performed okay in a recovery that has been unkind to safe dividend stocks. But safe dividend stocks won’t be out of style for long, not with the 10-year Treasury paying a meager 0.86%. The stock will continue to generate reliable income and pay you a monthly dividend through the rest of the pandemic and the excitement on the other side. The stock performance won’t light the world on fire. But you don’t have to worry about losing your shirt, and the longer term performance should be solid. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.3%) – This short term bond ETF is a beautiful thing in uncertain markets. 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 delivering as advertised. 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 desire for income 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 1.8%) – It’s been a crazy year in a crazy world. But NEE doesn’t seem to care. It just continues to forge ever higher, despite the price and despite the wild market. It has a formula that is loved in any environment. It offers the safety and reliability of a great traditional utility with exciting growth in alternative energy. You don’t have to worry about the stock but you get a benefit normally reserved for growth investors. Next year will probably be another great one for the stock. HOLD
Xcel Energy (XEL – yield 2.4%) – This smaller alternative energy utility just hit a new all-time high while its utility peers are having a lousy year. Xcel reported great earnings this last quarter. The utility grew earnings 12.87% over last year’s quarter. It also issued guidance for solid earnings for this year and next. Alternative energy is hot stuff. And this stock is a great way for conservative, income-oriented investors to play it. HOLD
