Market Prognosis May be Changing from Stable to Good
Don’t look now but things could actually be turning optimistic for the market. It’s looking like this could be more than just a bounce back from the overdone December lows. We could be looking at a very strong 2019 for the market.
Of course, I use the words ‘might’ and ‘could’ for a reason. There is still risk out there. But a catalyst may be emerging for strong upside. There is increasing optimism for a U.S./China trade deal. President Trump has indicated that he will let the upcoming deadline to raise tariffs on Chinese goods slide while the two sides continue to negotiate.
Anything can happen, of course. But a trade deal would be huge. China has good reasons to strike a deal because it is truly suffering from these trade frictions. Its market and economy are feeling the brunt much more than ours. And things aren’t all that stable in China. The country could really benefit from a deal at this point. The Trump Administration would also dearly love to claim a victory.
A trade deal would be an immediate huge positive for the market as a main source of concern would be eliminated. A trade deal would also improve the global growth outlook. The global slowdown probably got overblown and a positive catalyst like a trade deal could really change the outlook. Meanwhile, the Fed will not raise rates anytime soon. In fact, the Fed will likely issue a positive economic outlook at the next meeting.
So, we could conceivably be looking at strong growth at home, a trade deal with China, an improving global economic outlook and a neutered Fed. All the main concerns of the falling market at the end of last year could go away. And stocks are now cheaper!
In short, we have a stabilized market with a potential huge upside catalyst floating around out there. Thus the market prognosis is changing from pessimistic to good with a chance of great.
High Yield Tier
Rating change from “BUY” to “HOLD”
HOLD – Community Health Trust (CHCT $34 – yield 4.7%) – This REIT operates properties that provide outpatient health services in non urban areas throughout the US. Not only did it outperform the market in a down year but it has soared 25% since the December 24th low, 12.4% in the past month and 4.75% in the last week. It offers a strong yield and good earnings growth but it has gotten pricey. It’s a victim of its own success and I am downgrading the rating to HOLD based entirely on valuation.
HOLD – General Motors (GM $39 – 3.9%) – Last week’s earnings were strong and better than expected ($1.43 per share versus $1.22). However, earnings were still down a bit from the peak in 2017. GM is actually doing forward looking things these days like a massive restructuring that will significantly cut costs and breakeven car sales ahead of the next recession. It’s also investing heavily in future technologies like electric and self-driving cars. The only thing I don’t like about the situation is the external environment for autos with the slowing global economy, a late cycle in the US and trade frictions with China. For now I’ll hold it and see how much further it can run.
BUY – STAG Industrial (STAG $28 – 5.0%) – This industrial REIT has been a consistent outperformer with a high yield that pays on a monthly basis. STAG announces earnings on Wednesday and there is no reason to believe they won’t be good. It has been consistently outperforming expectations.
Dividend Growth Tier
BUY – AbbVie (ABBV $80 – 5.4%) – As I mentioned last week, this biopharmaceutical company is down over 30% from the 52-week high because of higher than expected foreign competition for its blockbuster drug Humira. The company has more than enough new drugs and drugs in the pipeline to offset the problem. Meanwhile it pays a 5.4% yield with a dividend that has increased for 46 straight years, including 40% last year and an approved 19% this year. There is some near-term uncertainty but with the stock selling at a single-digit forward PE ratio, double-digit anticipated profit growth for the next five years and a fat and growing payout, you should be well rewarded for holding over the longer term.
BUY – Altria (MO $50 - 6.4%) – The panic appears to have subsided in the cigarette maker. Skepticism about its new purchases of E-cigarette maker JUUL and its investment in marijuana company Cronos (CRON) still remains, though. The solid fourth quarter earnings along with great results at JUUL changed the momentum and the stock is up about 15% over the past three weeks. Meanwhile, it pays you 6.5% until results prove the critics wrong and, at a cheap price already, it should be strong in a down market.
