For investors lulled into a false sense of security by the low-volatility bull market of 2017, the past week has been a rude awakening. Even for investors who remember much longer and much deeper market corrections (and us professionals!) Monday’s sudden drop was a little scary.
But as you’ve doubtless heard or read numerous times by now, there’s no reason to panic. For one thing, this correction comes on the heels of a market rally so strong that pretty much everyone agreed a pullback was around the corner. For another, yesterday’s partial rebound was a textbook example of why it doesn’t pay to overreact short-term.
What happens next? Very short-term, a bounce is likely, but you might want to use it to do some selling. And even though the bargains may be tempting here, I don’t recommend doing a lot of buying right now. That’s because intermediate term, the market’s trend is now unhealthy, and more downside or at least sideways action is possible. A longer correction that further lowers investor sentiment would probably be healthy, while a consolidation period would allow the market to digest some of its 2017 gains. And, as you’ve probably noticed, volatility is back.
But long-term, the trend remains up.
In our portfolio, we’re turning more defensive without overreacting. I’m moving many of our stocks to Hold, and selling our weakest holding, Welltower (HCN).
HIGH YIELD TIER
BUY – General Motors (GM 42 – yield 3.6%) – After pulling back with the rest of the market last week, GM jumped almost 6% after reporting earnings yesterday morning. Revenue and EPS both beat estimates: revenue fell less than expected, and earnings rose more than expected thanks to cost cutting and other successful measures to improve profitability. In the fourth quarter, revenue fell only 5.5%; analysts had been expecting a 17% drop. And thanks to cost cutting and margin improvement, adjusted fourth quarter EPS rose 21%, to $1.65. Analysts were expecting a much more modest single-digit increase. A focus on profitability—including the divestment of Opel/Vauxhall and the decision to exit some unprofitable markets earlier this year—helped GM improve both margins and earnings, despite stagnation in revenues. Going forward, analysts are optimistic about the new crossover models and line of “next-gen” pickup trucks GM is introducing this year, and the launch of GM’s autonomous ridesharing fleet as soon as 2019. Potential speedbumps include headwinds from higher commodity prices and how much longer GM can offset flat sales volumes with cost-cutting. And management still didn’t make any promises to increase the dividend, which has been flat at 38 cents per quarter since early 2016. But overall, the report was very strong, and Wall Street was pleased. If you don’t own GM, and are looking to use the current market pullback to do some bargain hunting, I think you could nibble here. The stock is near the bottom of its trading range and has solid support just a few points below here.
Next ex-div date: March 8, 2018
HOLD – ONEOK (OKE 56 – yield 5.3%) – In a week of terrible performances, energy stocks was the absolute worst. The S&P energy sector ETF, XLE, is now 10% off its late-January high, and gained the third-least in yesterday’s rebound, after real estate and utilities. In that context, OKE actually looks okay, the stock is now trading about where it was in mid-January, which was the upper limit of its trading range for six months. Given the weakness in the energy sector, I’ll be cautious and put OKE on Hold today, but if the stock holds up over the next few weeks, I anticipate putting it back on Buy soon. ONEOK will report earnings February 27.
Next ex-div date: May 3, 2018 est.
HOLD – Pembina Pipeline (PBA 33 – yield 5.2%) – Tim Lutts, Chief Analyst of Cabot Stock of the Week, sold Pembina yesterday, writing: “PBA has found support around its 200-day line a handful of times, but on this pullback (which started in early January), it’s cut through the line like a hot knife through butter.” Also worrying, PBA briefly dipped below its lows from August and October, after previously making a series of higher lows. However, the stock bounced back into its trading range yesterday, so we’ll give it a chance to recover, but move it to Hold today. We’re more interested in the monthly dividends than Stock of the Week readers, and earnings estimates remain excellent, so we’ll hold PBA for now. Pembina will report 2017 results before the open on February 23.
Next ex-div date: February 22, 2018
SELL – Welltower (HCN 57 – yield 6.1%) – Unsurprisingly, HCN fell further this week, as interest rates continued to rise—and became a major focus of investors’ rising anxiety. In addition to persistently rising interest rates, Welltower investors are fighting against deteriorating earnings expectations. Most important, the stock is going down—and shows no signs of stopping. We’ll sell the second half of our Welltower shares today, and hopefully take advantage of a little bounce in the stock price (if we don’t get one today, feel free to try and wait for one, within reason, over the next week.) We sold half our shares at 63.44 in December, so after today’s sale, our total return will probably be about -18%. Sell HCN, and hold the cash.
Next ex-div date: February 12, 2018
DIVIDEND GROWTH TIER
HOLD – American Express (AXP 94 – yield 1.5%) – AXP held up okay last week; the stock had just pulled back and bounced off its 50-day moving average the previous week, so it wasn’t overextended. But then came Monday. AXP opened two points below its 50-day moving average and kept falling, eventually closing down 8%. It did stay above its 200-day moving average, which is down around 87. The stock participated in yesterday’s bounce, and is now back where it ended November, but remains below its 50-day. I’m moving AXP to Hold today; we’ll wait to see what it does over the next week. Management’s decision to suspend share buybacks to rebuild its capital ratio before the 2018 stress tests remains a headwind, so AXP may not be the best choice if we wind up in an extended correction or consolidation.
