The broad market continued to deteriorate this week. After days of weakness under the surface and breakdowns in individual stocks, major indexes took a big hit yesterday as selling pressure intensified. It was the S&P’s sixth down day in a row. Cabot’s short- and intermediate-term market timing indicators are both negative, so caution is the appropriate stance right now. Sell losers and keep new buying to a minimum.
We’re letting go of Equifax (EFX) today, booking a nice profit, and reducing our exposure to Home Depot (HD) by half. We also sold Amgen (AMGN) on Monday, after health care industry stocks suffered a major selloff. Drug companies and distributors are anticipating even more pressure to rein in drug prices next year.
However, it’s worth remembering that the market’s long-term trend remains up. Friday brings the October Jobs Report, which is expected to show that the U.S. created 178,000 jobs in October, up from 156,000 in September (although that number will also be updated on Friday). And while Wall Street is starting to get downbeat about consumer sentiment and remains skeptical of the auto and housing markets, UPS management argued in their conference call last week that “consumer fundamentals remain healthy and account for most of the economic expansion.”
HIGH YIELD TIER
HOLD – General Motors (GM 31 – yield 4.8%) – GM reported October sales numbers that beat estimates yesterday, although the effect on the stock was short-lived. Analysts expected GM’s sales to decline 6% because last October was such a strong sales month, and had two more selling days. Instead, GM’s sales fell only 1.7%, as it took market share from other carmakers. GM remains range-bound but is a good source of income for high yield investors. Hold.
Next ex-div date: December 5, 2016
BUY – Mattel (MAT 31 – yield 4.9%)
– No news.
Next ex-div date: November 18, 2016
BUY – Pattern Energy (PEGI 22 – yield 7.3%) – Pattern will report third-quarter earnings this Monday, November 7, before the market opens. Analysts are expecting revenue to grow nearly 10%, to $98.36 million, thanks to drop-down acquisitions completed over the past year. Pattern, a wind farm yieldco, remains speculative, but short- and medium-term investors looking for high yield will find it here. Be aware that the stock can be affected by changes in interest rates since yieldcos are seen as a bond alternative.
Next ex-div date: December 27, 2016 est.
BUY – Pembina Pipeline (PBA 31 – yield 4.8%) – Pembina will report earnings after the close tomorrow, November 3, and will hold a conference call on Friday morning. Analysts are currently expecting 6.6% revenue growth, to $1.09 billion. PBA is trading in the upper half of its trading range and is a Buy for risk-tolerant investors whose priority is high monthly income.
Next ex-div date: November 22, 2016 est.
DIVIDEND GROWTH TIER
HOLD – AbbVie (ABBV 56 – yield 4.5%) – We now have a 15% loss in ABBV after Friday’s sharp healthcare selloff. ABBV fell 6% on the day despite reporting solid earnings that morning; I issued a special bulletin on Friday changing ABBV’s rating to Hold. The selloff was triggered by negative comments on drug pricing from several major healthcare players who reported on Thursday and Friday. McKesson (MCK), a major drug wholesaler, missed estimates and lowered guidance due to pricing pressure, and biotechs including Amgen (AMGN, see below) said they expect prices to remain under pressure next year. At this time, I’m keeping ABBV on Hold because the company is seeing less of an impact from pricing pressures. AbbVie’s revenue growth is still primarily driven by volume increases (selling more drugs, rather than charging more for them). Management assured skittish analysts on the call that Humira’s market share is still rising, and that their guidance is based on conservative price increases. Also affecting our thinking is the stock’s action. Before Friday’s selloff, ABBV had found decent support at 60, and still looks like it could work its way back to that support level over the next few days. However, if support fails to materialize, I will cut our loss before it reaches 20%, and I recommend you use appropriate stop losses in your own portfolio as well. AbbVie also announced a 12% dividend increase on Friday and now yields 4.5%.
