The stock market has begun to recover from last week’s war of words-induced selloff, and I’m moving Broadridge Financial (BR) back to Buy today.
However, it’s not time for the all-clear yet; last week’s selloff was preceded by significant deterioration under the surface of the market, so we’ll need to see more proof that the bulls are back before jumping back in the water.
Earnings season is winding down this week with a raft of announcements from the retail sector, including Target (TGT) before the bell today and Wal-Mart (WMT) tomorrow morning. See today’s update on GameStop (GME), below, for more details on retail’s week.
On the fixed income side, the odds of another rate hike this year briefly fell to 32% last week, depressed by stock market jitters and persistent below-target inflation readings. But the odds of a December hike are back to nearly 50/50 today, with the minutes from the Fed’s July meeting due this afternoon.
Read on for updates on all our holdings.
HIGH YIELD TIER
HOLD – GameStop (GME 21 – yield 7.3%) – Retail stocks sold off sharply yesterday, even after July retail sales numbers beat expectations. The Commerce Department’s monthly report showed a 0.6% increase in July retail sales, well above economists’ 0.4% expectation. However, a large portion of the growth came from online retailers, whose sales jumped 1.3% in July, thanks in large part to Amazon Prime Day. Other retailers struggled; sales at electronic stores declined 0.5% and sales at clothing stores fell 0.2%. Coach (COH) and Dick’s Sporting Goods (DKS) also reported lackluster earnings yesterday, which didn’t help matters. On the flip side, Home Depot (HD) and Urban Outfitters (URBN) beat estimates, but their stocks declined regardless, while TJX Companies’ (TJX) beat was rewarded with a measly 0.8% gain. The SPDR Retail ETF (XRT) fell 2.7%, and GameStop dropped 4.2%. In recent months, GME’s low price and valuation have largely protected it from the carnage in retail, and yesterday’s reaction hasn’t changed that … yet. Our next data point will likely come Thursday, August 24, when GameStop reports second-quarter earnings (after the market closes). Analysts are expecting EPS to decline by 44%, from $0.27 to $0.15, while revenues are expected to decline only 0.6%, to $1.62 billion. The big EPS decline is partly due to a difficult comparison to the second quarter of 2016, which included the release of several big games. Results are expected to improve in the second half of the year, once the Switch is back in stock and the new iPhone is released. Worth noting is that GME actually beat EPS expectations in the last two quarters, but the stock gapped down anyway due to concerns about declines in its core business. However, downside potential now looks limited by the stock’s strong support at 20. If that changes—either due to an adverse earnings reaction or increased correlation with the rest of the retail sector—we’ll change our minds.
Next ex-div date: September 6, 2017 est.
HOLD – General Motors (GM 36 – yield 4.3%) – GM has gained 0.4% since our last update, making up for last week’s pullback with this week’s M&A speculation-fueled advance. An unnamed Chinese company apparently made an offer for Fiat Chrysler (FCAU), which is 5% higher this week. Though it was rejected, the offer has triggered speculation about other potential acquisitions, as usual. In addition, auto sales were actually a bright spot in yesterday’s July retail report, rising 1.2%, their strongest month so far this year. However, many of the sales were completed thanks to hefty discounts: motor vehicle prices declined for a sixth straight month, their biggest decline in eight years. GM has been one of the lightest discounters this year, which might have also contributed to the stock’s gains yesterday. GM still doesn’t look particularly promising short-term, but for high yield investors, it remains a decent Hold.
Next ex-div date: September 7, 2017
HOLD – Pembina Pipeline (PBA 31 – yield 4.6%) – PBA got hit hard by Thursday’s selloff, as I noted in last week’s Special Bulletin, and hasn’t found support yet. The stock declined 3.6% Thursday alone, and has lost a total of 5% since our last update (the energy SPDR, XLE, is down 2.3%). PBA is now about 9% off its late-July peak, so this is still a normal correction. And as I noted last week, PBA has strong support a few points below here, around 30.75. At this point, I think we’re more likely to see PBA take another extended stay in its 30-34 trading range than further significant downside. In other words, PBA is a Hold for patient high yield investors.
Next ex-div date: August 23, 2017
BUY – Welltower (HCN 71 – yield 4.9%) – HCN is now 8% off its late-June peak, and looks like it just found support right above its 200-day moving average. Risk-tolerant high yield investors can buy a little here.
Next ex-div date: November 3, 2017 est.
