Markets pulled it together last week, with oversold financial and consumer stocks finding support and delivering gains for the holiday-shortened week. However, the market started this week with another sharp pullback Monday, bringing the Dow and S&P 500 back to their February lows. And markets look set to open lower today after China announced a slew of retaliatory 25% tariffs on U.S. exports.
A rebound later this week is likely, but not certain. As Cabot President Tim Lutts wrote yesterday, “The broad market’s course has become increasingly suspect.”
Our options expert, Jacob Mintz, added that although he wouldn’t call this a bear market, he would call it “extremely treacherous and volatile.” So be careful out there.
While you wait for the trend to turn back up, you should be reducing risk and honing a watch list of stocks that are still behaving well. In our portfolio, I’m moving Broadridge Financial (BR) and Carnival (CCL) to Hold today, and looking for an opportunity to bank some profits in 3M (MMM). Watch for a special bulletin.
However, it’s not all doom and gloom. Some of our stocks are actually benefitting from the return of market volatility, like utilities (ED and XEL), REITs (STAG) and select financials (AB and CME).
On the fixed income side, the yield curve continues to flatten; the spread between two- and 10-year Treasury note yields ended the first quarter at its lowest level since 2007. That means companies that make money by borrowing at short-term rates and lending at higher long-term rates—including most banks—are seeing their profits margins squeezed.
Finally, a rash of economic data is being released today, including ADP’s employment numbers. Last week brought a taste of positive news—lower than expected jobless claims and an upward revision in fourth-quarter GDP—so expectations are probably primed for good news.
As always, feel free to email me anytime (chloe@cabotwealth.com) with any questions or concerns.
HIGH YIELD TIER
BUY – AllianceBernstein (AB 26 – yield 8.7%) – AB continues to trade sideways just under its 50-day line. Short-term momentum is sideways, but longer term its choppy uptrend remains intact. The asset manager remains a decent buy for investors whose priority is high income, and for whom predictability isn’t essential (AB’s distributions vary based on cash flow). AB is organized as a partnership, so dividends aren’t qualified and they issue a K-1 at tax time.
Next ex-div date: May 3, 2018 est.
HOLD – General Motors (GM 37 – yield 4.4%) – GM has started to rebound after reporting strong March sales numbers (the company sold 4% more cars than last March). However, that will be the company’s last monthly sales report as management has decided to cut back to quarterly reporting. The decision could reduce volatility in the stock somewhat, which would be a positive from our perspective. We sold half our shares in GM at last Wednesday’s average price of 35.35 after the stock pulled back to its August low; our profit (price-only) was 12%. We now own one-third of our original position. If all goes well, support around 35 will hold. If not, 32.50 is the next support level we’re watching.
Next ex-div date: June 7, 2018 est.
HOLD – ONEOK (OKE 57 – yield 5.3%) – OKE continues to trade sideways between its 50-day and 200-day moving averages. The stock’s trend is mostly sideways, but it’s a solid holding for investors whose priority is high yield. The company owns 38,000 miles of natural gas and natural gas liquids (NGL) pipelines, as well as natural gas and NGL storage, processing and fractionation facilities (fractionation is the breaking down of NGLs into component liquids like ethane and propane.) ONEOK has increased its dividend every year since 2003, and last year’s dividend coverage ratio was a very comfortable 1.3x.
Next ex-div date: May 3, 2018 est.
BUY – STAG Industrial (STAG 24 – yield 6.0%) – REITs have outperformed over the past few weeks, as sharp selloffs in the broad market drive investors into income investments and other counter-cyclical options. STAG is an industrial REIT that mostly owns warehouses and has increased funds from operations (or FFO, a widely-used measure of REIT cash flow) every year since coming public in 2011. Distributions are paid monthly and payments are steady (though they don’t qualify for the lower dividend tax rate). STAG just completed a 20% correction as interest rates surged, eventually finding support in early February, so it’s at a lower-risk entry point (although risk is always higher with high-yield stocks). Investors with high risk tolerance looking for high monthly income can Buy some STAG here.
Next ex-div date: est. June 28, 2018
DIVIDEND GROWTH TIER
HOLD – American Express (AXP 93 – yield 1.5%) – AXP is trading sideways above its February lows, and closed back above its 200-day line yesterday. Earnings estimates remain strong, and Amex has paid dividends since without interruption since 1977. While the short term is a little murky, I’ll continue to Hold for medium- and long-term gains. AXP trades ex-dividend tomorrow.
Next ex-div date: April 5, 2018
HOLD – BB&T Corp (BBT 52 – yield 2.5%) – BBT remains below its 50-day and above its 200-day, around where it bottomed in February. Financials remain under pressure due to the flattening yield curve, and BBT is trading in line with the sector. On the plus side, analyst estimates are moving up and the consensus estimate now predicts 41% EPS growth this year (that’s including a nice tailwind from the tax break). I’ll keep BBT on Hold for Dividend Growth investors.
Next ex-div date: May 9, 2018 est.
