While today brings an unexpected new political reality, markets around the world are already adjusting to the new order.
Global markets opened sharply lower Wednesday in a knee-jerk reaction to Trump’s surprise win, but pared losses as the day went on. As of this writing, U.K. markets are about half a percent lower while the German stock index is off just over 1%.
S&P 500 futures fell 5% before triggering circuit breakers. Once trading resumed, futures recovered some of the losses, and were predicting a 2% decline in the S&P about two hours before the open. Oil and the dollar also initially sold off sharply but pared some of the losses in the early morning.
In the bond markets, the yield curve has steepened as investors dump longer-dated treasuries (good news for banks and insurers). But the odds of a December rate hike have declined (bad news for those same stocks). The bond market selloff was already well underway before Trump’s win, as investors braced for the double-whammy of higher inflation and a rate hike next month. The election results have lowered the odds of both, but longer-dated treasury bonds remain out of favor.
I’m not changing any of our recommendations at this time, but will keep a close eye on our portfolio in coming days.
HIGH YIELD TIER
HOLD – General Motors (GM 32 – yield 4.8%) – GM looks set to open about 2.6% percent lower today and will likely see some volatility related to potential changes in trade agreements. More protectionist policies could increase costs for the automaker, which does much of its manufacturing in Mexico and Canada. GM is also multinational; China is GM’s largest market, although it operates there primarily through joint ventures. GM just reported good news from China on Friday, delivering a record 345,733 vehicles there last month. That’s 5.7% more than last October, and puts the company on track to sell over three million vehicles in China this year. GM’s stock has traded in a range between about 30 and 32 for the past three months. If the stock breaks out to the downside, look for support to hold around 28, where GM bottomed in February and July. Hold.
Next ex-div date: December 5, 2016
BUY – Mattel (MAT 31 – yield 4.9%) – Mattel held an analyst day last Wednesday. Management laid out the next steps in their turnaround plan, as well as long-term objectives. Mattel is already on its way to achieving their target operating margin of 15% to 20% by growing sales, especially in emerging markets, making supply chains more efficient and reducing expenses. Executives also reviewed their efforts to revitalize key brands. So far, these include introducing a more diverse range of Barbies, increasing distribution of American Girl dolls, hiring Jonathan Adler to design for Fisher Price, and creating branded content with partners like Amazon Video. MAT remains range-bound but is still a Buy for patient investors with medium risk tolerance.
Next ex-div date: November 18, 2016
HOLD – Pattern Energy (PEGI 21 – yield 7.6%) – Pattern reported third-quarter earnings on Monday, and while EPS beat estimates, revenue growth of 2.5%, to $91.9 million, fell about $6 million shy of analyst expectations. Management increased the dividend for the eleventh consecutive quarter; the 2% quarter-over-quarter increase brings the quarterly dividend to $0.408, or $1.63 per year. On an annualized basis, Pattern’s dividend is now nearly 10% higher than a year ago. Management also raised and narrowed their full-year guidance, guiding toward cash available for distribution of $130 million to $140 million this year, about 46% higher than last year (at the midpoint of the range).
However, PEGI declined 3.5% after the results were announced, in part because management disclosed an issue with Pattern’s financial reporting. During a regular review, management found that their internal controls over their financial reporting—the processes that ensure financial data is accurate and consistent—have flaws. Because of these flaws, there is “a reasonable possibility” that mistakes in financial results wouldn’t be detected or prevented in a timely manner. However, despite these flaws, management said all their financial data to date has been correct. Unfortunately, the improvement of their internal processes will take a few quarters to complete, so management expects to receive an unsatisfactory opinion in the mandatory audit of their internal controls at the end of this year. Even if financial results haven’t been affected, expecting to fail the auditor’s test raises red flags on Wall Street.
PEGI is also affected by interest rate changes because it is seen as a bond alternative. Longer-dated treasuries have sold off this morning, although the odds of a December rate hike have also declined. I’m changing PEGI’s rating to Hold today and we’ll watch to see how investors react. After yesterday’s decline, our loss in PEGI is now 12%; if PEGI continues to fall, we’ll cut the loss before it reaches 20%, if not sooner.
