The stock market’s pullback resumed yesterday, but this still looks like a normal retreat following a breakneck four-month rally. One warning light blinking on Cabot’s market timing dashboard is decreasing breadth, which suggests that when the rally gets going again, it could be driven by a smaller group of stocks. So pick your positions wisely, and don’t be afraid to cut laggards loose. In our own portfolio, we sold Costco (COST) on Friday, for a 49% profit.
Elsewhere, the price of a barrel of oil has fallen nearly 10% since the start of March, slipping below $50 for the first time since October. That’s causing energy and commodity stocks to pull back, and is also contributing to a selloff in the junk bond market, which you can read about in today’s bond ladder update.
Of course, the big news this week is today’s Fed meeting, where Janet Yellen is expected to announce the first rate hike since December. Some rate-sensitive investments, like REITs and high-yield bonds, have sold off over the past month, but the reaction has been more muted than in the past. In addition, certain assets that normally have a negative correlation to interest rates—including utilities and other high dividend stocks—have barely budged.
You’ll note that we’ve added a new column to our portfolio overview chart (included at the end of each update) showing position size. Full positions are marked with a 1 and partial positions with the appropriate fraction.
If you’re underinvested, you can continue to use pullbacks to start new positions, judiciously. Focus on investments that are healthy and meet your investing goals and risk tolerance. In the High Yield Tier, most of our recommendations are at good buy points, with General Motors (GM) probably the most promising in the short-term. For capital appreciation, look to the Dividend Growth Tier, where Carnival (CCL), Prudential Financial (PRU), U.S. Bancorp (USB) and now Wynn (WYNN) are all poised for gains. Home Depot (HD), in the Safe Income Tier, is another likely winner this year.
HIGH YIELD TIER
BUY – Game Stop (GME 25 – yield 6.2%) – GameStop pulled back to 24 this week after a downgrade from Telsey Advisory Group, but started to rebound yesterday. Elsewhere, Barron’s ran a cautiously optimistic article speculating that strong demand for Nintendo’s new Switch console may also boost GameStop’s video game and collectible sales this quarter if shoppers who pick up the console in store also buy other merchandise. The first blockbuster title for the new console, The Legend of Zelda: Breath of the Wild, is sold separately and has multiple related collectibles that unlock bonuses in-game. While they won’t include the Switch bump (if there is one), GameStop will report fourth-quarter results on March 23. Sales are expected to decline 11.7%, dragging earnings down 5% year-over-year. For the full year, analysts expect 5.6% lower EPS and 7.6% lower revenue. Risk-tolerant high yield investors can start positions in undervalued GME here.
Next ex-div date: June 6, 2017 est.
BUY – General Motors (GM 37 – yield 4.1%) – GM is building a loose base between 35 and 38, currently trading right on top of its 50-day moving average. The stock might get a slight pop today from the news that Trump’s administration is rolling back Obama-era fuel efficiency standards, paving the way for automakers like GM to sell more high-margin gas guzzlers. Risk-tolerant high-yield investors who don’t own it yet can buy here.
Next ex-div date: June 7, 2017 est.
HOLD – Mattel (MAT 25 – yield 6.0%) – MAT’s support at 25 held this week, and so will we.
Next ex-div date: May 12, 2017 est.
BUY – Pembina Pipeline (PBA 32 – yield 4.6%) – PBA has proved fairly resilient to the sudden slump in oil prices. The price of a barrel of oil dipped back below 50 this month, losing 10% over the past 30 days. PBA has pulled back slightly but is holding up fairly well; the stock is currently just above its 50-day moving average. I don’t expect much upside near-term, but high yield investors who want to start a position can do so here.
Next ex-div date: March 22, 2017
BUY – Verizon (VZ 49 – yield 4.7%) – The latest addition to our portfolio, VZ is a Buy for investors looking for a high and reliable income stream at a reasonable price. VZ has strong support a few points below its current level, and a 10-year history of dividend growth.
Next ex-div date: April 6, 2017
DIVIDEND GROWTH TIER
BUY – Carnival (CCL 57 – yield 2.5%) – CCL gained 2.6% this week. Analysts expect the cruise company to achieve 3% sales growth and 4% EPS growth this year, followed by 5% sales and 15% EPS growth in 2018. The stock has spent the past two months building a tight base just above 55 and can be bought here for dividend growth and medium-term gains.
Next ex-div date: May 24, 2017 est.
SOLD – Costco (COST 165 – yield 1.1%) – I advised subscribers to sell Costco in a Special Bulletin sent Friday. Since gapping down on earnings March 3, COST has been drifting lower, signaling that sellers are overpowering buyers for the time being. Declining earnings estimates and a rotation out of retail stocks could cause the selloff to drag on. We bought COST at 112 in February 2014, and sold half our position at 149 in February 2016, for a 33% profit. Friday’s sale was recorded at the day’s average price of 165.74, for a profit of about 48.6%. Our total return, including dividends, was 49%. If you haven’t yet, sell COST, and put the money to work in other, healthier stocks.
