The broad market remains in a holding pattern. Some stocks are breaking out to new highs, but others are breaking down.
The Nasdaq regained some ground this week, but the divergences between the major indexes remain. In fact, the Dow and Nasdaq have had a negative correlation over the past month—meaning that when one goes up, the other goes down. And it’s not just the Nasdaq: correlation between the Dow and S&P 500 is at a 14-year low.
From a sector perspective, this week’s winners were tech, industrials and materials stocks. The worst performers were energy stocks, which were hit by falling oil prices, and real estate stocks, which were hit by rising interest rates. The yield on the 10-year jumped from 2.32% to 2.39% last week, after the Fed and ECB released hawkish minutes. Friday also brought another strong jobs report, with 222,000 jobs created versus expectations of 170,000 (though wage growth remains lackluster.)
There’s no reason to panic, but we are making a couple of moves to reduce risk this week. I’m selling Verizon (VZ), which is hitting new lows, for a 10% loss. I’m also selling Automatic Data Processing (ADP), which has been a perpetual underperformer, for an 8% gain. If you have underperformers in your own portfolio, consider cutting them free—even if the next market rally begins tomorrow, they probably won’t be its leaders.
In other news, earnings season kicks off this week with the big banks reporting before the open on Friday. I’ve included earnings expectations and reporting dates for all our holdings that have confirmed them below.
As always, feel free to get in touch at chloe@cabotwealth.com and follow me on Twitter at @ChloeAtCabot. And don’t forget to register for our September Wealth Summit if you haven’t yet.
HIGH YIELD TIER
HOLD – GameStop (GME 21 – yield 7.3%) – GME’s seven-day rally was rebuffed at 22 last week, and the stock is back near its 52-week low. Like the seven-day rally before it, the five-day pullback occurred on light volume. We’ll look for support to hold here, as usual. GameStop is a struggling brick-and-mortar video game retailer branching out into faster-growing collectibles, electronics and digital markets. The stock’s P/E is just above 6. Hold.
Next ex-div date: September 6, 2017 est.
HOLD – General Motors (GM 35 – yield 4.3%) – GM popped to 36 when June auto sales data was released last Monday, but the stock gave back most of those gains when traders returned to work on Wednesday. Still, the stock is trending slightly up, and has pushed above its 50- and 200-day moving averages. The automaker will report second-quarter earnings on Tuesday, July 25, before the market opens. Auto sales have been declining this year, and analysts are expecting GM’s EPS to fall 9.1%, to $1.69 from $1.86 in the second quarter last year. Revenues are expected to decline 1.9%, to $41.58 billion from $42.37 billion. Hold.
Next ex-div date: September 7, 2017 est.
BUY – Pembina Pipeline (PBA 33 – yield 4.4%) – PBA held up well to the pullback in oil prices this week. Oil prices peaked at $47.07 last Monday, retreated to just above $44, and are now back in the high $45s. PBA is trading tightly around 33. The pipeline company will report second-quarter results on August 2 before the market opens. Analysts expect very strong earnings and sales growth, thanks to a number of new infrastructure projects completed last year. EPS are expected to rise 47.4%, to $0.28 from $0.19 in the same quarter last year. Revenues are expected to rise 27.1%, from $789.56 million to $1 billion. Risk-tolerant investors whose priority is monthly income can buy a little here.
Next ex-div date: July 21, 2017
SELL – Verizon (VZ 43 – yield 5.4%) – VZ has declined 4.7% since our last update, hitting new 52-week lows the whole way down. Our loss has grown to 10%. VZ last traded at this level in late 2015, and though the stock did bounce just above 42, it’s not a particularly notable support level. We also don’t have a lot of positive catalysts to look forward to: analysts expect Verizon’s EPS to expand a modest 1.1% this quarter (results out July 27), and revenues are expected to shrink 2.2%. The company’s revenues and margins just haven’t been able to hold up to the intense competition on price among cell carriers. It’s time to cut our losses and put our remaining cash to work in healthier stocks. We’ll sell our remaining half position in VZ at today’s average price; I suggest you do the same (if you want to try to sell at a higher price, at least set a stop loss around 42.5 while you wait.)
Next ex-div date: October 4, 2017 est.