Next ex-div date: January 11, 2016
SOLD – Amgen (AMGN 141 – yield 2.8%)
– AMGN also sold off sharply on Friday, and I recommended selling the stock in that afternoon’s Special Bulletin. While Amgen’s results for the latest quarter actually beat expectations, management confessed that pricing pressure is beginning to affect sales growth, causing a swift selloff in the company’s stock. As its drugs age, Amgen has increasingly relied on price increases to boost revenues in recent years. For example, Amgen sold fewer units of Enbrel, its blockbuster arthritis drug, this quarter because of competition, and price increases were the only thing that kept Enbrel revenues from declining (they were flat year over year). But going forward, management said that pressure from pharmacy benefit managers (PBMs) is likely to prevent them from pushing through further price increases. With high priced drugs in the cross hairs of insurers, PBMs and politicians, Amgen—which makes numerous drugs that sell for over $100 per dose—has become a much riskier investment than we’re comfortable with. Coupled with the stock’s lack of technical support and the negative sales growth outlook, this additional risk is plenty of reason to sell. We recorded our sale at Monday’s average price of 143.81, for a total return of -8%. I recommend you follow suit, if you haven’t already.
Next ex-div date: November 14, 2016
BUY – Carnival (CCL 48 – yield 2.9%)
– Our latest recommendation was added to our Dividend Growth Tier at yesterday’s average price of 48.61. (A better price was available when we recommended the stock last week, but our policy is to add new recommendations on the first trading day of the month.) Carnival has rallied thanks to a strong earnings report from peer Royal Caribbean (RCL) last week. Royal Caribbean’s EPS of $3.20 beat the consensus estimate by 10 cents, while sales met expectations. Reasonably valued CCL remains a Buy for dividend growth investors.
Next ex-div date: November 22, 2016
HOLD – Costco (COST 147 – yield 1.2%)
– No news.
Next ex-div date: November 2, 2016
SELL – Equifax (EFX 124 – yield 1.1%)
– Equifax slumped after reporting third-quarter earnings last Wednesday, despite beating expectations. Equifax’s EPS rose 26% to $1.44, eight cents above the analyst consensus, and revenue grew 20%, also above consensus. The stock’s decline was likely tied to fears that this growth is unsustainable. Mortgage-related revenue was one of the fastest-growing segments this quarter, and analysts are concerned that mortgage activity in the U.S. will slow after the Fed increases rates in December. Analysts are also worried that Workforce Solutions revenue growth will slow next year once the effect of employers getting into compliance with the Affordable Care Act wears off (a significant tailwind for the division in 2015 and 2016). Foreign exchange rates are one more dark cloud; depreciation in the British Pound is now expected to have a more significant impact on fourth-quarter revenues than previously expected. EPS are still expected to grow 11% next year, but that’s a deceleration from the 16%-20% growth of the past two years. I think it’s time to cut EFX loose, growth is decelerating and the stock’s past three months of uninspiring technical action now looks potentially toppy. We sold half our position in EFX at the end of August for a 40% gain, and will sell the rest at today’s average price.
Next ex-div date: November 21, 2016 est.
BUY – Prudential Financial (PRU 84 – yield 3.3%)
– Prudential will report earnings today, November 2, and hold a conference call tomorrow morning. Analysts are expecting revenue to climb 5% to $11.66 billion and EPS to rise about 4% to $2.49. PRU is also sensitive to rate-hike expectations, so we may see some volatility around the Fed’s release this afternoon.
Next ex-div date: November 18, 2016 est.
HOLD – U.S. Bancorp (USB 44 – yield 2.5%) – USB has finally broken out of its year-long trading range to the upside, as we speculated it might in our latest Update. I’ll wait a few more days to be sure the move is definitive (the Fed announcement this afternoon creates potential for volatility), but I look forward to putting the bank stock back on Buy soon.
Next ex-div date: December 28, 2016 est.
BUY – Wynn Resorts (WYNN 98 – yield 2.0%)
– Wynn popped yesterday after data out of Macau showed that gaming revenue there increased for a third consecutive month. Wynn will report third-quarter earnings after the close today. Consensus estimates call for EPS to fall 9.3% to $0.78, but revenue is expected to increase 12.2% to $1.12 billion.
Next ex-div date: November 9, 2016 est.
