After about eight weeks of consolidation, the major indexes all broke out to new highs late last week. The Dow, S&P 500 and Nasdaq are all about 2% higher since our last update. And the S&P and Nasdaq have closed higher on each of the last five trading days (the Dow on the last four).
Bonds sold off this week after Janet Yellen reaffirmed plans to raise interest rates this year. The odds of a March rate hike jumped to 18% after her testimony, though it’s still most likely that the Fed’s next move will be this summer. This morning’s inflation data will give Fed watchers one more data point; economists are expecting core CPI to rise 0.2%, the same as last month, while the consumer price index is expected to tick up another 0.3% (also the same as in December).
Earnings season is going well, with three-quarters of S&P companies beating EPS estimates so far (although fewer, about half, have beaten revenue estimates).
And after a several days of weakness, oil prices rebounded on the news that OPEC members are sticking to their production reduction targets, with Saudi Arabia cutting production by even more than promised.
All in all, the market is healthy and investors should be bullish. For our part, we’re putting Wynn Resorts (WYNN) back on Buy today. Investors looking to put money to work should also consider Carnival (CCL), Costco (COST), Prudential (PRU), U.S. Bancorp (USB) and Home Depot (HD), which all look healthy and strong today. Recent addition Schlumberger (SLB) has found support and is a solid Buy here. And value and yield investors who don’t own it yet should take a second look at General Motors (GM), which recently revealed a potential catalyst for medium-term gains.
HIGH YIELD TIER
BUY – Game Stop (GME 26 – yield 5.7%) – GME continues to rebound from last month’s gap down, triggered by disappointing holiday sales numbers. The retailer’s fiscal year ends in January, so GameStop hasn’t reported full-year 2016 results yet, but the holiday sales likely gave analysts a pretty good idea of what to expect. Analysts are currently estimating 2016 sales of $8.66 billion and EPS of $3.68, down 7.5% and 5.6%. EPS growth is expected to return in 2017 as growth in the new businesses—digital downloads, technology brands and collectibles—offsets shrinking video game sales. GME is trading at less than 7 times current and forward earnings, and is a Buy for risk-tolerant, bargain-hunting high yield investors.
Next ex-div date: March 6, 2017 est.
BUY – General Motors (GM 37 – yield 4.1%) – GM found support at 35 after last week’s post-earnings pullback, then got a nice pop yesterday when the automaker confirmed that they’re discussing selling their European business to Peugeot. GM’s European operations have been a drag on the business for years, but would vault Peugeot ahead of Renault to become the second-largest automaker in Europe (VW is number one.) It’s far from a done deal, but could provide a nice tailwind to GM’s stock as long as it’s on the table. Undervalued GM is a Buy for high yield investors with high risk tolerance.
Next ex-div date: March 8, 2017 est.
HOLD – Mattel (MAT 26 – yield 5.9%) – After losing 18% overnight because of disappointing holiday sales, MAT found support at 25 in late January and has been trading around that level ever since. We’re comfortable holding at this support level, but we won’t put the stock back on Buy until we see buyers return.
Next ex-div date: May 12, 2017 est.
BUY – Pembina Pipeline (PBA 31 – yield 4.6%) – Pembina will report fourth-quarter and full-year 2016 results on February 23 after the market closes. Analysts are expecting fourth-quarter EPS of $0.26, up from $0.24 last year, and revenue of $1.02 billion (up 7.7%). For the full year, EPS are expected to hit $0.84, up from $0.78 in 2015. However, the consensus revenue estimate of $3.33 billion is 5.7% lower than the $3.53 billion in revenue Pembina reported last year. PBA is a Buy for high yield investors looking for a source of monthly income.
Next ex-div date: February 22, 2017
DIVIDEND GROWTH TIER
BUY – Carnival (CCL 56 – yield 2.5%) – CCL looks very healthy. Data released earlier this month showed that travel, including cruises, remains one of the fastest-growing consumer spending categories. CCL is a Buy here for medium-term (because it’s cyclical) dividend growth investors.
Next ex-div date: February 22, 2017
BUY – Costco (COST 174 – yield 1.0%) – COST broke through resistance at 170 last week and is now trading at 52-week highs. Volume was average, but the breakout to the upside of the stock’s year-plus trading range is undeniably bullish. Buy on pullbacks.
Next ex-div date: May 10, 2017 est.
BUY – Prudential Financial (PRU 110 – yield 2.7%) – Prudential is also hitting new highs, after reporting earnings that beat expectations last week. For the fourth quarter, EPS of $2.46 easily beat the analyst consensus of $2.32. Full-year adjusted EPS of $9.65 also beat estimates. Higher international sales and strong inflows in the retirement and asset management businesses contributed to the results. Management also announced a 7% dividend increase, to $0.75 per share. Financials are the strongest sector in the market right now and PRU is a Buy on pullbacks.
