Some Weird Stuff
I mentioned last week that the market looked a little frothy after rising 72% from the March lows and about 20% since the beginning of November.
The market is down today with the Dow falling 400 points so far. It might get uglier before the day is over. Of course, I don’t know if today’s action indicates the beginning of a steeper selloff or not. But either way, the market is overdue for a pullback.
The market never goes straight up for long. Pullbacks and corrections are normal and healthy in even the strongest bull markets. I’m still bullish about the rest of the year and will consider a pullback a buying opportunity ahead of a promising year.
The economy, which has exceeded expectations at every step of the recovery so far, will remove the remaining shackles as lockdown restrictions subside with the vaccine over the course of the year. A full recovery and booming economy as well as trillions in government stimulus and low interest rates should be very good for stocks.
We’ll see what happens with the market over the next few weeks and months. In this update, more profits will be taken off the table with a sale of the B&G Foods position and a sale of one third of AbbVie (ABBV). This follows last week’s profit taking in Eli Lilly (LLY) and Innovative Industrial Properties (IIPR).
There is also some weird stuff going on in the market.
The High Yield Tier position B&G Foods (BGS) soared over 13% on Monday, after having been up 38% at one point during the trading day. It was then up another 10% on Tuesday, and it’s up over 18% so far today. Yet, there is no news at the company. What the heck?
It seems to all be about short-term trading shenanigans. There have been a number of “short squeezes” lately. Groups of investors, assembled on a social media platform, have been piling into stocks that hedge funds are betting against by taking short positions. The buying forces the stock price higher, which in-turn forces hedge funds to cover their short position by buying the stock, resulting in even more buying.
They have most notably affected gaming retailer GameStop (GME), which has risen from 17 per share to the current 326 in just a few weeks. Several other stocks have risen dramatically as a result of these activities, including our own BGS.
This is a brand new phenomenon. Social media is apparently flexing its newly discovered muscle in the investment world and pushing around professional speculators. I don’t know exactly what this is or what to expect. It could be that after these social media investors are done playing, whenever that is, the stock will crash back. BGS is currently trading at 45 per share, making for an 80% return on the stock since July, far above what I expected. Let’s take the money and run, before these knuckleheads change their tune.
High Yield Tier
Rating change “HOLD” to “SELL”
B&G Foods (BGS – yield 5.6%) – These are strange days indeed for this packaged food company stock. I honestly don’t know if the stock will continue to forge ever higher for a while, or if it will come crashing down in 5 minutes. But I’m not going to stick around to find out. I’m content to take the 80% profit here instead of speculating about what these pajama boys might do next. SELL
Brookfield Infrastructure Partners (BIP – yield 3.7%) – This infrastructure partnership stock has basically been in a slow slog higher since March. It just recently made new highs but is still reasonably valued. The future looks bright too as recent acquisitions will boost earnings, its transportation assets recover with the economy, and the infrastructure subsector becomes increasingly in vogue as the pandemic fades and the new Administration focuses more on infrastructure spending. BUY
Enterprise Product Partners (EPD – yield 8.5%) – The midstream energy stock is just coming off a dip in an uptrend. It’s a great entry point. The stock is dirt cheap with an amazing and safe yield ahead of what promises to be a much better year for business. There is also news that the new Administration is cracking down on pipelines and energy companies. That tends to benefit the already established ones, of which EPD is the poster child. The stock should also get a boost after it announces earnings next week. BUY
STAG Industrial (STAG – 4.6%) – This monthly paying industrial REIT has trended sort of sideways and down since the summer. It quickly recovered to new highs after the bear market but then ran out of gas. But the future looks bright as it is a cyclical REIT ahead of a strong recovery and industrial properties continue to be in high demand. REITs haven’t had a good time of it in recent months but that should change as well going forward. I like the way STAG is positioned from here and I love the monthly payout. HOLD
Verizon Communications (VZ – 4.4%) – This wireless giant announced earnings that beat expectations earlier this week and the market yawned. Adjusted earnings grew over 7% over last year’s quarter and Verizon showed resilience in the pandemic economy. But there wasn’t really anything new and exciting. The company announced a continued focus on 5G, which has not yet boosted the bottom line but may in future quarters. For now, it’s a good down market stock at a time when the market is frothy and it pays a solid dividend. It could also benefit in the months ahead as 5G becomes a bigger story in the market. HOLD
Dividend Growth Tier
Rating change “HOLD” to “SELL 1/3”
AbbVie (ABBV – 4.8%) – This is a fantastic company longer term. But it is likely near the high point of the near-term range. With the market high and looking wobbly, it’s not a bad time to take a third of the position off the table and lock in a solid profit. We can always buy that third back if and when the stock behaves in a way consistent with the recent pattern and pulls back for a little while. SELL 1/3
