After a two-week rally, the major indexes pulled back yesterday, but the retreat isn’t surprising given the market’s recent gains.
The last two weeks have turned the market’s intermediate-term trend up, and conditions are in place for a sustained rally. Most importantly, the major indexes have now successfully (meaning they bounced) re-tested their correction lows three times since the start of the year.
Still, yesterday’s pullback dealt out pain across the board. The biggest losers were aggressive health care and technology stocks, which had led the last two weeks’ rally. But high-yield stocks like REITs and utilities, which have been lagging in recent weeks, also pulled back sharply. Energy and financial stocks held up best.
Also yesterday the yield on 10-year treasuries spiked to 3.09%, its highest level since 2011.
I don’t have any rating changes today. After putting ONEOK (OKE) and Broadridge (BR) back on Buy last week, our portfolio ratings are evenly split between Buy and Hold (not counting our conservative bond ladder positions), which seems appropriate for the market environment. If you feel underinvested and are looking to take advantage of this pullback to do some buying, ONEOK (OKE), Broadridge (BR), Intel (INTC) and McGrath RentCorp (MGRC) are all in strong uptrends.
HIGH YIELD TIER
BUY – AllianceBernstein (AB 27 – yield 9.6%) – AB has remained above its 50-day line since our last update. Momentum is sideways, but the stock isn’t far off its 52-week high. The stock’s 200-day moving average, which provided support in February, is rising and is now around 26. And earnings estimates have moved up over the past week. Risk-tolerant investors can buy here for high yield, just remember that distributions don’t qualify for the lower dividend tax rate, and you’ll get a K-1 at tax time.
Next ex-div date: August 2, 2018 est.
HOLD – General Motors (GM 37 – yield 4.1%) – GM found support about two weeks ago and is now trading just below its 50-day moving average. And after some earlier downward revisions, analyst estimates for both 2018 and 2019 have moved back up over the past week. The evidence here is still decidedly mixed, but we’ve already sold two-thirds of our position at higher prices, so we’ll hold the remainder to see what happens next.
Next ex-div date: June 7, 2018
BUY – ONEOK (OKE 67 – yield 4.8%) – Since breaking out past long-term resistance two weeks ago, OKE has been moving straight up. The stock is now trading at 52-week highs, and is about 13% above its 50-week moving average. While OKE may be overextended short-term, the stock’s breakout follows a 15-month consolidation, so the rally is well supported. I’ll keep OKE on Buy for high yield investors. Note that although ONEOK is a pipeline company, it’s not a master limited partnership (or MLP). The company is organized as a corporation and dividends qualify for the lower dividend tax rate.
Next ex-div date: August 3, 2018 est.
BUY – STAG Industrial (STAG 26 – yield 5.5%) – STAG’s two-week advance brought it all the way to its 200-day moving average, where the stock is now pausing to catch its breath. A week or two of consolidation here would be warranted. STAG is an industrial REIT that mostly owns warehouses, which are in high demand from e-commerce companies competing to fulfill orders faster. The stock pays monthly distributions that don’t qualify for the lower dividend tax rate. High-yield investors can buy some here.
Next ex-div date: May 30, 2018
DIVIDEND GROWTH TIER
HOLD – American Express (AXP 101 – yield 1.4%) – After bouncing off its 50-day moving average a week and a half ago, AXP has surged back to the top of its trading range. The stock faces overhead resistance around 102 but has good support from its 50- and 200-day lines. EPS are expected to grow by double-digits this year and next, thanks in part to a tailwind from the tax cut. The market is improving and AXP has a good setup, but I’ll wait to put the stock back on buy until it breaks out past its previous highs.
Next ex-div date: July 5, 2018
HOLD – BB&T Corp (BBT 55 – yield 2.7%) – BBT is back near the top of its three-month trading range between about 51 and 56. The stock’s 50-day moving average is down around 53, and its 200-day—which the stock has stayed well above since November—is now around 50. BBT is a Hold for Dividend Growth investors.
Next ex-div date: August 8, 2018 est.
BUY – Broadridge Financial Solutions (BR 116 – yield 1.3%) – I put Broadridge back on Buy last week after the stock’s post-earnings breakout to new highs. After rallying 10% in under two weeks, the stock is now pausing around 116. Following management’s guidance boost on the earnings call, analysts have increased their current-year earnings estimates for Broadridge to an average of 4.21 per share, up from 4.09 a week ago. The new estimate represents year-over-year growth of nearly 35%, at the high end of management’s guidance range. BR is a Buy for dividend growth.