BUY – Welltower (HCN 73 – yield 4.8%) – HCN’s pullback deepened in the past week, with the biggest losses coming as interest rates popped higher on Thursday. The stock is now below its 50-day moving average. So far, this pullback looks similar to the stock’s March and May pullbacks, when it broke through the 50-day, built a rounded bottom over a couple of days, and soon bounced back. And volume hasn’t increased noticeably during the selloff. I’ll keep HCN tentatively on Buy for income-focused investors with moderate risk tolerance. The health care REIT will report earnings on July 28 before the market opens. Analysts expect FFO (funds from operations) of $1.04 per share, down 11.5% from $1.16 per share last year. Revenues are expected to decline less, about 0.9%, to $1.07 billion from $1.08 billion.
Next ex-div date: August 4, 2017 est.
DIVIDEND GROWTH TIER
BUY – Broadridge Financial Solutions (BR 75 – yield 1.8%) – BR’s sideways meander continues; the stock’s 50-day moving average has just about caught up to it. I’ll keep it on Buy, but keep new positions small until the broad market gets a little healthier.
Next ex-div date: September 12, 2017 est.
BUY – Carnival (CCL 66 – yield 2.1%) – CCL continues to consolidate just north of 65. The stock’s consolidation could go on a bit longer, but selling pressure looks light. And the future looks bright: 15 analysts have raised their current year EPS in the last 30 days. Cabot Stock of the Week Chief Analyst Tim Lutts, who also has CCL in his portfolio, thinks we might see a bit of a pullback here though. He wrote yesterday, “My eye says the stock has the potential to pull back to its 50-day moving average, which is now down under 64, and that would be a better place to buy, so I’ll downgrade to Hold for now.” He could be right, so feel free to wait, but for our long-term strategy, I’ll keep CCL on Buy.
Next ex-div date: August 23, 2017 est.
BUY – Cummins (CMI 165 – yield 2.6%) – CMI hit another new 52-week high Monday, and management just raised the dividend 5.4% to $1.08 per quarter (from $1.025). The company, which makes engines for trucks, busses, ships and heavy machinery, has beaten earnings estimates in each of the last four quarters and analysts expect sales and earnings to rise 5.5% and 13.9% this year. If you don’t own CMI yet, I think it’s buyable on pullbacks.
Next ex-div date: August 16, 2017
HOLD – Prudential Financial (PRU 111 – yield 2.7%) – PRU has rocketed back to the top of its trading range over the past two-and-a-half weeks, as investors rotate back into financials. If the financial rally proves sustainable and PRU breaks out, I’ll put it back on Buy. The insurer will report second-quarter earnings on August 2 after the market close. Analysts are expecting 46.2% EPS growth, to $2.69 (from $1.84 in the same quarter last year). Revenues are expected to rise 5%, to $12.4 billion from $11.8 billion.
Next ex-div date: August 18, 2017 est.
BUY – Wynn Resorts (WYNN 134 – yield 1.5%) – WYNN has cooled off a little this summer, trading sideways since the start of June. Selling pressure looks light though—in fact, volume is fairly low overall. And the stock bounced off its 50-day moving average earlier this month, and is now trending up again. Four analysts have increased their earnings estimates in the past 30 days, and while the company hasn’t yet announced its next earnings date, analysts are expecting 35% revenue growth and 9% EPS growth. In think Dividend Growth investors can still buy a little here.
Next ex-div date: August 9, 2017 est.
SAFE INCOME TIER
BUY – 3M (MMM 210 – yield 2.2%) – MMM looks healthy. 3M has all the hallmarks of a long-term winner, including accelerating revenue growth, rising earnings estimates and a 100-year dividend history. The company will announce second-quarter earnings results on Tuesday, July 25 before the market open. Analysts are expecting 22.6% EPS growth, to $2.55 from $2.08 a year ago. Revenues are expected to rise 2.4%, to $7.94 billion from $7.66 billion last year. The stock may pause a bit longer here to let its 50-day catch up, but it’s still a solid Buy for all investors.
Next ex-div date: August 16, 2017 est.
SELL – Automatic Data Processing (ADP 102 – yield 2.2%) – ADP is the largest payroll processor in the U.S. The company should be a main beneficiary of rising employment numbers, but revenues have grown more slowly than expected this year (ADP’s fiscal year just ended in June) because ADP hasn’t been able to sign many new customers. In part, that’s because the last deadlines for small businesses to get into compliance with Obamacare were last year (the new regulations prompted many small businesses to seek outside HR help).