HOLD – Broadridge Financial Solutions (BR 108 – yield 1.4%) – BR is consolidating its recent gains just under 110. The stock remains exceptionally strong, but given the weakening market, and the fact that BR is still nearly 7% above its 50-day line, I’m going to move it to Hold today. There’s no reason to worry if you own it though.
Next ex-div date: June 14, 2018 est.
HOLD – Carnival (CCL 64 – yield 2.8%) – CCL has pulled back to its lowest point since September, and is now below its 50- and 200-day moving averages. I’m going to switch this cruise stock back to Hold, for now. Earnings estimates remain very strong and there’s no sign of cruise demand slackening, but the stock is range-bound, so there’s no reason to rush in now.
Next ex-div date: May 23, 2018 est.
BUY – CME Group (CME 161 – yield 1.7%) – If there’s one stock you want to own when volatility explodes, it’s CME. CME Group own exchanges where futures and derivatives are traded, and market volatility is good for business. In the first quarter, average daily volume on CME exchanges rose 30% year-over-year. In addition, CME’s rumored acquisition of NEX Group was confirmed Monday. The deal will bring trading in treasuries and foreign currency to CME’s exchanges, which already offer trading in derivatives on those products. CME is just below its 50-day moving average and I think dividend growth investors can nibble here.
Next ex-div date: June 7, 2018 est.
HOLD – Cummins (CMI 160 – yield 2.7%) – CMI remains flat as a pancake. That’s better than going down, especially since the engine maker could be a loser in the tit-for-tat tariff war with China. On the plus side, earnings estimates have been rising, and remain strong. We’ll Hold for now.
Next ex-div date: May 18, 2018 est.
BUY – Intel (INTC 50 – yield 2.4%) – Intel was added to our portfolio at last Thursday’s average price of 50.98. The stock pulled back sharply Monday after Bloomberg reported that Apple plans to phase Intel chips out of Mac computers as early as 2020 in favor of an in-house solution. However, INTC found support at its 50-day moving average, helped by reports that Apple represents no more than 4% of revenues. The pullback looks like a good buying opportunity. Don’t go wild—in this market environment, anything can happen—but if you have your eye on INTC I think you can pick up a few shares here. Earnings are accelerating, the stock’s uptrend is less than six months old, and management just increased the dividend by 10% in January.
Next ex-div date: May 4, 2018
SAFE INCOME TIER
HOLD – 3M (MMM 216 – yield 2.5%) – After hovering below its 200-day for a few days, MMM lost more ground Monday, and will probably pull back further today, given all the trade war talk. The stock is now 14% off its late-January high. If you’re a short- or medium-term investor, I recommend selling now, ideally on a bounce tomorrow or Friday. We’ll try and take some profits tomorrow to reduce risk—I’ll send out a special bulletin—but I’d like to hold the majority of our shares for the long-term. 3M is a 100-year dividend payer and its long-term trend remains up.
Next ex-div date: May 16, 2018 est.
HOLD – Consolidated Edison (ED 78 – yield 3.7%) – ConEd is a New York-area electric utility with slowly rising earnings and a very reliable dividend. Increased volatility is driving investors back into utilities and other conservative income assets. ED is no exception, and is back above its 50-day average for the first time since December. Hold for slowly rising income.
Next ex-div date: May 14, 2018 est.
HOLD – Ecolab (ECL 137 – yield 1.2%) – ECL is holding up well, back in its December-January trading range and above its 50- and 200-day moving averages. EPS estimates for the chemical company are rising, and the stock could earn back its buy rating soon. For now, stolid ECL is a good safe income holding in this environment.
Next ex-div date: June 15, 2018 est.
HOLD – 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 24 – yield 4.9%)
BUY – Guggenheim BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.4%)
Next ex-div dates: est. May 1, 2018 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.8%) – PGX is an ETF that holds preferred shares and pays dividends monthly, making it a good conservative holding for investors looking for regular income. The fund has low volatility but no capital appreciation potential; it generally trades between 14 and 16. Currently trading around 14.50, PGX is buyable now for investors looking for a good store of value and regular income.
Next ex-div date: April 13, 2018 est.
HOLD – UnitedHealth Group (UNH 225 – yield 1.3%) – After bouncing just shy of its 200-day moving average last week, UNH is rebounding. Support looks solid, and the stock didn’t react negatively to the news of a potential Wal-Mart-Humana tie-up. UNH is a Hold for long-term safe income investors. The company has an eight-year history of dividend growth, funded by a massive health insurance business and a growing medical services business.
Next ex-div date: June 14, 2018 est.
HOLD – Xcel Energy (XEL 45 – yield 3.2%) – Like ED, XEL is back above its 50-day for the first time since December thanks to the rebound in utilities. Investors whose primary goal is income can continue to Hold. XEL is a Minnesota-based utility, the largest producer of wind energy in the U.S., and has a highly reliable income stream. The utility recently increased its dividend by 5.6%, the 14th consecutive annual increase in a row.
Next ex-div date: June 12, 2018 est.
Closing prices as of April 3, 2018