Next ex-div date: June 14, 2018
HOLD – Carnival (CCL 65 – yield 3.1%) – The stock is still stuck in neutral, but CCL’s double bottom around 63 is looking stronger every day. Carnival launched its newest ship, the Seabourn Ovation, in Malta this week. The “ultra-luxury” Ovation has 300 ocean-facing suites and will spend its maiden season cruising around Northern Europe. CCL is a Hold.
Next ex-div date: May 24, 2018
HOLD – CME Group (CME 160 – yield 1.7%) – I sold a third of our shares in CME last week, booking a profit of about 17%. We’ll hold the rest of our position; as I wrote last week, there’s nothing big wrong at CME. However, I’d like to see the stock get back above its 50-day moving average and eventually resume its uptrend. 2018 earnings estimates did move back up over the past week, which is a step in the right direction.
Next ex-div date: June 7, 2018
BUY – Intel (INTC 54 – yield 2.2%) – INTC still looks healthy, ascending steadily just above its 50-day line. Earnings estimates are rising and INTC is a good Buy for dividend growth.
Next ex-div date: May 4, 2018
SAFE INCOME TIER
HOLD – PowerShares BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.0%)
BUY – PowerShares BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
BUY – PowerShares BulletShares 2020 High Yield Corporate Bond ETF (BSJK 24 – yield 4.9%)
BUY – PowerShares BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.4%)
The BulletShares funds make up our bond ladder, which is a conservative strategy for generating income by buying a series of individual bonds or defined-maturity bond funds that mature in successive years. Because the BulletShares funds mature at the end of the year in their name (at which point Invesco disburses the net asset value of the ETF back to investors), they are a good store of value even when interest rates rise. And if you reinvest the proceeds of the maturing fund in a new, longer-dated holding every year, you can secure rising income stream as rates rise. You can construct your own ladder with either the investment-grade or high-yield funds, or a mix, as we’ve done. The 2018 fund’s yield will gradually decline over the second half of this year as Invesco moves the fund into cash, so if you’d like to construct your own bond ladder today, start with BSCJ or its 2019 high-yield counterpart, BSJJ.
Next ex-div dates: est. June 1, 2018 est.
HOLD – Consolidated Edison (ED 75 – yield 3.8%) – Just as utilities were starting to recover from the U.S.’s violation of the Iran nuclear deal, yesterday’s surge in treasury yields dealt the sector another blow. April retail sales data and manufacturing numbers released yesterday showed economic growth is proceeding apace, despite rising gas prices. That raised expectations that the Fed will hike rates three times this year, and interest rates rose commensurately. ED is now back at its February-March lows, but is still a good long-term Hold for investors whose primary goal is safe income.
Next ex-div date: August 13, 2018 est.
BUY – Ecolab (ECL 146 – yield 1.1%) – ECL continues to consolidate its big April gap up, and is only a few points off all-time highs. Earnings estimates have been moving up, and EPS are now expected to grow by 15% this year, and 12% next year. Buy for Safe Income.
Next ex-div date: June 18, 2018
BUY – McGrath RentCorp (MGRC 64 – yield 2.1%) – MGRC continues to march steadily higher. McGrath rents modular offices, classrooms, and more, and has a 25-year history of dividend growth. Earnings estimates for this year and next have both moved up over the past week and EPS are now expected to rise by 32% this year and 9% next year. Buy for safe income.
Next ex-dividend date: July 13, 2018 est.
BUY – PowerShares Preferred Portfolio (PGX 14 – yield 5.8%) – PGX remains under 14.50, presenting a good buying opportunity for investors looking to add reliable monthly income to their portfolio. PGX is an ETF that holds preferred shares and pays monthly distributions. The fund has low volatility but no capital appreciation potential; it generally trades between 14 and 16. Buy for a good store of value and regular income.
Next ex-div date: May 16, 2018 est.
HOLD – UnitedHealth Group (UNH 240 – yield 1.3%) – After a few weeks of post-earnings consolidation, UNH bounced off its 50-day last Wednesday and then rose to its highest level since January before pulling back slightly yesterday. The stock’s intermediate-term trend is still sideways, but it’s getting healthier, and a breakout past 250 could be in the cards soon. Hold.
Next ex-div date: June 14, 2018 est.
HOLD – Xcel Energy (XEL 45 – yield 3.2%) – Last week’s utility pullback brought XEL just back to its 50-day line, and yesterday’s selloff pulled the stock below it. A renewed uptrend in XEL may have to wait a while, but investors whose primary goal is income can continue to Hold.
Next ex-div date: June 12, 2018 est.
Closing prices as of May 15, 2018