When we added ADP in December, analysts were still expecting sales growth of about 7% to 8% for the fiscal year ending in June. EPS were expected to grow 11% to 13%. But after ADP’s second- and third-quarter revenues missed expectations (in February and May), sales growth expectations have fallen to 5.9%. And in fiscal year 2018 (the next 12 months), revenue and earnings growth are both expected to decelerate.
In addition, those two revenue misses caused ADP’s stock to gap down to 95, even though EPS growth beat expectations. The stock has rebounded after each gap down, but is consistently rebuffed right around 105. The latest bounce off the ceiling was just on Monday; the stock has since fallen back to 102.
ADP’s fourth-quarter earnings report is due before the market opens on July 27. Analysts expect EPS to decline 2.9%, while sales are expected to rise 4.9% to $3.04 billion. A miss—or even a beat with disappointing new customer numbers—could see the stock gap down to 95 again. A beat could see the stock finally blow past 105, but that still leaves us with next year’s earnings deceleration to look forward to. Given that, the potentially negative catalyst of earnings coming up, and the stock’s increasingly ironclad trading range, we’re going to take our small 8% profit, and sell ADP today.
Next ex-div date: September 7, 2017 est.
HOLD – Consolidated Edison (ED 80 – yield 3.4%) – Interest rates peaked on Friday (for now) and ED found support at 80 and is now trading sideways. However, the correction could deepen if interest rates continue to rise. When rates rose for six months in 2015, ED retreated 17%. A five-month period of rising rates in 2016 translated into an 11% decline for ED. So far today, ED is 5% off its late-June highs. Keep that in mind if you’re a shorter-term investor. For us, ED remains a long-term Hold—just take some profits off the table if you haven’t yet.
Next ex-div date: August 14, 2017 est.
HOLD – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.1%)
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 25 – yield 4.8%)
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 because of the funds’ maturity features. 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. Towards the end of each year, we’ll sell that maturing fund and reinvest the proceeds into a new longest-dated ETF to preserve the bond ladder. If you’re looking to start a new bond ladder today, start with the 2018 fund as your nearest-dated position and add a 2021 fund if you’d like to build a four-year ladder. You can use either investment grade funds (which begin BSC) or high yield funds (which begin BSJ) or a mix, like we have. All the funds pay distributions monthly.
Next ex-div dates: all August 1, 2017 est.
HOLD – Home Depot (HD 151 – yield 2.4%) – HD still looks like trouble. The stock isn’t that far off its highs (about 4%), but the choppy action since mid-May (including the high-volume break through the 50-day last month) is a red flag. We’ve already sold half our position, but if you’re still fully invested, you might consider taking some off the table here. The home improvement chain will report earnings on Tuesday, August 15 before the market opens. Analysts are expecting 12.2% EPS growth, to $2.21 per share from $1.97 in the same quarter last year. Sales are expected to rise 5.0%, to $27.8 billion from $26.5 billion. For now, it’s a Hold.
Next ex-div date: September 5, 2017 est.
HOLD – PowerShares Preferred Portfolio (PGX 15 – yield 5.5%) – PGX is a Hold for investors who want reliable monthly income. The preferred share ETF doesn’t have capital appreciation potential, but it trades in a low-volatility range between 14 and 16 and pays monthly dividends of about seven cents per share.
Next ex-div date: July 14, 2017 est.
HOLD – Xcel Energy (XEL 46 – yield 3.2%) – Like ED, XEL remains below its 50-day moving average but has stopped falling for now. The correction could deepen if interest rates continue to rise though. Take a look at what happened to XEL when interest rates rose in 2015 and 2016 for an example of what that might look like. From February to June 2015, XEL pulled back 15%. The 2016 correction was shallower, about 10%, but also lasted about five months. A 10% retrenchment from its recent highs would take XEL down to about 43—where its 200-day moving average is, coincidentally. We’ll stay on Hold, but feel free to take some profits off the table if you like. (Shorter-term investors could even sell here.) Xcel will report second-quarter results on Thursday, July 27 before the market opens. Analysts expect revenue to rise 9.3%, to $2.73 billion (from $2.50 billion last year). EPS are expected to grow 7.7%, to $0.42 from $0.39.
Next ex-div date: September 13, 2017 est.
Closing prices as of July 11, 2017.
