Financial stocks have declined sharply this week, affecting two of our portfolio holdings: BB&T Corp. (BBT) and Prudential Financial (PRU).
The S&P 500 financials sector is already down over 2% so far today, bringing its losses for the holiday-shortened week to nearly 4%.
The 10-year Treasury yield fell to its lowest level of the year earlier this week, hitting 2.072% on Tuesday. That drove the spread between the two- and 10-year Treasury yields to 0.78 percentage points, also a low for the year.
When the spread between long- and short-term interest rates narrows, it squeezes profit margins at banks and insurers, which lend money at short-term rates and pay interest on deposits at long-term rates.
As a result of the selloff, it’s now time to sell PRU, and I’m moving BBT to Hold. Details are below.
I also include a special update on Ecolab (ECL), which issued a hurricane-related business update on Wednesday morning.
BB&T Corp. (BBT) moved to Hold
I’m moving BBT, the latest addition to our Dividend Growth Tier, to Hold until the financial sector selloff blows over. BBT has declined nearly 5% since the market opened on Tuesday, and is now trading at its lowest level since late June. The stock is below both its 50- and 200-day moving averages. As I noted in last week’s recommendation of BBT, a longer correction in either the broad market or the financial sector could drag BBT as low as 42, where it bottomed in May, at which point our loss would be about 8%. Assuming the stock bounces there, I’ll put it back on Buy. But for now, we’ll limit our risk by switching BBT to Hold.
Sell Prudential Financial (PRU)
PRU has fallen 4.4% so far this week, and is now trading at its lowest level since November. I wrote two weeks ago that we’d cut PRU loose if the stock continued to deteriorate, and that’s exactly what the stock has done. We’ll sell our remaining 2/3 position in PRU at tomorrow’s average price (since it’s now mid-afternoon), likely for a total return of around 23%.
Hold Ecolab (ECL)
Lastly, as I wrote on Wednesday, Ecolab had to close three manufacturing plants in the Houston area because of Hurricane Harvey, and many of its industrial and refining customers also halted production. The stock fell about 2% after the news was announced on Wednesday morning, erasing ECL’s earlier post-hurricane gains. (ECL is often classified as part of the basic materials sector, which has surged in anticipation of post-hurricane rebuilding demand.) ECL is now trading back where it was before the hurricane, and looks like it has decent support here. I’ll keep it on Hold.