One thing that most investors are looking to pounce on are those stocks and sectors that have been crushed in the wake of the pandemic at the right moment in time when it’s a legit breakout and not another false re-opening rally that fades like the first one that fizzled out in early June.
It sure would be nice to lock and load on the industrial, hospitality, travel, restaurant, office and retail sectors that have started to percolate again this past week. The set of charts below from the COVID Tracking Project shows the most recent data for August, and though it’s early to call it a trend, the numbers are improving across the board.
Now, we’re only one to two weeks into this positive change in the data, but the market senses that this might be a genuine turning point for these sectors if the bullish price action late last week is any indicator. Take notice of the downward move in the charts.
Of all the data points that I’ve been watching the closest, it has been emergency room admissions related to COVID-19. And here, too, the numbers are just beginning to get better week by week. Again, it’s too early to call it a definable trend, but there is reason for the market to think that even while the world waits on a vaccine, the virus is showing signs of dissipating.
And whatever set of reasons or rationale one wants to apply, since the topic is so politically charged, we all should be quick to note that the stock market doesn’t care about who’s right, who’s wrong or why this or why that. It just cares only that the outlook for those sectors of the economy that have been hammered the most by the coronavirus are seeing a glimpse of daylight.
Under this premise, income investors may want to take a hard look at some of the highest quality brick-and-mortar real estate investment trusts (REITs) for attractive income and potential capital appreciation. I am fully aware of the effect Amazon (NASDAQ: AMZN) and all other online juggernauts like Costco (NASDAQ: COST), Walmart (NYSE: WMT) and Target (NYSE: TGT) are having on spending patterns, but some services have to be bought in person, and this is where there is opportunity.
There are numerous businesses that are modeled on physical customer interaction. They include Walgreens (NASDAQ: WBA), CVS Pharmacy (NYSE: CVS), Kroger (NYSE:KR), urgent care centers (not publicly traded), Home Depot (NYSE: HD), 7-Eleven (not publicly traded), ExxonMobil Service Station, Dollar General (NYSE:DG), FedEx (NYSE: XOM), LA Fitness (not publicly traded), Circle K (OTCMKTS: ANCUF), Ross Stores (NASDAQ: ROST), Hobby Lobby (not publicly traded), Publix (not publicly traded), Dick’s (NYSE: DKS), Ulta Beauty (NASDAQ: ULTA), Total Wine, Party City (NYSE: PRTY), Firestone (not publicly traded), Goodyear (NASDAQ: GT), Jiffy Lube (not publicly traded), Verizon (NYSE: VZ), TJ Maxx (NYSE: TJX), Panera Bread (not publicly traded), Petco (NASDAQ:PETC), Kohl’s (NYSE: KSS), Chipotle (NYSE: CMG), Visionworks (not publicly traded), Supercuts (NYSE: RGS), Applebee’s (NYSE: DIN), Olive Garden (NYSE: DRI), Hallmark (not publicly traded), McDonalds (NYSE: MCD), Burger King (NYSE: QSR), Arby’s (NYSE:WEN), KFC (NYSE: YUM), Popeye’s (NASDAQ: PLKI), Chick-fil-A (not publicly traded)
Most of these businesses are seeing increased foot traffic from the days of widespread shutdowns, but the stocks of the retail REIT holdings that own the properties that lease back to all these companies are not trading anywhere near pre-pandemic levels. There are 34 brick-and-mortar retail REIT stocks listed on the www.nareit.com site that are worthy of taking some time to investigate.
I found three among the group that all reported solid second-quarter results, are collecting on more than 95% of current rents and reporting strong financials and stable dividends. These are your neighborhood strip malls anchored by a grocery store or shopping areas where none of these retail businesses own the ground and, in most cases, the structure where they operate. And yet, activity is getting back up to normal rapidly, but the underlying stocks have a long way before fully recovering.
Realty Income Corp. (O) — paying 4.5%, trades 26% below its February high of $84.92.
Essential Properties Realty Trust (EPRT) — paying 5.2%, trades 39% below its February high of $29.34.
STORE Capital (STOR) — paying 5.4%, trades 36% below its February high of $40. We are long STOR in the Cash Machine portfolio.
The charts are all shaping up and if we get a third week of improving virus data, then this sector might giddy up. We saw some of this early rotation kick in last Friday when big-cap tech rolled over and blue-chip industrial stocks traded firmly higher, leading all sectors for the week.
If there is widespread recognition that the coronavirus is finally starting to run its course where the data show a steady decline in all categories, the entire market will get lift, even the overbought high price-to-earnings (P/E) technology stocks. It will all work when the S&P adds another 200 points to the rally, but the big percentage moves will be produced by the sectors that have been shunned to date.
So, it should be a very interesting time ahead when Friday’s COVID-19 data is released for the week. It would not surprise me in the least to see a strong upside reaction by the market if the COVID-19 numbers continue to trend down. Up to now, the narrative has centered 100% on when a vaccine will be available, with high hopes of that being by the year’s end.
However, all this market needs to push higher is more evidence that the effects of the virus are dissipating. And if so, then it stands to reason that the yields on those retail REITs will be falling because the underlying stocks will be rising.