Next ex-div date: December 27, 2016 est.
BUY – Pembina Pipeline (PBA 30 – yield 4.9%) – Pembina reported earnings that fell short of estimates on Thursday and the stock is off about 2.4%. Revenue fell about 6% year-over-year, to $970 million. Analysts were expecting 7% growth, to $1.09 billion. However, cash flow from operating activities rose 32% year-over-year, to $247 million, thanks largely to improvement in operating margins. The higher operating margins were driven by volume improvement in most segments and the expansion of some infrastructure, which offset the effect of outages elsewhere. PBA has already begun making up the post-earnings selloff, moving toward the middle of its trading range over the last two days. However, oil prices slid this morning as part of a selloff in riskier assets amid heightened geopolitical uncertainty. Longer-term, it’s unclear what effect Republicans’ gains in the U.S. will have on oil prices. I’ll keep the pipeline company on Buy for investors whose priority is high monthly income.
Next ex-div date: November 22, 2016
DIVIDEND GROWTH TIER
HOLD – AbbVie (ABBV 59 – yield 4.4%) – As hoped, ABBV held up well after last Friday’s major healthcare selloff, spending the next week trading between 56 and 57. The stock then took advantage of Monday’s market rally to start a nice rebound, rising from 57 to 60 before closing around 59. And this morning, the stock was 2% higher pre-market, as fears of new drug price regulation disappeared with the Democrats’ control of government. Market pricing pressure is still strengthening, but ABBV is seeing less of an impact than other biotechs; revenue growth is still primarily driven by volume increases and new product introductions. AbbVie also received some positive company-specific news this week. The FDA granted lung cancer treatment Veliparib orphan drug status, and the Patent Office denied a competitor’s challenge to one of AbbVie’s Humira patents. I’m keeping ABBV on Hold for risk-tolerant dividend growth investors.
Next ex-div date: January 11, 2016
BUY – Carnival (CCL 50 – yield 2.8%) – CCL held up very well during last week’s broad market slump, holding all of its gains from the prior Friday (when CCL rose from 47 to 49 on strong earnings from peer Royal Caribbean). However, today the stock is trading 1.2% lower pre-market, likely related to fears that geopolitical instability could increase under President Trump. However, as Carnival CEO Arnold Donald said on their latest earnings call, “Every year there’s geopolitical tensions. There’s some kind of disease consternation. There’s macroeconomic malaise. ... Every year in some markets around the world, those things happen and it’s part of our business.” I’ll keep CCL on Buy for dividend growth investors for now.
Next ex-div date: November 22, 2016
HOLD – Costco (COST 146 – yield 1.2%) – COST pulled back this week, falling more than the market, and now the stock is off about 1.6% in today’s pre-market trading. The warehouse retailer’s October results, reported last week, were solid relative to recent trends. Net sales rose 4% and comp sales rose 2% for October. However, the stock has been in a downtrend since August. I’m still looking for COST to find support around 141, where it bottomed in February and May.
Next ex-div date: February 2016
SOLD – Equifax (EFX 127 – yield 1.0%) – We sold the second half of our Equifax (EFX) position at Wednesday’s average price of 122.38, for a profit of 30%. Including dividends and the sale of the first half of our position in August, our total return in EFX was 37%. We initially recommended the stock in April 2015 at 94.
Next ex-div date: November 21, 2016
BUY – Prudential Financial (PRU 89 – yield 3.2%) – Prudential had a great week, rising 4.6% over the past five days versus the S&P’s 0.7%. After reporting better-than-expected third-quarter earnings last Wednesday, PRU ended the week up about 1.5%, versus the S&P’s 1.9% loss. Adjusted EPS of $2.66 per share beat estimates by almost 7%. Prudential now has $1.31 trillion in assets under management, 11% higher than a year ago. I wouldn’t be surprised to see PRU pull back now as the timeline for a rate hike becomes less certain. But even after recent gains, PRU still trades below book value and at a forward P/E of less than 9. Buy.
