Yesterday, the stock market had its worst day since October; the Dow, Nasdaq and S&P 500 all declined over 1%. Financials and materials stocks were the biggest losers, while safe havens gained; treasury yields fell to their lowest levels since the start of the month, despite the Fed’s rate hike just last week. Conservative stocks like utilities and consumer staples also outperformed.
One bad day is no reason to panic, but we’re becoming slightly more cautious, especially since we also saw a couple of other yellow flags this week. For example, the dollar has pulled back, which might be a sign that markets are losing confidence in Trump’s ability to increase U.S. economic growth relative to the rest of the world. And while oil prices have leveled off, energy and commodity stocks continue to lag the broad market amid concerns about large stockpiles.
Bottom line, you may want to take some defensive moves today, especially if you’re aggressively positioned. In the Cabot Dividend Investor portfolio, I’m putting General Motors (GM) and Prudential (PRU) on Hold, and I’m selling a third of U.S. Bancorp (USB) and changing its rating to Hold. I’m also going to sell a third of Xcel Energy (XEL) today, simply because our profit has gotten quite large. We may also sell J.M. Smucker (SJM) in the coming days, although for now it’s a Hold.
However, if you’re already positioned fairly conservatively, you may not need to do any selling today. And several of the stocks in our portfolio are still very healthy, even hitting new 52-week highs! Investors eager to put cash to work could dabble in Carnival (CCL), Wynn (WYNN) and Home Depot (HD), which are all looking pretty unstoppable. In the High Yield tier, nothing is exactly outperforming, but Pembina Pipeline (PBA) and Verizon (VZ) are both still at decent buy points for longer-term, risk-tolerant investors.
As always, feel free to get in touch with any questions, you can reach me at chloe@cabotwealth.com or on Twitter (@ChloeAtCabot).
HIGH YIELD TIER
BUY – Game Stop (GME 24 – yield 6.3%) – GME stumbled early this week, closing just below the lower boundary of its recent trading range on Monday, but bargain hunters stepped in during yesterday’s selloff. In addition, the stock is still above lows from January (about 22) and November (just above 20). GameStop is reporting fourth-quarter and full-year earnings tomorrow, March 23, after the market closes (GameStop’s fiscal year ends in January). Sales and earnings estimates have fallen in recent weeks, and fourth-quarter revenues are now expected to fall to $3.1 billion, 12.2% lower than in the same quarter last year, while EPS are expected to fall 4.6% year-over-year to $2.29. For the full year, analysts expect EPS to decline 5.4%, to $3.69, while revenue is expected to fall 7.8%, to $8.64 billion. Even after estimates were lowered, GME still trades at a measly 6.3 times forward EPS. Risk- and volatility-tolerant high yield investors can nibble at GME here.
Next ex-div date: June 6, 2017 est.
HOLD – General Motors (GM 35 – yield 4.4%) – GM pulled back to 35 this week, the lower end of its multi-month trading range, then closed below it during yesterday’s selloff. I expect the stock to find support here, but will switch it to Hold for now. (We already took profits on a third of our position at the end of January, at around 38.)
Next ex-div date: June 7, 2017 est.
HOLD – Mattel (MAT 25 – yield 6.1%) – MAT continues to chug sideways right around support at 25, and didn’t see much selling yesterday. For the current quarter (ending March 2017), sales are expected to fall 7%, but revenue is expected to rise 6% for the full year, while EPS are expected to balloon 36%. Risk-tolerant high yield investors can Hold.
Next ex-div date: May 12, 2017 est.
BUY – Pembina Pipeline (PBA 32 – yield 4.6%) – PBA also held up well yesterday, after proving to be fairly resilient to the slump in oil prices over the past month. The stock is trading sideways just above its 50-day moving average. I don’t see any catalysts for near-term upside, but support is strong, so high yield investors who want to start a position can do so here. PBA trades ex-dividend today.
Next ex-div date: March 22, 2017
BUY – Verizon (VZ 50 – yield 4.6%) – VZ tacked on 1.6% over the past five trading days, and held its ground yesterday. The stock remains in the lower third of its multi-year trading range. Investors looking for a high and reliable income stream at a reasonable price can start positions here. 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 58 – yield 2.4%) – CCL hit a new 52-week high yesterday, an impressive show of strength. The latest advance has been on light volume so far, compared to the accumulation we saw during the stock’s last rally at the end of last year. But the stock has strong support at 55, where it built a base in February, and from its 50-day moving average. We take profits at some point—most likely when the advance stalls—but for now, we’re very happy holding. Dividend growth investors who don’t own CCL can buy on pullbacks.
Next ex-div date: May 24, 2017 est.
