by Bryan Perry

August 11, 2020

Many investors are waiting for a clear signal to pounce on those stocks and sectors that have been crushed in the wake of the pandemic, but they wonder when it’s a legit breakout rather than another false rally like the first “re-opening” that fizzled out in early June. It sure would be nice to lock and load on the travel, industrial, hospitality, restaurant, office, and retail sectors that started to percolate again last week.

From the set of charts below (from the COVID Tracking Project), we see the most recent data for early August. Although it’s too early to call it a trend, the numbers are improving across the board. 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.

Nationwide Covid-19 Metrics Charts

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Of all the data points that I’ve been watching the closest, it’s been emergency room admissions related to COVID-19 that are the most impressive. And here too, the numbers are just beginning to get better week by week. Again, it’s too early to call it a definite 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 one wants to apply, we should be quick to note that the stock market doesn’t care who’s right, who’s wrong, or why this or why that. It just cares that the outlook for those sectors of the economy that have been hammered the most by the coronavirus are seeing a glimpse of daylight.

United States Trends in Emergency Department Visits Dot Plot

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Under this premise, income investors may want to take a hard look at some of the highest quality brick and mortar REITs for attractive income and potential capital appreciation. I’m fully aware of “the Amazon effect” and the effect that all the other online juggernauts are having on spending patterns, but some services have to be bought in person, and this is where there is opportunity.

Navellier & Associates owns Amazon in managed accounts.   Bryan Perry does not own Amazon in a personal account.

There are numerous businesses that are modeled on physical customer interaction. They include familiar names in drug stores, home supplies and do-it-yourself centers, convenience stores, gas stations, dollar stores, fitness clubs, hobby stores, wine and liquor stores, tire franchises, car repair and maintenance, restaurant chains, pet stores, eye care, barber shops, cards and gifts – and the list goes on and on.

Most of these businesses are seeing increased foot traffic, but the stocks of the retail REIT companies that own the properties that lease to all these companies are not trading anywhere near pre-pandemic levels.

There are 34 brick and mortar retail REIT stocks listed on the site. That list is worthy of taking some time to investigate. I found three among the group that reported solid second-quarter results, while collecting on over 95% of current rents and maintaining strong financials and stable dividends. These are your neighborhood strip malls anchored by a grocery store in shopping areas where none of these retail businesses own the ground, and, in most cases, the structure they operate on. And yet, activity is getting back up to normal rapidly, but the underlying stocks have a long way before fully recovering.

These three stocks are

Realty Income Corp. (O) – yielding 4.5% and trading 26% below its February high of $84.92.
Essential Properties Realty Trust (EPRT) – paying 5.2% and trading 39% below its high of $29.34.
STORE Capital (STOR) – yielding 5.4% and trading 36% below its February peak of $40.

Navellier & Associates does not own Reality Income Corp, Essential Properties Reality Trust or Store Capital in managed accounts.   Bryan Perry does not own Reality Income Corp, Essential Properties Reality Trust or Store Capital in a personal account.

The charts for these three stocks are all shaping up, and if we get a third week of improving virus data, 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.

Weekly Sector Performance Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If there is widespread recognition that the coronavirus is finally starting to run its course, and the virus data shows a steady decline in all categories, the entire market will get a big lift, even the overbought high P/E tech stocks. Everything will 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.

It should be a very interesting time when Friday’s COVID-19 data is released each week. It would not surprise me in the least to see a strong upside market reaction if the 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 vaccine arriving by 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, but only because the underlying stocks will be rising.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Fitch Downgrades U.S. Credit Outlook

Income Mail by Bryan Perry
Retail REITs Getting Ready to Rumble?

Growth Mail by Gary Alexander
Comparing the Continents Fairly: America vs. Europe vs. Asia

Global Mail by Ivan Martchev
The Dollar Short Squeeze is Not Over Yet

Sector Spotlight by Jason Bodner
Big-Game Hunting for “Outlier” Stocks

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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