Prepare for Trouble Ahead
The S&P 500 has now regained more than half of what it lost in the bear market selloff. We are still in the midst of a six-week rally, although it has leveled off in the past few weeks. What can you expect going forward?
Fear of a depression is waning and the market found a bottom as the economic restart is underway sooner than originally feared. That’s great news. But the market recovery may have gotten ahead of itself.
To be clear, I believe we will recover from this crisis. The American economy is resilient and the economic engines will restart and roar again in short order. The market and the economy will again flex their muscles and perhaps a lot sooner than many people expect. But we probably aren’t out of the woods yet.
The market is sensing an end to the virus cycle. But it has not yet grappled with the economic disaster cycle. The battle may be winding down but the damage assessment is just beginning. First-quarter company earnings only reflect a couple of weeks of the lockdown and two months of a booming economy. The real pain lies ahead.
There are 30 million new unemployed. Major banks are forecasting a 30% to 40% contraction in second-quarter GDP. We’ve never seen such carnage. The financial hardship has not yet been realized. There will be bankruptcies and dividend cuts. And there will be chain reactions to the financial disaster. As the virus news fades, the economic news will take over.
Of course, the downturn will be short term. And it’s self inflicted, not the result of a crumbling economy. It is caused by government restrictions. And the removal of those restrictions will revitalize the economy. But the coming weeks and months will present headlines that could easily cause investors to lose their newfound mojo. And there is a good chance that they will.
In short, the economy and the market will come back from this, but probably not before more trouble. The path to economic strength and a booming market is ahead, only with more bumps in the road than the market seems to be currently anticipating.
If the market does take another drubbing, it will probably be short lived. Don’t fear it. Expect it. And prepare to exploit it.
High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 5.5%) – Infrastructure in not only defensive; it’s the hot new chick in school. More and more, infrastructure is becoming a hot investment sector as countries all over the world try to remedy their shortfalls. The latest virus shutdown has increased speculation that infrastructure stimulus spending is likely in the post-coronavirus world. The company should maintain the dividend through the crisis and be a winner afterwards. BUY
Community Health Trust (CHCT – yield 4.5%) – The small healthcare REIT announced earnings that beat expectations and raised the dividend. The performance in the down market has been disappointing and CHCT has underperformed the S&P 500. Part of the reason is that this stock had been a favorite in the bull market and gotten overpriced. Fortunately, two-thirds of the position was sold during the good market. But the remaining position is now reasonably priced and poised to do well from here. HOLD
Enterprise Product Partners (EPD – yield 10.4%) – The energy sector has been ravaged. And it might be too early to go bargain hunting. That said, this midstream energy giant is far less vulnerable to hard times in the industry than the vast majority of energy companies, as its revenues are fee based and not affected by commodity price swings. In fact, it just announced solid first-quarter earnings that beat estimates. The stock has fallen more than twice as far as the overall market in this downturn. And it was underpriced already. It’s probably still too early to jump in. But the dividend is safe and it is selling at a fire-sale price with a longer-term perspective. HOLD
STAG Industrial (STAG – yield 5.7%) – The bad news is that this REIT is more cyclical than its peers as it invests in industrial properties. It had also gotten pricey in the bull market. As a result, the stock is down a little more than the overall market in the downturn. The good news is that its warehouse properties are booming as online shopping is exploding and the need for warehouse storage of properties is surging. The REIT also announced better-than-expected earnings and few clients having trouble paying rent so far. The high and safe dividend, along with the now reasonable price, makes this a solid holding from here. HOLD
Verizon Communications (VZ – yield 4.3%) – The wireless giant was chosen for the portfolio at the height of the bull market because it has very defensive earnings and strong growth prospects ahead with the rollout of 5G. Boy, has it come as advertised. While the S&P 500 is down 15% from the high, VZ has fallen less than 3%. During the lockdown, cell phone plans are proving to be consumer staples on par with food and housing as people rely on their phones more than ever. But the exciting part of the story lies ahead. This stock will add an element of strong earnings growth when 5G comes out. 5G will also be a big market driver in the post-virus world. BUY
Dividend Growth Tier
AbbVie (ABBV – yield 5.5%) – The biopharmaceutical giant is only down about 10% from the high. There was good news this week as the company got regulatory clearance to buy Allergan (AGN). I don’t think approval of the deal was ever really in doubt, but the market liked the news nonetheless. AbbVie announced earnings this week that beat expectations as its newly launched drugs continue to kick butt. The company also reiterated earnings guidance of over 8% growth for 2020. That’s a huge deal in this coronavirus world. AbbVie is still an undervalued healthcare juggernaut with a fat and safe dividend. It’s a great holding through this bear market and beyond. BUY
