The dust from the election is settling, and we’re making a few adjustments to our portfolio today.
I now recommend selling Pattern Energy (PEGI), a yieldco that is facing a multitude of short- and medium-term challenges.
I’m also putting Pembina Pipeline (PBA) on Hold today. Like PEGI, the stock has a number of forces working against it: high yield stocks are struggling, and oil prices and exchange rates have become more volatile.
On the plus side, we’re sitting on a two-month, 21% gain in Prudential Financial (PRU) and are going to book some profits today, while holding the rest for further gains.
Lastly, because of its recent strength, I’m putting US Bancorp (USB) back on Buy, but I recommend waiting for a pullback.
Our growth analyst, Mike Cintolo, conducted a review of historic post-election trading recently. While elections can shake up markets—especially when the results are unexpected—he found that markets usually resume fairly normal trading—returning to their previous trend—between one and five days after the election. Today is the sixth trading day since the election results were announced.
As always, send me your questions and comments at chloe@cabotwealth.com, and follow me on Twitter @ChloeAtCabot.
HIGH YIELD TIER
HOLD – General Motors (GM 33 – yield 4.5%) – GM initially dropped following the election on concerns that more protectionist policies could increase manufacturing costs. But the stock began making up the losses within two days of the results and is now not only 4% higher than before the election, but at its highest level year-to-date! The gains are welcome but could be temporary; trading based on the President-Elect’s potential policies is still very speculative. We’ll keep GM on Hold.
Next ex-div date: December 5, 2016
BUY – Mattel (MAT 32 – yield 4.7%) – MAT is back near the middle of its trading range post-election. Consumer sentiment improved in the last survey before the election, raising hopes for a strong holiday season for toy makers. October retail sales data released yesterday also showed improvement, and September retail growth was revised up to 1% from 0.6%. Post-election results won’t be available until later this month, but the trend looks like it’s improving. MAT has good support and analysts expect EPS growth to accelerate from 2.4% this year to 37.2% in 2017 as the company’s turnaround progresses. MAT is a Buy here for risk-tolerant dividend-growth and yield investors.
Next ex-div date: November 18, 2016
SELL – Pattern Energy (PEGI 20 – yield 8.4%) – Yieldco Pattern has never been a sure bet, and the stock now has more working against it than for it. The selloff in high-yield investments following the Republicans’ election sweep is the latest blow. The exodus has driven the yield on 10-year U.S. Treasuries to 2.3%, its highest level since December. Analysts believe that Trump and the Republicans will cut taxes and issue new debt to fund infrastructure spending, and that this will drive up inflation, reducing the value of existing bonds. High-yield investments like PEGI have sold off alongside bonds.
In addition, analysts are pessimistic about renewable energy companies’ prospects under the new administration.
Both selloffs are speculative and may be short-lived, but they’re not the only factors working against PEGI. Management disclosed an issue with their financial controls in last week’s conference call, which will result in an unsatisfactory auditor’s opinion at the end of the year.
On top of the stock’s slide since the beginning of September, it all adds up to too many strikes against PEGI, and we’re going to cut our losses today. In your own portfolio, you may be able to get a higher price for your shares by waiting for a bounce or using a sell order set around 21 or 22. Just be ready to pull the trigger if shares slip further instead. In our portfolio, we’ll keep things simple as usual and sell at today’s average price.
Next ex-div date: December 28, 2016
HOLD – Pembina Pipeline (PBA 28 – yield 5.2%) – PBA is off 6% since the election, dragged down by oil price declines, a slump in the Canadian dollar and the high yield selloff discussed above. PBA is now at its lowest level since April, having broken through the lower bound of its May-through-October trading range. The technical action in the Canadian listing (which isn’t affected by exchange rates) is better—it’s still above support from June-July—but it has also declined. I’m changing PBA’s rating to Hold today and recommend you set a stop loss if your losses are mounting.
Next ex-div date: November 22, 2016
DIVIDEND GROWTH TIER
HOLD – AbbVie (ABBV 63 – yield 4.1%) – ABBV has held its post-election gains, although it’s still a few points off its 52-week high from August. Biotechs’ rebound could be one of the more lasting post-election ripple effects. Republicans’ plan to roll back health care sector reform is among their most well telegraphed proposals, and is likely to be high priority. Plus, biotechs are unusually undervalued, with each rally attempt over the past year stymied by renewed focus on drug prices (first we had Martin Shkreli, then Epi-Pens, then Hillary Clinton’s dominance in the polls). ABBV is a Hold and will be upgraded to Buy if this post-election boost can develop into sustained strength.