Next ex-div date: February 17, 2017
BUY – Schlumberger (SLB 82 – yield 2.4%) – SLB found support at its 200-day moving average last week. Oil prices have ticked back up on the news that OPEC is sticking to its production cut agreement, with Saudi Arabia trimming production by even more than agreed. Schlumberger is the largest provider of technology and services to the oil and gas industry, and is a broad-based way for investors to play the energy rebound. Dividend growth investors with moderate risk tolerance can buy here.
Next ex-div date: June 2, 2017 est.
BUY – U.S. Bancorp (USB 55 – yield 2.1%) – USB hit another new all-time high this week. The super-regional bank is a high quality financial stock and a Buy for all investors, ideally on pullbacks.
Next ex-div date: March 29, 2017 est.
BUY – Wynn Resorts (WYNN 98 – yield 2.0%) – WYNN continues to chop around in the middle of its multi-month trading range, with support North of 80 and resistance around 110. Seven analysts have raised their 2017 and 2018 EPS estimates in the past month; the consensus is now for 27% growth this year. I’m going to put the stock back on Buy today for patient investors with a high tolerance for volatility. However, if you’re looking for short-term gains, wait for a breakout above 110, which will likely signal the start of WYNN’s next rally. And if you’re a value investor, feel free to use WYNN’s volatility to your advantage by waiting for a pullback toward 90.
Next ex-div date: May 9, 2017 est.
SAFE INCOME TIER
HOLD – Automatic Data Processing (ADP 99 – yield 2.3%) – ADP has closed higher every day since our last update, as the stock gradually recovers from its post-earnings drop. The high-volume gap down and the company’s lack of new customers are still concerns, but investors’ improving economic expectations may outweigh them. We’ll hold the stock for now, with a mental stop just below 95.
Next ex-div date: March 8, 2017
HOLD – Consolidated Edison (ED 74 – yield 3.7%) – New York-area utility ConEd will report fourth-quarter and full-year 2016 earnings tomorrow, February 16. The consensus estimate calls for fourth-quarter net income of $2.74 billion, up 1.3%, and EPS of $0.66, up 8.2%. Full-year 2016 revenues are expected to decline 1.7%, to $12.34 billion, while EPS are expected to fall 2.9%, to $3.96. ED is a Hold for long-term income investors.
Next ex-div date: May 8, 2017 est.
BUY – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.3%)
BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.4%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
BUY – Guggenheim BulletShares 2020 High Yield Corporate Bond ETF (BSJK 25 – yield 4.9%)
These four funds make up our bond ladder, a conservative strategy for owning fixed income that’s particularly good at preserving capital when interest rates are rising. Each ETF will mature at the end of the year in the fund’s name, and Guggenheim will distribute the net asset value (NAV) of the fund to shareholders at that point—just like getting your principal back when a bond matures. Because of this maturity feature, these bond funds don’t lose value when interest rates rise, like traditional bond funds. At the end of each year, we’ll sell the maturing fund and reinvest into a new longest-dated ETF to preserve the bond ladder. Note that the last letter in each of Guggenheim’s ETFs corresponds to the maturity year, so if you’re constructing a four-year ladder starting in 2017, your funds should end in H, I, J and K—whether you’re using high yield or investment grade funds.
Next ex-div dates: all March 1, 2017 est.
BUY – Home Depot (HD 141 – yield 2.0%) – HD is steadily advancing ahead of the home improvement retailer’s fourth-quarter and full-year earnings report, due before the market opens on February 21. Analysts are expecting quarterly EPS of $1.33 and full-year EPS of $6.34, up 13.7% and 17.4%, respectively. Revenues are expected to show 6.3% growth for the full year, to $94.13 billion, and 3.7% growth in the fourth quarter (to $21.75 billion). HD is a buy on pullbacks for all investors.
Next ex-div date: March 7, 2017 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.8%) – PGX is an ETF that owns preferred shares, a type of debt issued mostly by financial companies. The ETF can be affected by interest rate changes but usually trades in a fairly low-volatility range between 14 and 16. Investors looking to add reliable monthly income (without capital appreciation) to their portfolio can buy PGX below 15.
Next ex-div date: February 15, 2017 est.
HOLD – J.M. Smucker (SJM 138 – yield 2.2%) – SJM is close to earning back its Buy rating, if the stock’s reaction to Friday’s earnings report is positive. Several disappointing quarters triggered a three-month, 20% correction late last year, but the stock looks to have built a solid bottom in November-December, and is now trending up again. Smucker will report third-quarter earnings before the open this Friday, February 17. Analysts are expecting EPS of $2.00, up 23.5%, on revenue of $1.92 billion, down 2.9%. They’ll also be looking for improvement in pet food sales, which were expected to be a major growth driver after Smucker’s acquisition of Big Heart pet brands in 2015 but have so far disappointed.
Next ex-div date: May 10, 2017 est.
HOLD – Xcel Energy (XEL 42 – yield 3.3%) – Minnesota-based electric utility XEL is a Hold for long-term income investors. The company has a 13-year history of gradual but reliable dividend growth.
Next ex-div date: March 21, 2017 est.
Closing prices as of February 14, 2017
