Welcome to 2020
Here we are at the beginning of a new year and a new decade. A pivotal calendar turn like this is a great time to stop, get off the train, look around and see where we are, and where we might be going.
This is a time when Wall Street prognosticators come out of the woodwork with notoriously inaccurate predictions. I’m not going to pretend that I can predict the future. I can’t. That said, it is still a worthwhile exercise to size up the current environment and how things look at this juncture.
We are in the 11th year of a bull market and the 10th year of a recovery. These things never last forever and the current bull market and recovery are already the oldest on record. You get a sense that a recession is looming somewhere in the not-too-distant future. And that tempers investors risk appetites. For that reason, I believe that safer plays in REITs and Utilities will continue to do well.
Although we are way late in the cycle, the bull market could last for a while longer, perhaps years. This has been a slow recovery and the normal excesses that usually accrue at this point have not. As well, the economy got very late-stage stimulus in the form of tax cuts and deregulation. The Fed also lowered rates last year.
Although anything is possible, there is no reason to believe, at this point, that the bull market will end in 2020. While the 30% plus S&P 500 returns of 2019 are highly unlikely in 2020, it could still be a solid year. The economy is still strong and there are no signs of recession.
Looking further down the road, it is a lot tougher to evaluate the market. Too much will depend on events that haven’t happened yet and are unpredictable. The only thing that I can confidently predict, at this point, are megatrends that will continue, including these three.
• The aging of the population
• The growth of the global middle class
• The continuing proliferation of new technology
These things are well worth considering if you have a longer-term perspective. Stocks that are well positioned in front of these trends will likely post strong performance over time.
For now, while the overall market is expensive and near an all-time high, there are still a lot of attractive opportunities, particularly in the long-neglected value stocks. There are also some powerful trends that should drive performance in certain areas of the market in the year ahead, like 5G and marijuana. I like the way the current portfolio is positioned with safe plays in REITs and Utilities, several value stocks that have regained momentum, and 5G- and marijuana-related positions.
High Yield Tier
Brookfield Infrastructure Partners (BIP 50 – yield 4.0%) – The global infrastructure company had a great 2019, returning over 50%. That said, valuations aren’t that stretched because the stock had a rotten 2018. Going into 2020 I still like the way the stock is positioned as demand for safe companies that own steady revenue-generating assets should remain strong. As well, infrastructure is a growing subsector that is increasingly popular with investors, almost like a Utility on steroids. The stock is still rated HOLD because it has had a solid run up and this might not be the ideal entry point. HOLD
Community Health Trust (CHCT 42 – yield 3.9%) – Of all the REITs in this portfolio, this smaller Healthcare REIT performed best in 2019, returning over 50%. It is also faring the worst as the Real Estate sector has been struggling during the market rise. While all the REITs struggled for a while, the other ones have recovered or at least stabilized over the past few months, but not CHCT. The stock is down over 10% in the past month. This REIT is probably taking it the worst because it had been the highest flying. Valuations had gotten stretched which is why I sold two thirds of the position while things were good. CHCT is still holding above its 200-day moving average, so it has support and could rebound. But if there is further weakness I will likely sell the remaining position. HOLD
Enterprise Product Partners (EPD 28 – yield 6.3%) – I’m very positive on this midstream energy company for 2020. Other value areas stocks have already rebounded but energy has been lagging. Everything is working for this company right now, except performance. Earnings are growing as many new projects continue to come on line. The dividend is well supported. And the stock is cheap in a high priced market. At some point, investors will awaken to the story in a yield starved world. Energy stocks are selling at a huge discount to the S&P 500, despite the fact that oil prices gained 35% in 2019. EPD is still selling 30% below the 2014 high and revenues are up 25% on a trailing year basis. It’s a great yield and a great value here. BUY
STAG Industrial (STAG 31 – 4.5%) – The industrial REIT is a low drama, steady performer that pays dividends every single month. The stock just slowly trends higher with less volatility than the overall market. It’s basically a safe, consistent performer that pays a steady income. Valuations are not out of whack but not cheap either. I like it that this stock held its own during a rough period for other stocks in the sector. HOLD
Dividend Growth Tier
AbbVie (ABBV 89 – 5.3%) – Since rising 40% from the summertime lows, the biotech giant has stabilized but still has an upward bias. And it is still selling at a very cheap valuation while the environment surrounding the stock is markedly improving. Healthcare has been the best performing market sector of late with biotech stocks leading the pack. It looks like attractive valuations and a defensive business are outweighing concerns about election talk regarding healthcare reforms. Meanwhile, the pipeline looks great and the merger with Allergan (AGN) should go through early next year. The stock already had value and a great dividend. Now is has momentum too. BUY
