The New Year is a wild one so far in the market with big up and down swings. The Dow was down big Monday and it’s up big today as bank stocks have caught fire.
The market sold down on the first trading day of the year at least partially on trepidation about yesterday’s Georgia Senate runoff elections. There had been a post-election rally because of the anticipation of divided government. But a Democratic sweep in Georgia would rest control of all three branches of government with one party. Some feared that post-election rally could reverse itself if both Democrats won.
It appears that both Democrats have won, although it isn’t official yet. And the market decided to rally anyway. What’s the deal?
The market liked the idea of dividend government because it makes more draconian legislation unlikely. But with just a microscopic Senate majority, the market still believes radical legislation to be highly unlikely. And the Democratic majority raises the likelihood of increased stimulus. It sees the same essential result, but with more stimulus, at least for now.
Bank stocks are flying and driving the market higher. The Financial Select Sector SPDR Fund (XLF) is about 5% higher on the day. Recent portfolio addition U.S. Bancorp (USB) is up over 6%. Banks love the specter of more stimulus spending, looser monetary policy and higher interest rates.
Energy stocks are rallying too but for different reasons. OPEC affirmed a commitment to keep prices higher and the sector has moved higher for the past several days as oil moved above 50 per barrel for the first time in nine months.
While the near-term action is cute, the main market driver remains the prospect of a more full recovery in 2021 as the vaccine removes lockdown restrictions. That should drive previously downtrodden sectors like energy and finance higher. And those stocks are still cheap in an expensive market.
High Yield Tier
B&G Foods (BGS – yield 6.9%) – The packaged food company stock has been on a rollercoaster. After shooting higher by 16% in about three weeks in December, it just gave back all that gain in the past two weeks. There is no identifiable fundamental reason for the retreat as of yet. It peaked in the late summer and has since been bouncing around in a range. But it was up over 50% for 2020.
Going forward, BGS still looks good. Although the torrid earnings growth from the pandemic won’t last, it should have earnings growth far better than pre-pandemic levels for a long time. And the stock is still cheap, at just 11 times forward earnings, with a high and safe dividend. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.9%) – This operator of infrastructure assets picked in mid-November and has been consolidating since. That’s to be expected after the big surge it had in early November. Meanwhile, this coming year looks good. Brookfield invested over $1 billion in new projects that will be online this year. Plus, the transportation and energy assets should get a bump as economies recover. The infrastructure subsector is likely to be increasingly in vogue with investors as well. BUY
Enterprise Product Partners (EPD – yield 8.9%) – This midstream energy giant got a 5% bump in the past two days as oil prices spiked on recent statements from OPEC. While earning are not dependent on commodity prices, stronger prices will likely lead to more volume passing through its systems. After a 30% surge in a short time, the rally petered out before yesterday. But I’m very positive on the stock as the economy recovers in 2021. I don’t think the recent consolidation marks the end of the price surge, but just the end of the beginning. BUY
STAG Industrial (STAG – 4.7%) – This monthly paying industrial REIT has done okay but hasn’t been a great performer in the market recovery. A lot of that has to do with the fact that the REIT sector has struggled while investors gravitated toward growth stocks. But I think STAG is very well positioned ahead of 2021 with its cyclical industrial properties and exposure to E-commerce. HOLD
Verizon Communications (VZ – 4.3%) – This wireless leader is a solid dividend stock. It typically offers a high and dependable payout with little earnings growth in the mature U.S. wireless market. But 5G should be a catalyst for a higher level of earnings going forward as phone contracts are upgraded and more systems and devices access their networks. I also believe that 5G will be a much more important market story after this pandemic fades. It’s solid for now and likely better than that for later. HOLD
Dividend Growth Tier
AbbVie (ABBV – 4.9%) –The stock tends to go up and down on a longer term upward trend, and it seemed likely to pull back from this latest surge to a new recent high. But the stock is hanging tough and indicating that it could break the trend this time around. However, the stock and the healthcare sector could be under pressure if Democrats take the Senate. There was a huge rally on the expectation of divided government that could be reversed in the days ahead. While the stock and sector could be under pressure in the next couple of days, I still like ABBV regardless of the election outcome. HOLD
Altria (MO – 8.4%) – This is a great income stock with a questionable longer term prognosis until it finds a way to replace declining cigarette volumes with other reliable sources of revenue. E-cigarette maker JUUL looks like a swing and a miss. Although the stock has moved higher lately, it still has not broken out of the longer term downtrend. For now, MO pays a massive and safe yield while selling at a dirt cheap valuation. It’s also operationally performing better than expected during the pandemic. It has potential. This is a stock that provided an average annual return of 17.7% between 1926 and 2016. BUY