Next ex-div date: April 5, 2018 est.
BUY – BB&T Corp (BBT 54 – yield 2.5%) – BBT also got hit hard Monday but remains above its 50-day, making it one of the stronger stocks in our portfolio. I don’t expect it to go straight up here, but I’ll keep it on Buy in recognition of its technical and fundamental strength. Rising interest rates are a tailwind, as is the tax bill, and analysts expect EPS to grow a whopping 40% this year. BBT trades ex-dividend tomorrow.
Next ex-div date: February 8, 2018
HOLD – Broadridge Financial Solutions (BR 91 – yield 1.6%) – Broadridge was pretty extended before this week; I noted in my last update that “the stock’s 50-day moving average is way down at 91.” So it’s not a huge surprise that BR has corrected fairly deeply, shedding 6% and falling just below that 50-day line Monday. It’s a pretty big selloff, so I’ll switch BR to Hold today. However, given the company’s strong fundamental position and thriving industry, I’ll be surprised if BR rolls over here. The company will report second quarter earnings tomorrow, February 8, before the open (Broadridge’s fiscal year ends in June.) Analysts expect EPS growth of 38.5%, from $0.39 to $0.54, and revenue growth of 5.2%, to $938.98 million. Hold.
Next ex-div date: March 14, 2018
BUY – Carnival (CCL 69 – yield 2.6%) – I just put CCL back on Buy last week, and I’m going to maintain the rating today. Though CCL has pulled back with the rest of the market, it stopped short of its 50-day moving average, and bounced off it yesterday. The stock spent the last five months consolidating, so it’s not overbought. And the technical and fundamental strength that led me to put CCL back on Buy last week is still impressive. Earnings are growing by double digits, and 2018 bookings are well ahead of last year’s pace. It’s not time to be loading up on new shares of anything, but when the market gets healthy again, I expect CCL to do particularly well.
Next ex-div date: February 22, 2018
BUY – CME Group (CME 158 – yield 1.7%) – One of the few stocks that’s higher than it was last Wednesday, CME reported excellent earnings before the open Thursday. Analysts raised their 2018 estimates in the wake of the report, and buyers kept the stock buoyant throughout the selloff. Fourth-quarter EPS of $1.19 beat estimates by ten cents, and revenue beat estimates by $17.25 million. About a quarter of fourth-quarter revenue came from interest rate contracts, followed by energy and equities derivatives. While volatility in most asset classes declined at the end of 2017, it was already expected to rebound this year, before the volatility spike of the last week. In other words, if this week’s action was good news for anyone, it was good news for CME. Management also noted on the call that they expect to increase their regular and special dividend again this year. Dividend growth investors can nibble on CME here.
Next ex-div date: March 7, 2018 est.
HOLD – Cummins (CMI 175 – yield 2.5%) – Cummins, on the other hand, has had a positively lousy week. The stock got slammed by Monday’s selloff, falling 5.4% to just under 180. Then Cummins reported earnings that beat estimates yesterday morning, but the stock still fell another 2.3%, closing just below its 50-day moving average. Adjusted for the impact of the tax bill, fourth-quarter EPS of $3.03 beat estimates by 14% and were up 35% year-over-year. Revenues rose 22% and also beat expectations, thanks to strong demand for trucks and construction and mining equipment. Aside from a headline loss before adjusting for a $777 million charge related to the tax bill, the only real negative in the report was a deceleration in revenue growth expected in 2018. Management’s guidance calls for sales growth of 4% to 8%, less than half 2017’s 17% revenue growth rate. EPS are still expected to grow by double-digits, thanks to margin improvement, but the sales number may have disappointed analysts. Whatever the reason, instead of rebounding with the market, CMI slid further yesterday. CMI was extended short-term, as I noted last week, and is still well above its lows from August and November (and only a hair under its 50-day). So the stock could recover here, or after pulling back to its 200-day (currently at 164), where it found support in August and November. So for now, I’ll just put CMI on Hold.
Next ex-div date: February 15, 2018 est.
HOLD – Wynn Resorts (WYNN 163 – yield 1.2%) – WYNN held up pretty well this week, hovering just above its 50-day; the stock actually popped 3% Thursday after January gaming data from Macau beat expectations. But Steve Wynn resigned as Chairman and CEO last night, which could cause many investors and analysts to lose faith in the company that bears his name. Matt Maddox, Wynn’s president, will take over as CEO immediately. But it’s anyone’s guess whether Wynn will be able to maintain its pinnacle-of-luxury image and market-leading position without Steve Wynn at the helm. On the upside, Wynn’s resignation may blunt or forestall penalties from U.S. and Chinese gaming regulators, which started their own investigations after the sexual harassment claims against Steve Wynn came to light last week. We’ll see how the stock reacts. For now, Hold.