Altria (MO – yield 9.1%) – The cigarette maker announced stellar earnings that grew 18.5% as people smoke like crazy during this crisis. But the stock fell for the week anyway as the news about e-cigarette acquisition JUUL continues to be terrible. JUUL is now exiting several European markets. Let me be clear: Even if JUUL becomes absolutely worthless, this stock is undervalued. It is a rare consumer staple with earnings that grow through this recession. The dividend is safe. Unfortunately, the market hasn’t been agreeing with me so far, but it will come around eventually. HOLD
Crown Castle International (CCI – yield 3.0%) – Earnings for this cellular infrastructure REIT met estimates and confirmed prior estimates for the year. Cellular service is a main technology helping the country through this crisis as people depend on the service more than ever as they are stuck at home. As well, new 5G technology continues to roll out in haste, pandemic or no pandemic. For those reasons, the stock is only down slightly, and much less than the overall market, so far in this crisis. It was downgraded to a “HOLD” last week because the stock isn’t cheap enough to acquire in my view. However, it is a rock-solid stock to hold through the rest of this crisis and beyond. HOLD
Innovative Industrial Properties (IIPR – yield 5.3%) – This marijuana farm REIT will report first-quarter earnings after the market close today. Analysts expect 88% earnings growth this year and marijuana use has increased during this lockdown. So, I expect the report to be good and it could propel the stock higher. This is a rare marijuana stock that is actually highly profitable right now. Prospects for the sector are actually improving as cash-strapped states are more likely to legalize marijuana for the tax revenues. IIPR may be a little too sexy for this volatile market, but fundamentals almost always win in the end. This stock should be a big winner. HOLD
Qualcomm Inc. (QCOM – yield 3.4%) – The chipmaker announced earnings last week that beat expectations. But the news isn’t great. The company expects 30% lower phone sales during the pandemic. Semiconductor stocks are cyclical. Qualcomm does a lot of business in China. Phone sales are tanking. Yet, the stock is still down less than the overall market in this selloff. What does that tell you? The market is expecting big things for this company as 5G rolls out and this company has the only smartphone chip for the new technology. Hold on and wait for QCOM to inherit the post-coronavirus market. HOLD
Valero Energy Corp. (VLO – yield 6.2%) – These are dark days for refiners as demand for gasoline and diesel plummet during the lockdown. But Valero was chosen because it is the most efficient and financially strong large U.S. refiner. The company took huge write-downs in the first quarter. It also pared back on capex spending, stopped stock buybacks and borrowed money to endure the downturn. The company now has a $6.3 billion cash war chest to weather the storm. The market is forward looking and the worst is likely over for this stock. Demand should spring back in the economic restart while crude oil costs will remain cheap. It may take a while but I’d be very surprised if this stock doesn’t trend a lot higher over the intermediate term. HOLD
Safe Income Tier
Alexandria Real Estate Equities (ARE – yield 2.7%) – This defensive life science and research lab REIT announced solid first-quarter earnings. Revenues grew 22% year over year and new acquisitions factored in an earnings increased 6.4% from last year’s quarter. Guidance for the rest of 2020 was only lowered very slightly and the company has pulled back on its acquisitions strategy. The company has plenty of cash on hand as well. The defensive business is likely to be little affected by the recession and the dividend is safe. This is a great stock to hold through the crisis and beyond. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.7%) – This short-term bond ETF has held up well through the crisis because it isn’t in the stock market, the bonds are short term, and they are investment grade-rated. It’s a great holding in times like these, and it is delivering as advertised. BUY
Invesco Preferred ETF (PGX – yield 5.4%) – This preferred stock ETF continue to recover from a rather disturbing selloff in the market panic. It has a high yield but it does have downside if the market takes another plunge. That said, it is only down about half as much as the stock market in this downturn. The high dividend and diversification from the market should also bolster demand for this fund in the post-coronavirus market. HOLD
NextEra Energy (NEE – yield 2.4%) – This regulated and alternative energy utility is one of the very best stocks a conservative investor can own. It has steady income from its best-in-class regulated utility in Florida and solid growth from its world-leading alternative energy business. The stock is down during the crisis, albeit less than the overall market, primarily because it had risen to dizzying heights during the bull market for the aforementioned reasons. Its relative value is being blurred by the fact that so many other good stocks are selling at cheap prices. But this stock will rise again. Safety and growth doesn’t go out of style for long. If the market again turns south, I will recommend a BUY on NEE at a cheaper price. HOLD
Xcel Energy (XEL – yield 2.7%) – This smaller alternative energy utility is only down about 3% year-to-date, despite the fact that the price had run up very high in the bull market. This was a superstar of the bull market that is still outperforming the market during the downturn. This defensive utility with growth should flourish in the post-crisis market as scared-straight investors seek reasonable income and solid total returns when things return to normal. HOLD
