The stock market’s post-election rally became more orderly this week, as the divergences of the past couple of weeks largely disappeared. Most stocks are now participating in the uptrend and it has become less feverish, although all three indexes are at all-time highs. The Nasdaq has performed the best over the past five trading days, gaining 2%, followed by the S&P 500’s 1% rise. The Dow is up only 0.5%, but passed the psychologically important 19,000 mark yesterday. Cabot’s intermediate-term market timing indicator, the Cabot Tides, has flipped back to positive.
Small- and mid-cap stocks continue to outperform their larger peers, and financials remain the best overall performers since the election. Industrials have also held on to their gains, although the action in biotechs has become more mixed. Oil prices, which had been declining, rebounded by 2% over the weekend, while the dollar gave back some of its post-election gains.
Recent economic releases have been very positive. Housing starts and existing home sales both beat estimates, and weekly jobless claims point to a tightening labor market. Odds that the Fed will raise rates in December are now over 90%. Longer-term though, the pace of rate hikes is still expected to be slow. Futures markets are pricing in 40% odds that 2017 will bring only one more rate hike, and a 27% chance that December’s rate hike will be the last until at least this time next year.
Among investors, sentiment is either overheated or overly cynical, depending on what measure you look at. Stock ETF inflows hit an all-time high in the week after the election, while U.S. Treasury fund outflows are historically high. However, sentiment indicators suggest investors remain skeptical, with memories of the failed post-Brexit rally and the general choppiness of the last few months still strong.
Overall, the market is looking more constructive than it has in months, and we’re cautiously optimistic. We don’t have any rating changes today—we’ve sold three underperforming stocks this month, so our portfolio is in fighting shape. If you’re underinvested, focus on our Buy-rated recommendations, and try to start new positions on pullbacks. Mattel (MAT), Carnival (CCL) and UPS (UPS) look particularly healthy today (and offer investors an option from each portfolio tier). Our two financial stocks, Prudential (PRU) and US Bancorp (USB), could also be at the start of sustained new uptrends, although I think they are overbought in the short-term.
Lastly, I wish you a happy Thanksgiving surrounded by family and friends. Our offices will be closed Thursday and Friday (the market will be open until 1pm on Friday, but trading is usually very quiet). So enjoy the holiday, and you’ll hear from me next week!
HIGH YIELD TIER
HOLD – General Motors (GM 34 – yield 4.5%) – GM has spent the past five trading days consolidating its post-election gains. Current-year EPS estimates have increased in recent weeks; analysts now expect EPS to grow 19.7% to $6.01. However, analysts still expect growth to slow in 2017 (GM’s fiscal year coincides with the calendar year), which is exerting downward pressure on the stock. A 2016 earnings beat and strong 2017 guidance could adjust expectations, but failing that, GM could continue to struggle. We’ll wait and see how the end of the year goes. GM is a Hold for risk-tolerant high yield investors.
Next ex-div date: December 5, 2016
BUY – Mattel (MAT 31 – yield 4.8%) – After bottoming in October 2015, Mattel surged 50% in six months, rising from a low of 20 to a high of 35 (we bought around 27 in January 2016). But the toy company’s stock lost its momentum in the second quarter of 2016, and has been trading in a range between 30 and 35 for the past seven-plus months. Mattel is in the midst of a major turnaround that has been largely successful but not without speed bumps. Earnings beat estimates in 4Q 2015 and 2Q 2016, but missed slightly in the first and third quarters of this year. Full-year 2016 estimates have gradually been revised downward, and EPS are now expected to inch up less than 3% this year. But analysts still expect double-digit earnings growth of 37% next year (Mattel’s fiscal year ends in December). In other words, our investment thesis remains intact but is taking slightly longer than expected to pan out. With MAT now near the bottom of its trading range, I think the stock is a good long-term Buy for patient investors who are happy to collect the nearly-5% yield while we wait for the stock’s uptrend to resume.
Next ex-div date: February 2017
SOLD – Pattern Energy (PEGI 20 – yield 8.2%) – We sold Pattern Energy at last Wednesday’s average price of 19.43, for a total return of -17%. Yield stocks have taken a beating as bond yields have surged over the past two weeks. On top of that, Pattern is facing the prospect of receiving an unsatisfactory auditor’s opinion at the end of the year, due to an issue with their internal financial controls. And PEGI has been technically weak since September. I recommend you cut your losses and invest the cash somewhere it will be treated better.
Next ex-div date: December 28, 2016
HOLD – Pembina Pipeline (PBA 29 – yield 5.0%) – Pembina received a nice boost from the rebound in oil prices over the weekend, bumping the stock back into its trading range. We’ll keep PBA on Hold for risk-tolerant high yield investors.
Next ex-div date: December 28, 2016 est.
DIVIDEND GROWTH TIER
HOLD – AbbVie (ABBV 59 – yield 4.3%) – ABBV has drifted lower over the past five trading days, as the Trump rally has started to meet reality. The stock is now revisiting its May-June lows around 59. A few weeks of consolidation between here and 65 would be normal, but a trip back to 55—where the stock bottomed pre-election—isn’t out of the question. On the upside, a breakout through about 67 would likely be enough to earn AbbVie back its Buy rating. We’re holding for a return to fair value once the storm clouds of a new administration and Humira’s expiration clear.