Altria (MO – 8.1%) – Yeah, MO is a good down-market stock that sells at a cheap valuation and pays a very high and safe yield. Although the price has been on a longer term downtrend, it looks okay in the current environment. That’s been the story. But that may be underestimating the stock. It could benefit a lot from the increasing legalization of marijuana and find the growth catalyst there. There are also other promising products. It’s a safe income stock for now that could morph into a lot more. BUY
Broadcom Inc. (AVGO – yield 3.1%) – The market could turn from bullish to bearish. The virus could worsen and the recovery could be delayed. Politics could get even uglier. But 5G is coming fast regardless of that stuff. And Broadcom will benefit hugely. I could point out clever nuances about the company and stock, but the story is really as simple as that. AVGO should benefit in terms of higher earnings and more investor interest as the pandemic fades in the months ahead. BUY
Rating change “HOLD” to “BUY”
Digital Realty Trust (DLR – yield 3.2%) – I like this REIT. And I like it now. Data centers are a growing business, and earnings and the stock should continue to benefit from that fact, as they always have. The stock tends to bounce up and down on an upward trend and it’s at a low point now. DLR fell below the 50-week moving average. Every time that has happened over the past several years, the stock has come back and rallied strongly. With a beta just 0.11, it doesn’t really care what the overall market does as well. And I’m not afraid to own it if the market turns south. BUY
Eli Lilly and Company (LLY - yield 1.7%) – There was more good news for this big pharmaceutical company over the past week. Trial results reported that its Covid-19 antibody cocktails (in a joint venture with Regeneron) reduced death and hospitalization by 70%. It adds to a plethora of good recent news for the company, and LLY sprung to a new all-time high. I love the company because it is well run and has one of the best pipelines in the industry.
But LLY has soared 63% since the end of October. That a massive move in a short time for a big pharma stock. We took some profits last week as a third of the position was sold. It is very much within the stock’s personality to pull back after such a run up. LLY is still attractive longer term, but it made sense to take some money off the table in this frothy market. HOLD
Innovative Industrial Properties (IIPR – yield 2.6%) – This is a great REIT that is making money and growing earnings like crazy. The marijuana sector is hot too. It could forge still higher. But IIPR can be volatile and no stock goes up forever. After a 180% return in a little over a year, we took profits on a third of the position last week. That leaves just one third of the initial position left. HOLD
Qualcomm Inc. (QCOM – yield 1.6%) – Despite the 100% return in the position so far, 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 – 4.6%) – This is a good down market stock that sells at a historically very cheap valuation and pays a strong and reliable dividend. It’s also true that the stock should benefit as the pandemic fades and the economy gains more traction later in the year. The stock doesn’t really deserve to be as cheap as it is because the REIT grew earnings in the first nine months of the year despite the lockdowns. Despite lackluster performance since the summer, I like it now. BUY
U.S. Bancorp (USB – 3.7%) – I expect good days for banks ahead, for the rest of this year and beyond. This best-in-class bank is still miles below the pre-pandemic price, and business should be better than pre-pandemic business as a full recovery boosts both interest rates and loan demand. It should also continue to be a much better bull market for banks and financial stocks than the last one. BUY
Valero Energy Corp. (VLO yield 7.0%) – This high leverage play on a full recovery is back up near the post-vaccine high after a brief consolidation. There are no guaranties. But if the near full recovery later this year that the market has already at least partially priced in comes to fruition, VLO will most assuredly move higher from here, and perhaps significantly so. The refiner announces quarterly earnings tomorrow and it could get a boost. We’ll see. BUY
Safe Income Tier
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.2%) – 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 about 1%, the yield isn’t bad for safe money by today’s standards. BUY
Invesco Preferred ETF (PGX – yield 4.9%) – 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 1.6%) – The combination regulated and alternative energy utility announced fourth quarter results that beat estimates. The company grew adjusted earnings per share 11.1% for the quarter and 10.5% for 2020. Earning were largely driven by the alternative energy business which grew earnings by 15% for the year.
Future earnings growth is likely to be driven by a sizable backlog of alternative energy projects. The utility guided to 7% overall growth for 2021. The stock has pulled back 4% so far today, albeit in a down day. It’s mostly just selling on the news. I don’t see any reason for negativity in the report. If there is further weakness I will raise the stock to a BUY. HOLD
Xcel Energy (XEL – yield 2.6%) – This smaller and more volatile alternative energy utility is near the low point in a pattern that moves up and down on a longer-term uptrend. It’s been struggling of late as investors focus on other things. Fourth quarter earnings will be announced tomorrow and we will see if the recent weakness is normal volatility or is something more based on fundamentals. BUY