Next ex-div date: January 11, 2016
BUY – Carnival (CCL 51 – yield 2.7%) – CCL’s post-election rally has been modest—about 3%—but pushed the stock through resistance at 50 yesterday. We could see more resistance between here and CCL’s 52-week high at 55.77, but I think CCL is a solid Buy today.
Next ex-div date: November 22, 2016
HOLD – Costco (COST 151 – yield 1.2%) – The election outcome and resulting stock market rally have wrenched COST out of its downward spiral. After bottoming at the same level where it found support in February and May, COST has added 3.5% in the last five days. If the rally continues, COST is likely to meet resistance around 160. COST is a Hold for long-term investors with a decent profit cushion.
Next ex-div date: February 2016
SELL A THIRD – Prudential Financial (PRU 99 – yield 2.8%) – PRU has surged 11% since the election, on top of the stock’s 5% gain the week prior. The insurer reported better-than-expected earnings on November 2, and is now benefiting from the post-election increase in interest rates and rally in financial stocks. My colleague Roy Ward, chief analyst of Cabot Benjamin Graham Value Investor, recommended his members sell PRU on Monday, after the stock reached his minimum sell price of 99.71, which his mathematical models say is overvalued territory. Stocks can continue to rise long after they become overvalued, however, we now have a 21% gain in PRU in less than two months, so I think it’s appropriate to take some profits here. We’ll sell a third of our PRU shares at today’s average price. Sell a third; Hold the rest. (If you don’t own PRU yet, wait for a pullback before starting a new position.)
Next ex-div date: November 18, 2016
BUY – U.S. Bancorp (USB 49 – yield 2.3%) – USB has also gotten a nice post-election bump from the increase in interest rates, coupled with hopes that Trump and a Republican congress will loosen regulations on banks. Respecting the strength, I’m switching USB back to Buy today. However, the stock is overextended short-term and the Trump rally could reverse any day, so I recommend that you wait for a pullback before starting a new position. The 45-46 area would be a good entry point.
Next ex-div date: December 28, 2016 est.
HOLD – Wynn Resorts (WYNN 87 – yield 2.3%) – WYNN drifted lower as the market rallied after the election, but began to rebound yesterday. The slow start at the company’s new Macau resort remains a concern, but no new information was released this week. If WYNN is consistently anything, it’s consistently volatile. We’ll keep it on Hold.
Next ex-div date: February 2017
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 71 – yield 3.8%) – The selloff in bonds that followed the election also dragged down defensive dividend stocks like ConEd. The slump may have ended yesterday, but doesn’t really affect our thinking on ED anyway. ED remains a long-term Hold for investors whose priority is regular income.
Next ex-div date: February 2017
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%) – HD reported earnings that beat analyst estimates on all fronts yesterday morning. Revenues of $23.2 billion, up 6% year-over-year, beat estimates by $150 million. EPS rose 17% to $1.60, two cents above analysts’ estimates. Same-store sales rose 5.5% thanks to both higher traffic and higher spend per customer. However, the stock declined 2.6% after results were released. Year-over-year EPS growth is expected to stall next quarter because of a “tough comparison” to the fourth quarter of 2015, when weather and other factors boosted results. EPS growth remains on track with management’s full-year guidance, but investors clearly aren’t enthusiastic about owning a stock that’s expected to report 0% year-over-year EPS growth in three months. HD remains on Hold.
Next ex-div date: December 6, 2016 est.
BUY – PowerShares Preferred Portfolio (PGX 14 – yield 6.0%) – The post-election fixed income selloff has dragged PGX below 14.50. However, the risk of a wave of defaults or a significant credit event hasn’t increased, so long-term investors have no reason for concern. In fact, the fund primarily holds preferreds issued by financials, which are doing great right now. Opportunistic investors looking to beef up the ultra-conservative portion of their portfolio can use this as an opportunity to start a new position in PGX.
Next ex-div date: November 15, 2016 est.
HOLD – J.M. Smucker (SJM 129 – yield 2.3%) – J.M. Smucker will release earnings tomorrow morning, 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 113 – yield 2.8%) – UPS hit a new 52-week high on Friday and is now pulling back slightly. Try to buy on pullbacks to 110-112.
Next ex-div date: November 9, 2016
HOLD – Xcel Energy (XEL 39 – yield 3.5%) – XEL has fallen along with the other “bond alternative” stocks. Short-term movements here are of little concern to us; the utility is a long-term Hold for investors whose priority is safe income.
Next ex-div date: January 2017
Closing prices as of November 15, 2016.