DIVIDEND GROWTH TIER
BUY – Broadridge Financial Solutions (BR 76 – yield 1.7%) – Thursday’s selloff brought BR to its lowest point since late May, but the stock has recovered nicely. Broadridge happened to report fourth quarter and full-year earnings the same day, so it was hard to separate investors’ reaction to earnings, which beat expectations, from the effect of the market selloff. With a little distance, the stock’s strong rebound Friday and Monday suggests investors were pleased once the panic subsided and they had a chance to look at the earnings report properly. For the quarter, EPS of $1.71 beat the analyst consensus by two cents and revenue of $1.35 billion beat by $50 million. Revenues and EPS rose 38% and 18% year-over-year, respectively. For the full year, revenue grew 43% (thanks in part to a major acquisition) and EPS grew 15%, both beating estimates. Management also raised the dividend by 11%, the ninth annual increase in a row. And three analysts have revised their 2018 estimates upward since the report. Given the stock’s good showing since the selloff, I’ll put BR back on Buy today (just use caution given the shaky market environment).
Next ex-div date: September 14, 2017
BUY – Carnival (CCL 69 – yield 2.0%) – CCL barely flinched during last week’s selloff, a sign of how little selling pressure there is in the stock, even at all-time highs. Carnival operates on a fiscal year that ends in November, and will report third quarter earnings at the end of September. The company has beaten analysts’ earnings estimates in each of the last four quarters, and is expected to deliver 5% revenue growth and 8% EPS growth this year. Cruise demand is growing steadily in both the U.S. and abroad, boosting Carnival’s booking volumes and ticket prices year-over-year. Dividend Growth investors who don’t own CCL yet can start new positions on pullbacks.
Next ex-div date: August 23, 2017
HOLD – Cummins (CMI 156 – yield 2.8%) – CMI’s August 1 post-earnings drop was followed up by five days of sideways-to-slightly-up action, before the stock got hammered again by Thursday’s selloff. The broad market selloff pulled CMI back to its post-earnings low, where it stands now. While the technical picture is less-than-rosy, analyst estimates haven’t moved down and volume has been normal since the August 1 gap down, so I’ll keep CMI on Hold for now. The stock trades ex-dividend today.
Next ex-div date: August 16, 2017
HOLD – Prudential Financial (PRU 106 – yield 2.8%) – Prudential has declined 7% since its August 2 earnings report. After dropping 3.5% during Thursday’s selloff (financials were the day’s worst performers) the stock bounced off its 200-day moving average Friday. At this point PRU is one of the weaker stocks in our portfolio, but it’s starting to rebound this week, and is still within its multi-month trading range. So long-term investors can Hold. PRU will trade ex-dividend on Friday.
Next ex-div date: August 18, 2017
HOLD – Wynn Resorts (WYNN 136 – yield 1.5%) – WYNN surged 6% yesterday (making it the best-performing stock in the S&P 500) after a glowing upgrade from Deutsche Bank. The Deutsche analysts said their research showed that Wynn’s casino floor reconfigurations have resulted in significant improvement in walk-in business at the Wynn Palace, which was one of the major points of concern in Wynn’s last earnings release. Hold.
Next ex-div date: November 7, 2017 est.
SAFE INCOME TIER
HOLD – 3M (MMM 207 – yield 2.3%) – MMM has been trading sideways since our last update, right below its 50-day moving average. 3M’s management shared some details of the company’s latest five-year plan at an industry conference last week. Long-term, 3M is targeting organic growth of 2% to 5% per year, fueling annual EPS growth of 8% to 11% (with the help of efficiency improvements, supply chain optimization and other investments.) Management plans to grow the dividend in line with earnings. Hold.
Next ex-div date: August 23, 2017
HOLD – Consolidated Edison (ED 83 – yield 3.3%) – Investors have begun using utilities as a safe haven again; the low-volatility, high-income stocks are one of the only sectors in the black over the last five trading days. ED is a good Hold for long-term income investors.
Next ex-div date: November 13, 2017 est.
BUY – Ecolab (ECL 131 – yield 1.1%) – Our latest buy is off to an inauspicious start; ECL has been drifting lower since reporting earnings August 2. It’s still only 0.2% lower month-to-date though, so I’ll keep it tentatively on Buy for now. Just use caution.
Next ex-div date: September 15, 2017
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 September 1, 2017 est.
HOLD – PowerShares Preferred Portfolio (PGX 15 – yield 5.6%) – 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: September 15, 2017 est.
HOLD – Xcel Energy (XEL 49 – yield 3.0%) – XEL hit new all-time highs last week as investors reducing risk rotated into utilities. Xcel generates reliable cash flow and pays a very predictable dividend, and remains a good long-term Hold.
Next ex-div date: September 13, 2017 est.
Closing prices as of August 15, 2017.