Digital Realty Trust (DLR – yield 3.4%) – This data center REIT is a leader in a fast-growing business. It had been a great performer as technology boomed during the pandemic. But the stock pulled back after the vaccine announcements as investors looked beyond pandemic beneficiaries. But there is strong growth ahead as technology infrastructure needs continue to grow, especially as new technologies enabled by 5G require more servicing. This is a good entry point into what should be a longer-term winner. I’m holding off on raising the rating to a BUY until the near-term momentum improves. HOLD
Eli Lilly and Company (LLY - yield 2.0%) – This best-in-class pharmaceutical company stock had a huge rally at the end of the year on a plethora of good news including positive clinical trials, higher earnings projections and raising the dividend. As with ABBV, it could potentially be under pressure in the days ahead depending on the election results. But, either way, the company is well-positioned with positive fundamentals and a solid longer term uptrend for the stock. BUY
Innovative Industrial Properties (IIPR – yield 2.8%) – Although this high-flying, best-in-class weed stock pulled off the recent highs, it is still in a solid uptrend and well above the moving averages. It offers huge profitability and earnings growth in a volatile sector that has gotten hot since the election legalized marijuana in still more states. IIPR was up 19% in December and 141% for 2020. I will be quick to pull the trigger and take profits when the stock shows weakness, but for now it makes sense to keep riding the momentum. HOLD
Qualcomm Inc. (QCOM – yield 1.8%) – Sure, this 5G chipmaker stock has a huge move higher since the summer and recorded a 73% price gain for 2020. But I don’t think the party is over. Qualcomm is a primary beneficiary of the 5G rollout as it currently has the only 5G smart phone chip and other important supporting technologies. It’s going to ring that register big time as the royalties flood in over the next year plus. It’s also likely that 5G becomes a market driver in 2021 as the pandemic finally fades. HOLD
Realty Income (O – 4.7%) – This retail REIT has historically been an income investing superstar. Although a few of its tenants are having trouble with the lockdowns, it still grew year-over-year earnings in the first nine months of last year. It should also benefit as the economy moves toward a full recovery. As the pandemic inevitably fades next year, this stock is likely to come back in vogue with yield-hungry investors. And O still has well over 30% to go to get back to the pre-pandemic high. BUY
U.S. Bancorp (USB – 3.6%) – As the election results trickle in and it looks likely that Democrats will capture the Senate with a razor thin majority, banks stocks are on fire. USB is up 6% on the day. The market is expecting more stimulus to be likely along with looser monetary policy and higher interest rates. Those things are good for banks in the near term. USB was well positioned, selling at a cheap valuation ahead of a more full recovery in 2021. This is icing on the cake. BUY
Valero Energy Corp. (VLO yield 7.0%) – The refiner stock is getting a nice bounce from the strong rally in the energy sector over the last few days. Price supportive statements by OPEC have led to a rise in oil prices and oil has broken above 50 per barrel for the first time in nine months. While higher prices don’t necessarily help Valero per se, as crude oil is an input cost, the stock is being lifted by the sector. The main benefit for VLO will be a loosening of lockdown restrictions and a more full recovery in the months ahead. The stock is highly levered to a recovery and should perform very well in the quarters ahead. BUY
Safe Income Tier
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.3%) – This short-term bond fund is a safe port. While the market is promising for the New Year, there are still a lot of uncertainties out there. It’s nice to have something in the portfolio that you don’t have to worry about. Plus, considering the 10-year treasury still yields less than 1%, the yield isn’t bad for safe money by today’s standards. BUY
Invesco Preferred ETF (PGX – yield 5.0%) – This preferred stock ETF is much less volatile than the stock market and provides a big yield. It also provides diversification as preferred stock performance is historically not correlated to the stock and bond markets. It’s a great place to generate a solid yield while rounding out your portfolio. HOLD
NextEra Energy (NEE – yield 1.9%) – This combination regulated and alternative energy utility is also getting a huge bounce today. The market perceives the likelihood of Democratic control of the Senate to be positive for clean energy. NEE is a hugely popular beneficiary of the trend and is one of the first places investors will go. This is a great company anyway and a greater belief in the sector during the new Administration could make it even better. HOLD
Xcel Energy (XEL – yield 2.6%) – This smaller and more volatile alternative energy utility is getting a smaller bump today. While earnings growth hasn’t been that impressive, alternative energy continues to get less expensive to produce and more in demand. The recent hiccup in the stock created a good entry point for the stock as the near term prospects look even better. BUY