Next ex-div date: February 13, 2018
SAFE INCOME TIER
HOLD – 3M (MMM 234 – yield 2.3%) – MMM was at all-time highs before this week’s selloff, so like many overextended stocks, it got walloped. MMM is now back where it started 2018, a few points below its 50-day but well above its 200-day. We still have a 24% profit (on a total return basis) and a full position, so we could take some profits here. But as a Safe Income portfolio holding, we’d like to hold MMM for the very long-term, so I don’t want to reduce our position or income stream unnecessarily. For now, I’ll just move the stock to Hold.
Next ex-div date: February 15, 2018
HOLD – Consolidated Edison (ED 76 – yield 3.8%) – Utilities got no relief yesterday, as the bounce back in the stock market triggered further gains in interest rates (presumably reflecting less-panicky investors switching back from bonds to equities). As I’ve said before, this downtrend looks persistent, if your primarily goals aren’t safe income and your holding period isn’t very long-term, sell now. We’ll keep holding for income. ConEd will report 2017 earnings on February 15 after the close, but earnings typically don’t have much of an impact on the stock. Analysts are expecting fourth quarter EPS of $0.77 and revenue of $2.8 billion, up 13.2% and 3.4% year-over-year. For the full year, analysts are expecting revenue of $11.99 billion, down 0.7%, and EPS of $4.09, up 3.3%.
Next ex-div date: February 13, 2018
HOLD – Ecolab (ECL 132 – yield 1.2%) – ECL slid right through its 50-day Monday, and actually lost a little more ground yesterday, to close just above its 200-day. I’m moving the stock to Hold while we wait to see if the 200-day provides support or if it corrects further. The industrial company will release fourth quarter and full year results February 20, before the open. Analysts are expecting to see 7.5% revenue growth and 12.0% EPS growth in the quarter, to $3.6 billion and $1.40 per share. For the full year, analysts are expecting revenue of $13.79 billion and EPS of $4.69, up 4.8% and 7.3%.
Next ex-div date: March 16, 2018 est.
HOLD – ExxonMobil (XOM 78 – yield 3.9%) – As I noted in Monday’s special bulletin, our timing with XOM was lousy. We added the stock to our portfolio at 86.90 on Thursday; it immediately fell 6% after reporting earnings Friday. Analyst downgrades and downward earnings estimate revisions began to flood in this week, adding to the market-wide pressure on XOM, and the stock plunged even further, erasing five months of gains. Our loss is now 10%, nearly overnight. It’s tempting to sell here and put this all in the rear-view mirror, but given the ferocity of the selloff and the fact that it coincided with a major market panic, a bounce is almost certain. So we’ll wait a few more days, and try to lighten our position on a bounce back above 80. We’ll also reconsider what to do with the rest of our shares then. As noted in the Special Bulletin, Exxon is holding an analyst meeting March 7, and they’ll address some of the worrying issues from their earnings report.
Next ex-div date: February 9, 2018BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.1%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
BUY – Guggenheim BulletShares 2020 High Yield Corporate Bond ETF (BSJK 24 – yield 4.9%)
BUY – Guggenheim BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.3%)
Next ex-div dates: all March 1, 2018 est.
HOLD – PowerShares Preferred Portfolio (PGX 14 – yield 5.8%) –PGX pullback toward 14 has deepened as interest rates continue to rise. But long-term investors can continue to Hold for income; PGX has low volatility and is unlikely to drop more than 5% to 10%. Last time rates spiked, in the fourth quarter of 2016, PGX corrected as far as 14 before eventually rebounding. In the meantime, PGX’s monthly dividends keep flowing. Hold.
Next ex-div date: February 15, 2018 est.
BUY – UnitedHealth Group (UNH 225 – yield 1.3%) – UNH pulled back sharply Monday but rebounded nicely yesterday, closing just above its 50-day moving average. I’m going to keep the health insurer tentatively on Buy; the stock’s long-term uptrend is intact and earnings estimates are moving up.
Next ex-div date: March 8, 2018 est.
HOLD – Xcel Energy (XEL 43 – yield 3.4%) – XEL is at its lowest level since last February; if you’re looking to bail a short-term bounce seems likely soon. Intermediate-term, the trend is down and XEL is a Hold only for long-term investors whose primary goal is income. Xcel was slated to report earnings before the market open today, but the report isn’t likely to have too much of an impact on the stock price. Analysts were expecting revenue of $2.9 billion and EPS of $0.43 in the fourth quarter, up 5.2% and down 4.44%. For the full year, revenues are expected to hit $1.6 billion while EPS are expected to rise 4.5% to $2.31.
Next ex-div date: March 20, 2018 est.
Closing prices as of February 6, 2018