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 74 – yield 3.6%) – ConEd will report third-quarter earnings tomorrow, November 3, after the close. Analyst estimates have been lowered recently, and analysts are now expecting 2.1% EPS growth to $1.47, and a slight contraction in revenue to $3.41 billion. ED is a long-term Hold for investors whose priority is regular income.
Next ex-div date: November 14, 2016
BUY – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.3%)
BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.5%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
BUY - Guggenheim BulletShares 2020 High Yield Corporate Bond ETF (BSJK 24 – yield 5.0%)
These four funds make up our bond ladder, a conservative strategy for owning fixed income that preserves capital and can create a growing income stream over time (if interest rates rise). The ETFs pay monthly dividends and have defined maturity dates, at which time Guggenheim redeems the shares at their net asset value (NAV). The investment-grade corporate bond ETFs are issued at a par value of 20, while the high yield ETFs are issued with a par value of 25, but historically the funds have matured slightly above their par values.
Next ex-div dates: all November 1, 2016, est.
SELL HALF – Home Depot (HD 120 – yield 2.3%) – Confidence in housing-related stocks continued to deteriorate over the past week. After Tuesday’s misses by Whirlpool (WHR) and Sherwin-Williams (SHW), the next few days brought multiple downgrades for Home Depot and peer Lowe’s (LOW). The downgrades cited signs of waning consumer spending on the home and tough year-over-year comparisons as reasons to anticipate slower growth at home improvement stores next year. HD is now trading below support from June, and at its lowest level since February. Because I don’t see an obvious support level for the stock here, and Home Depot still won’t report earnings for two weeks, we’re going to reduce our position in HD by half today. This reduces our risk should this rotation turn out to be longer lived. We’ll hold the second half of our shares through Home Depot’s earnings report on November 15. Analysts are expecting 16.2% EPS growth to $1.58, and 5.8% revenue growth to $23.08 billion.
Next ex-div date: December 6, 2016 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.8%)
– No news.
Next ex-div date: November 15, 2016 est.
HOLD – J.M. Smucker (SJM 131 – yield 2.3%)
– SJM has come to rest right where it started five months ago. I expect the stock to continue to trade around this support level until earnings are released on the morning of November 17. Analysts are expecting EPS to rise 19% to $1.93, despite a slight contraction in sales from $2.08 to $2.00 billion (the effect of lower coffee prices and even lower input costs). However, all eyes will be on the sales numbers from the pet food division, which sorely disappointed last quarter. The pet business was acquired at significant cost last year and is a cornerstone of Smucker’s growth strategy, but the division delivered disappointing results last quarter.
Next ex-div date: November 8, 2016
BUY – UPS (UPS 107 – yield 2.9%) – UPS is slightly lower after reporting results that met estimates last Thursday. EPS of $1.44 were in line with the consensus estimate and up 3.6% year over year. Revenue growth of 4.8% to $14.93 billion beat estimates by $200 million. UPS shipped more packages than expected in the U.S. thanks to strength in e-commerce, while the weakest areas were freight and supply chain services, which are tied to industrial activity and business investment. Management reaffirmed their full-year guidance, although they warned that operating profit in the freight and supply chain segments is likely to contract. However, they expect that weakness to be offset by strength elsewhere; UPS is expecting record package levels this holiday season, and believes they are prepared. The company is also adding more planes to its fleet to meet growing demand for air and international shipments. UPS remains well within its multi-month trading range and is a Buy.
Next ex-div date: November 23, 2016 est.
HOLD – Xcel Energy (XEL 41 – yield 3.3%) – Xcel Energy reported mixed earnings last Thursday. Revenues rose 4.8% to $3.04 billion, missing the analyst consensus by $230 million. However, EPS of $0.90 beat estimates by three cents. Management narrowed their 2016 guidance to $2.17 to $2.22 per share, from the previous range of $2.12 to $2.27 per share. Management also issued 2017 earnings guidance of $2.25 to $2.35 per share, in line with their long-term EPS growth objective of 4% to 6%. XEL is seeing renewed investor interest as the stock market becomes shakier and remains a long-term Hold.
Next ex-div date: January 2017
Closing prices as of November 1, 2016.