Next ex-div date: November 18, 2016
HOLD – U.S. Bancorp (USB 45 – yield 2.5%) – After breaking out of its year-long trading range last week, USB has been consolidating between 44 and 45. However, the stock is pulling back ahead of the bell this morning, as analysts recalibrate their interest rate models based on Trump’s win. Obama and Yellen will still be at the controls in December, but the Fed is sensitive to market action. USB has the potential to be an outperformer once the market gets back into gear, but for now it’s a Hold.
Next ex-div date: December 28, 2016 est.
HOLD – Wynn Resorts (WYNN 87 – yield 2.3%) – I sent out a Special Bulletin moving Wynn to Hold on Thursday, after the company reported earnings that fell short of estimates. Revenue of $1.11 billion rose 11% year-over-year, but missed the consensus estimate by $10 million. EPS of $0.75 were three cents short of estimates, and lower year-over-year. A slow start at the new Wynn Palace in Macau was responsible for much of the miss. Steve Wynn pointed the finger at construction that is making it difficult to access the resort, but analysts are concerned that a lack of attractions for mass-market tourists is equally to blame. Lower spending but more numerous mass-market tourists are expected to be key to Macau’s recovery, because the Chinese government’s anti-corruption effort continues to put a damper on VIP spending and travel. Analysts have lowered their 2016 and 2017 estimates for Wynn since the report, reflecting a bleaker earnings environment in Macau. However, WYNN continues to trade at support around 87, losing no additional ground since Thursday’s selloff. That suggests that, even with the future getting a little dimmer, there are few sellers in WYNN at this level. Since support is holding and WYNN remains within its multi-month trading range, I’ll keep the stock on Hold.
Next ex-div date: November 15, 2016
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 75 – yield 3.6%) – ConEd reported third-quarter earnings that beat estimates after the close on Thursday. Adjusted EPS of $1.51 were about 3% higher than expected. Net income rose 16% year-over-year. 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.
HOLD – Home Depot (HD 124 – yield 2.2%) – We sold half our shares in Home Depot in our last Update, recording the sale at the day’s average price of 120.56 for a slight (4%) gain. Since then, HD has started rebounding, possibly thanks to the stock’s new attractiveness to value investors. My colleague Roy Ward, chief analyst of Cabot Benjamin Graham Value Investor, happened to add HD to his portfolio just as we were reducing risk with our partial sale last week. Roy wrote: “The U.S. housing market is expected to strengthen in 2017, and older homes need repairs and upgrades. Low interest rates will help the home improvement boom expand in 2017. Sales will probably climb 6%, and EPS will increase 15% to $6.95 during the next 12 months ending October 31, 2017. At 19.9 times current EPS and a dividend yield of 2.6%, HD sells at a reasonable price. Home Depot is a blue-chip company with a proven track record and exceptional management. I expect HD to rise 28% and reach my Min Sell Price of 153.03 within 12 to 18 months. Buy at 121.79 or below.” I like Roy’s analysis but will keep HD on Hold until at least after earnings, which are out November 15. Analysts are expecting 16.2% EPS growth to $1.58, and 5.8% revenue growth, to $23.08 billion. HD was down 2.3% before the market opened this morning, but still above where it found support earlier this month.
Next ex-div date: December 6, 2016 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.8%) – PGX, a preferred share ETF, is trading below 15 again and is a good Buy here for investors beefing up the conservative income portion of their portfolio. The ETF offers little price appreciation above 15 but pays reliable monthly dividends.
Next ex-div date: November 15, 2016 est.
HOLD – J.M. Smucker (SJM 133 – yield 2.3%) – J.M. Smucker will release earnings 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 delivered disappointing results last quarter. SJM is a Hold.
Next ex-div date: November 8, 2016
BUY – UPS (UPS 112 – yield 2.8%) – UPS staged a nice rally over the past two days after raising its long-term guidance. The stocks looks healthy this morning, and I’ll keep it on Buy for now.
Next ex-div date: November 9, 2016
HOLD – Xcel Energy (XEL 42 – yield 3.3%) – XEL is a long-term Hold for investors whose priority is safe income.
Next ex-div date: January 2017
Closing prices as of November 8, 2016.