Next ex-div date: May 10, 2017 est.
BUY – Prudential Financial (PRU 111 – yield 2.7%) – Markets are pricing in a 100% chance that the Fed will raise rates this afternoon, so I don’t expect much of a pop from PRU. But longer-term, the company will be a major beneficiary of higher rates; seven analysts have raised their 2017 earnings estimates in the past 30 days. Investors who don’t own PRU yet should try to buy on pullbacks for the solid dividend and more capital appreciation this year.
Next ex-div date: May 19, 2017 est.
HOLD – Schlumberger (SLB 78 – yield 2.6%) – Oil’s 10% drop this month has taken a toll on SLB; the stock is now trading at support dating back to November. A sustained pullback in oil prices would throw our investment thesis for Schlumberger into question; the company’s customers are highly sensitive to oil prices. I’m putting SLB on Hold today.
Next ex-div date: June 2, 2017 est.
BUY – U.S. Bancorp (USB 55 – yield 2.0%) – USB has advanced 27% in the past six months, but as with PRU, I expect even more gains as higher interest rates begin to trickle down to the bank’s earnings. Investors who don’t own USB yet should try to buy on pullbacks.
Next ex-div date: March 29, 2017 est.
BUY – Wynn Resorts (WYNN 105 – yield 1.9%) – WYNN popped 5% this week after Morgan Stanley upgraded the casino stock. Macau gaming revenues are rebounding, driven in particular by rising per-visitor spending, which Morgan Stanley believes will play into Wynn’s premium positioning. Volatility-tolerant investors can buy WYNN on pullbacks for medium-term capital returns and dividend growth. As a reminder, Wynn’s management tends to raise the dividend rapidly when profits are growing, but reserves the right to slash it again when times get tough. The casino industry is highly cyclical.
Next ex-div date: May 9, 2017 est.
SAFE INCOME TIER
HOLD – Automatic Data Processing (ADP 104 – yield 2.2%) – ADP ran into resistance at 105 this week, the same level where the stock rolled over in early January. The employment situation is strong—which benefits ADP as a payroll processor. But I’ll keep the stock on Hold until we see confirmation that the stock’s uptrend is intact.
Next ex-div date: June 7, 2017 est.
HOLD – Consolidated Edison (ED 76 – yield 3.6%) – Strangely enough, utilities haven’t sold off ahead of today’s almost-certain rate hike, even as treasury yields have risen to their highest level since December. Typically, utilities pull back when rates rise, because they carry high levels of debt and are used as bond alternatives. Anticipation of a tax cut for U.S. businesses may be attracting some investors; most utilities, including ConEd, have purely domestic operations and pay the top corporate tax rate.
Next ex-div date: May 8, 2017 est.
BUY – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.4%)
BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.0%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
BUY – Guggenheim BulletShares 2020 High Yield Corporate Bond ETF (BSJK 24 – yield 4.9%)
The high yield funds in our bond ladder have pulled back this month as oil prices fell and treasury yields rose. Oil prices affect the junk bond market because many of the least-creditworthy issuers of high yield debt are small energy companies. Another period of low oil prices could cause defaults among those issuers, and losses in junk bond ETFs. In addition, higher benchmark interest rates will raise borrowing costs for businesses, further strapping less-creditworthy borrowers. And of course, rising interest rates cause prices of existing bonds to fall. Short-term, we could see more downside in BSJI and BSJK. But long-term, investors with a bond ladder in place can Hold, or even use this pullback as a buying opportunity, since these fund’s defined maturity dates protect investors’ principal as long as you buy at a reasonable price.
Next ex-div dates: all April 3, 2017 est.
BUY – Home Depot (HD 147 – yield 2.4%) – HD is consolidating its recent gains, trading just under 150. The stock may pause for a bit here to let its 50-day moving average, currently down at 140, catch up. But long-term, HD is a solid Buy for all investors. Eighteen analysts have raised their current year earnings estimates over the past 30 days; EPS are now expected to rise 11% in 2017 and 12% in 2018.
Next ex-div date: June 6, 2017 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.7%) – PGX is pulling back slightly this week, but preferred stocks are typically less affected by interest rate changes than bonds. The ETF usually trades in a fairly low-volatility range between 14 and 16, and pays monthly dividends of about seven cents per share. Investors looking to add reliable monthly income (without capital appreciation) to their portfolio can buy PGX when it is trading below 15.
Next ex-div date: March 15, 2017 est.
HOLD – J.M. Smucker (SJM 139 – yield 2.2%) – SJM found support above 138 this week, as I thought it might. We’ll Hold.
Next ex-div date: May 10, 2017 est.
BUY – Xcel Energy (XEL 43 – yield 3.3%) – I’m considering taking some profits in XEL off the table soon; the shares are up 42% since we started the position in October 2014. We’ll see how the utility reacts to today’s interest rate hike. Long-term, XEL remains an excellent safe income holding.
Next ex-div date: June 20, 2017 est.
Closing prices as of March 14, 2017