HOLD – Prudential Financial (PRU 106 – yield 2.8%) – PRU fell 3% yesterday, bringing the stock’s losses over the past five trading days to nearly 5%. There’s no obvious reason for financial stocks’ sharp pullback since Wednesday’s rate hike. Some investors may have been hoping for four rate hikes this year, and the Fed only guided to three. Other sources are pointing to declining confidence in Republicans’ ability to pass significant financial reform. Or this could just be a normal (albeit somewhat sudden) pullback after months of outperformance. Regardless, I’m going to put PRU on Hold today, and we’ll see what the sector does next. In addition, investors who haven’t taken profits yet (we sold a third of our PRU at 97 in November) may want to do so now.
Next ex-div date: May 19, 2017 est.
HOLD – Schlumberger (SLB 79 – yield 2.5%) – SLB found support around 79 this month, the same level where the stock paused for a while in November. A sustained pullback in oil prices would throw our investment thesis for Schlumberger into question, but no analysts have lowered their estimates yet, and the stock’s slide has stopped. We’ll keep SLB on Hold.
Next ex-div date: June 2, 2017 est.
SELL A THIRD – U.S. Bancorp (USB 53 – yield 2.1%) – USB had been holding up pretty well as financials weakened, but gave in during yesterday’s selloff. The stock’s 3% drop pulled USB through its 50-day moving average to the downside. There’s no reason to panic, but I am going to switch USB to Hold until we see where this selloff goes. In addition, since we have a double-digit profit on the table, we’ll sell a third of our position today and lock in the gains. Sell a third, hold the rest.
Next ex-div date: March 29, 2017
BUY – Wynn Resorts (WYNN 112 – yield 1.8%) – WYNN popped to a new 52-week high this week, finally breaking out of its 11-month trading range to the upside. The rebound in Macau gaming revenues accelerated last month and is expected to remain strong in March, and Wynn’s new resort there is expected to have a great first quarter. This could be WYNN’s big breakout, so if you don’t own the stock yet, and have been thinking of buying, start a position now. WYNN is appropriate for medium-term dividend growth and growth investors with moderate risk tolerance and high volatility tolerance. (But it’s not a long-term buy-and-hold because the casino industry is very cyclical.)
Next ex-div date: May 9, 2017 est.
SAFE INCOME TIER
HOLD – Automatic Data Processing (ADP 103 – yield 2.2%) – ADP continues to trade sideways just under resistance at 105. 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—like a breakout through 105.
Next ex-div date: June 7, 2017 est.
HOLD – Consolidated Edison (ED 77 – yield 3.6%) – Utilities held their counter-intuitive pre-rate hike gains this week. Typically, utilities pull back when rates rise because they carry high levels of debt and are used as bond alternatives. But the sector has outperformed the broad market this month, even as rates rose (in the early part of the month) and the Fed announced another increase to their benchmark rate. Investors may be focused on Republicans’ promises to cut taxes for U.S. businesses; most utilities, including ConEd, have purely domestic operations and pay the top corporate tax rate. Or the sector may be feeling a flight-to-safety effect, although most investors were fairly complacent until yesterday. Whatever the reason, we’ll hold; feel free to take some profits if you still have a full position.
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 pulled back this month, as oil prices fell and treasury yields rose, though the moderation in both since the Fed rate hike has caused a partial rebound. 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. Regardless, investors with a bond ladder in place can hold, or even use this pullback as a buying opportunity, since these funds’ 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 hit a new 52-week high on Monday, then pulled back slightly during yesterday’s selloff. The stock is benefiting from a strong housing market and increased consumer spending on the home. Housing starts rose to an annual rate of 1.29 million last month, the second-best rate since before the housing crash. And data being released this morning by the National Association of Realtors is expected to show that existing home sales remained above 5.5 billion for February, their highest level since 2007. HD is a Buy on pullbacks (like this one) for all investors.
Next ex-div date: June 6, 2017 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.7%) – PGX is a preferred share ETF; preferred stocks are typically less affected by interest rate changes than bonds. The fund 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: April 13, 2017 est.
HOLD – J.M. Smucker (SJM 135 – yield 2.2%) – SJM got hit hard by yesterday’s selloff, the stock broke through support at 138 and is now trading at 134. It’s tempting to call it a day here; we’ve been waiting for SJM to get in gear for far longer than we’d like. We’ll see what the stock does over the next three days, and may issue a special sell alert if it heads lower.
Next ex-div date: May 10, 2017 est.
SELL A THIRD – Xcel Energy (XEL 44 – yield 3.2%) – After yesterday’s surge, our profit in XEL has risen to 45% (price only). That’s fantastic, and we’re still quite pleased with the stock (we put it back on Buy at the end of February). But it’s also a big unrealized profit, so I want to take some off the table today. In addition, the stock faces upside resistance just above its current level, at 45. I still like the utility’s long-term prospects, but we’ll sell a third today and book the profits. Sell A Third, hold the rest.
Next ex-div date: June 20, 2017 est.
Closing prices as of March 21, 2017