Next ex-div date: January 11, 2016
BUY – Carnival (CCL 52 – yield 2.7%) – CCL continues to advance steadily, progressing toward its 52-week high at 55.77 (where we could see resistance develop). CCL is a solid Buy for dividend growth investors.
Next ex-div date: February 2017
HOLD – Costco (COST 153 – yield 1.2%) – Costco will report November sales results on November 30, followed by first-quarter results on December 7 after the market closes. Comp sales rose 2% last month, and are averaging 2% growth for the quarter so far. An uptick in November could be the kick in the pants COST needs to get going again—the stock hasn’t made any progress since the start of the year. Recent consumer confidence numbers suggest we may get our wish, though of course we won’t count on it. In the meantime, COST remains on Hold.
Next ex-div date: February 2016
BUY – Prudential Financial (PRU 100 – yield 2.8%) – We took some quick profits in PRU last Wednesday, selling a third of our position at the day’s average price of 97.48. This netted us a profit of 19.6% in just under two months. I recommend you hold the rest of your shares for further gains, or wait for a pullback if you’re interested in starting a new position.
Next ex-div date: February 2017
BUY – U.S. Bancorp (USB 49 – yield 2.3%) – USB has held its post-election gains and is sitting at a new 52-week high. The stock remains Buy-rated, but I recommend investors interested in starting a new position wait for a pullback, ideally to the 46-47 area.
Next ex-div date: December 28, 2016 est.
HOLD – Wynn Resorts (WYNN 98 – yield 2.0%) – WYNN has surged from 85 to above 95 since our last update, reinforcing what I wrote about the stock last week: “If WYNN is consistently anything, it’s consistently volatile.” We haven’t received any new information about the recovery in Macau, data from Las Vegas, or signs of improvement at Wynn’s new resort (although if you’ve been to the Wynn Palace, feel free to let me know how the experience was.) But all the casino stocks are outperforming this week, including MGM Resorts (MGM) and Las Vegas Sands (LVS). I’ll keep Wynn on Hold for risk- and volatility-tolerant investors looking for both dividends and capital gains.
Next ex-div date: February 2017
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 70 – yield 3.8%) – No news.
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%)
The longer-dated funds in our bond ladder have dipped along with bonds over the past two weeks, providing a decent buying opportunity for investors looking to add to the conservative portion of their portfolio. Since the funds have maturity dates—at which times the shares can be redeemed for their net asset value—temporary price movements aren’t really a concern to us. The investment-grade corporate bond ETFs are issued with a net asset value of $20 per share, while the high yield ETFs are issued with a NAV of $25, but historically the funds have matured slightly above those values (due to Guggenheim’s practice of reinvesting some distributions).
Next ex-div dates: all December 1, 2016, est.
HOLD – Home Depot (HD 131 – yield 2.1%) – HD’s post-earnings pullback was short-lived. The stock has rallied more than 5% over the past five trading days, supported by Thursday’s strong housing starts report and yesterday’s better-than-expected existing home sales data. Analysts have been raising their earnings estimates for 2016 and 2017 (Home Depot’s fiscal year ends in January), and now expect EPS to grow over 17% this year. HD is a Hold.
Next ex-div date: November 29, 2016
BUY – PowerShares Preferred Portfolio (PGX 14 – yield 6.0%) – PGX remains depressed due to the post-election fixed income selloff. 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, which holds preferred shares (a type of debt) primarily issued by financials.
Next ex-div date: November 15, 2016 est.
HOLD – J.M. Smucker (SJM 127 – yield 2.4%) – SJM is 1.5% lower after releasing second-quarter earnings last Thursday morning. The grocery company’s EPS of $2.05 beat estimates by 12 cents, but revenues of $1.91 billion fell $90 million short of the analyst consensus. EPS rose 7% year-over-year thanks to synergies from acquisitions and share buybacks. However, the pet food and pet treats divisions continue to struggle, with net sales declining 6% year-over-year primarily due to lower volumes. The company is responding by expanding the distribution of Nature’s Recipe, a premium dog food previously only available in specialty pet stores, to mainstream grocery and mass-market stores. Management expects the product to be able to capture market share there thanks to consumers’ growing preference for “natural” pet products. The brand will begin shipping to the new retailers in the fourth quarter (Feb-Apr), and the rollout will be supported by a new marketing campaign. However, analysts are skeptical that the move will be enough to stem the declines in the pet category, where mainstream brands including Kibbles ‘n Bits and Meow Mix are struggling. I’ll keep SJM on Hold for now, but it’s still a candidate for sale if the market weakens or selling pressure increases.
Next ex-div date: February 2017
BUY – UPS (UPS 115 – yield 2.7%) – UPS continues to hit new high ground as the stock market strengthens and opinions about the U.S. economy improve. Try to buy on pullbacks.
Next ex-div date: February 2017
HOLD – Xcel Energy (XEL 39 – yield 3.5%) – No news.
Next ex-div date: January 2017
Closing prices as of November 22, 2016