Altria (MO 50 – 6.7%) – The FDA is reportedly set to ban all e-cig flavors except tobacco and menthol. It affects the 35% stake Altria took in e-cig market JUUL a year ago. The stock has had solid momentum since early October when value stocks started to come alive. But there is always another negative headline around the corner to knock the stock back. In this case, JUUL already stopped selling flavors this past fall and the ruling might actually help JUUL versus its competitors. E-cigs will likely continue to take their lashes in 2020. But I believe Altria will perform well anyway. The company’s bottom line continues to grow and the huge 6.7% dividend is safe. BUY
Crown Castle International (CCI 141 – yield 3.5%) – This 5G cell tower REIT was taking on the chin during the sector selloff this past fall. CCI had fallen from a high of about $150 to about $130. But it has since rebounded nicely and recouped most of those losses. It had been one of the best performing REITs and it fell hard when the sector had its comeuppance. But at the end of the day investors seem to realize that CCI should continue to experience robust and growing demand for its properties as the 5G buildout continues in haste. I believe 5G related stocks should have a strong 2020. BUY
Innovative Industrial Properties (IIPR 73 – yield 5.4%) – This owner of marijuana farms and greenhouses has been all over the place lately. Over the past couple of weeks it’s been up 6% one day and down 3% another. It was also a wild ride last year. The stock returned over 70% for 2019. Yet, IIPR is trading 47% below the 52-week high. The carnage in the marijuana sector precipitated its decline but, unlike most companies in the sector, this REIT is making money. The yearly increase in price actually lagged revenue growth by a wide margin. The company has an expected earnings growth rate of 80% in 2020 and the beaten down sector is due for a rebound. I’m expecting a strong January as investors who sold for tax losses in December buy it back. BUY
Qualcomm Inc. (QCOM 87 – yield 3.0%) – The 5G chip company is set up well for a sizable earnings boost in the quarters ahead as demand for its 5G chips hits the bottom line. The growing earnings will prevail and I believe the stock can move substantially higher in the year ahead. In the near term it should benefit from positive trade headlines and the phase one China deal will likely be signed later this month. Some argue that the benefit of 5G is somewhat baked into the price already but I disagree. 5G is not a garden variety rollout and the earnings growth should be quite substantial. This is still a good entry point. BUY
Valero Energy Corp. (VLO 93 – yield 3.9%) – This refiner stock had a great run, moving from just over $70 per share in late August to over $100 in the first half of November. It has since pulled back to about $95. It looks at this point like a natural consolidation after a strong move higher. The stock is still well above the range in which it had been trading all year. Valero is coming off a downtrend in a longer term uptrend. Refiners have been one of the most profitable subsectors of the market over the past five years. Plus, the company has been investing in new projects that will come on line this year and boost the bottom line. Crack spreads have been improving and 2020 is shaping up to be a much better year than 2019. BUY
Safe Income Tier
Alexandria Real Estate Equities (ARE 160 – yield 2.5%) – Even this consistent performer pulled back ever so briefly during the REIT selloff. But it’s right back on track and still trading above its moving averages. Demand for its rare life science and research lab facilities remains strong and investors are still attracted to the defensive nature of the business. It also helps that investors have a newfound appreciation for anything Healthcare in recent months. The stock returned over 40% in 2019 and has blown away the performance of its peers in every measurable period over the last 10 years. The problem is that valuations are getting a little high to initiate a position at the current price. On valuation reasons alone it is just a HOLD. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.8%)
The best thing I can say about this short-term, investment grade bond ETF is that there’s nothing to say. These bonds remain steady and predictable, just like they should. It’s comforting to have something in a portfolio that pays interest and is unaffected by market volatility. It tends to steady out portfolio performance and can help keep you invested in times of volatility. It also offers a nice yield for bonds that mature at the end of the year. BUY
Invesco Preferred ETF (PGX 15 – yield 5.5%) – This preferred stock ETF is a great way to get a high yield and diversify into an asset class that is not correlated to the stock or bond markets. It is a rare way to get a good yield in a low interest rate world without taking on much risk. The performance has been solid and it remains a nice position to have in the late stages of the market cycle where uncertainty in the stock market continues to remain a factor. BUY
NextEra Energy (NEE 241 – yield 2.1%) – The market soared on the first trading day of the year and investors expressed their contempt at being slowed down by anything safe. Utilities and REITs took a beating. But don’t let this opening day price action fool you. There is still a strong appetite for safety and yield and NEE is one of the very best in class. This largest American utility by market cap combines steady cash flow from its stellar Florida Power and Light division with growth from the alternative energy business. NextEra is a huge player in fast-growing clean energy and is the world’s largest producer of wind and solar energy. It is also shareholder friendly, targeting 12% to 15% annual dividend growth through 2024.The only kink in the armor is a high valuation. But momentum still looks great. HOLD
Xcel Energy (XEL 63 – yield 2.7%) – This alternative energy utility remains one of the very best of the sector and has returned over 100% since being added to the portfolio. We’ll see if it once again tests the highs in the months ahead. Momentum has petered out of late though and it is still below the September high. It’s still trading above the moving averages and the utility will report earnings at the end of this month. We’ll see what happens. HOLD