HOLD – American Express (AXP $107 – yield 1.3%) – Everything is going great right now for the credit card giant. It had a great 2018 and the business seems to be firing on all cylinders. Meanwhile, the stock is cheaper than rivals Visa (V) and Mastercard (MA). The only thing I don’t like is the slowing global economy. AXP really took it on the chin when the global economy tanked a few years ago, but it may have more room to run for a while.
HOLD – CME Group (CME $179 – yield 1.6%) – The company operates exchanges that trade derivatives. Volatile markets are great for profits but the markets are settling down. After a great run I took some money off the table last week. The company announces fourth quarter earnings on Thursday. Given the volatility in the fourth quarter they should be strong.
Safe Income Tier
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ $21 – yield 1.9%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL $21 – yield 2.4%)
These short term funds should hold strong no matter what happens out there. The funds not only provide a good safe place to diversify away from stocks, but they can provide a great source of funds to get in on the cheap after the next bear market.
HOLD – Consolidated Edison (ED $79 – yield 3.6%) – This is a safe and solid utility with a decent yield that should be rock solid. True, the stock has underperformed its peers but utilities have been very strong lately and this stock has been trending higher, albeit slowly. It’s still worth holding for now. I believe safety has a good chance of coming back into vogue in the months ahead.
HOLD – Ecolab (ECL $162 – yield 1.1%) – It was another strong week for a stock that seems to trend higher week after week. The cleaning and sanitizing service company is following a strong year and strong down market performance with good performance in a strong market. As well, defense is likely to be a popular place for investors going forward. The only thing holding me back from upgrading it to a buy is that it is at the 52-week high and not particularly cheap here. But the momentum is strong and it has excellent down market resilience if things turn south.
HOLD – Hormel Foods (HRL $44 – yield 1.9%) – If you want safety and reliable performance a food stock is a great place to be. Food is among the most defensive industries out there as people still need to eat in a lousy economy. But this stock has consistently outperformed the market during good times as well. It’s a home run. As with, EC, he only thing holding me back from rating this one a buy is that it is at a new 52-week high, and also not particularly cheap. Plus it is announcing earnings next week. The combination is somewhat risky so I will keep it a hold for now.
HOLD – Invesco Preferred ETF (PGX $14 – yield 5.8%) – This is a great place to diversify away from stocks and bonds and get a high yield in a portfolio of preferred stocks. Performance of the fund had faltered a little bit this past fall, along with the rest of the asset class. But it has been doing very nicely since the market lows. I’ll be watching closely to see if it falters again in a down market.
HOLD – McCormick & Co (MKC $129 - yield 1.8%) – The stock continues to crawl back nicely after getting hammered after a lower than expected earnings report in late January. The stock had a blowout 2018, returning 39%, and now it’s coming back down to earth. MKC is still well off its 52-week high of $156 per share. While it has not performed nearly as well as some of the other defensive positions in the portfolio of late, it’s cheaper than they are on a relative basis.
BUY – NextEra Energy (NEE $183 – yield 2.4%) – This utility that combines the steady cash flow of regulated Florida Power and Light with the growth of alternative energy big shot NextEra Energy Resources has consistently outperformed the market and the Utility Index. The stock just had a great week and is now very near its 52-week high. It has strong expected growth and is a utility that is king of alternative energy. It will likely be seen very favorable as the green debate continues. I expect the stock to keep moving past the 52-week high.
BUY – UnitedHealth Group (UNH $263 – yield 1.4%) – The health insurer just had a rare down week. Fundamentally, everything is going right for this company; profits are strong and the sector is doing well also. The main risk right now is legislative risk, changes in the healthcare laws. A lot of noise is being made in that regard, but I don’t believe it is likely that the two parties will work together on anything right now. That could change after 2020, but for now I think the sector is quite safe. On a technical basis this stock is very strong and should have more upside near term.
HOLD – Xcel Energy (XEL $53 – yield 2.7%) – This is a good strong utility with stability and strong growth. Being a leader in alternative energy it is benefitting from all the Green New Deal talk. Pressure for alternative energy will likely increase, even though the new proposal will never become a reality any time soon. The stock broke through a key resistance level and is now marching toward the 52-week high. We’ll see if it can break through that but right now I like the momentum.
