Stock markets started the New Year with a nice pop yesterday, after closing out the last week of 2016 marginally lower. While one day of action isn’t enough to indicate a trend, we’re optimistic that 2017 could bring a strong market rally. The economy is chugging along, and we’ll get some more data on that front this week: Thursday brings some of the first retail data from the holiday shopping season, and on Friday morning, we’ll get a look at the December jobs report. Today, the Fed will release their December minutes, potentially providing clues on the pace of rate hikes.
From a technical perspective, the last few weeks look like a normal consolidation following markets’ strong post-election advance. I wouldn’t be surprised to see some sector rotation as we start the New Year though. Again, it was just one day, but yesterday’s strongest sectors were energy, materials and telecom.
Lastly, earnings season is getting started, and I have details on what the market expects from our holdings below.
Happy New Year!
HIGH YIELD TIER
BUY – Game Stop (GME 25 – yield 5.8%) – GameStop was added to our high yield portfolio at yesterday’s average price of 25.24. (We add new recommendations to our portfolio on the first trading day of the month, to give subscribers a chance to replicate our results.) Analysts expect the retailer’s diversification efforts to result in 4% EPS growth next year, following a slight decline in 2016 (the company’s fiscal year will end in January). Reasonably valued, high-yielding GME is a Buy for risk-tolerant investors seeking high current yields and medium-term capital appreciation.
Next ex-div date: March 2017
HOLD – General Motors (GM 35 – yield 4.3%) – Three weeks ago, I wrote this about GM: “The company is a major beneficiary of NAFTA, with production chains that stretch from Mexico to Canada. That makes GM a potential target of Donald Trump’s anti-trade policies—or one of his errant Tweets.” So it was no surprise when the President-elect sent a tweet criticizing GM for selling a Mexican-made Chevy Cruze in the U.S. yesterday. And apparently most other investors weren’t surprised either! After trading lower pre-market, GM actually opened slightly higher, and closed the day up nearly 1%. Clearly, the market is growing more skeptical that Trump’s populist proclamations will become policy, instead anticipating a more corporate-friendly compromise. While this resilience is a good sign, GM remains in a short-term downtrend. The stock traded as low as its 50-day moving average, now at 34, before finding support. GM will likely report fourth-quarter and full-year 2016 results later this month. Analysts are expecting 3% sales growth for the fourth quarter and 7.3% sales growth for the year just ended. 2016 EPS are expected to be 20% higher than in 2015, despite 16% lower EPS in the fourth quarter. Estimates for next year are still lackluster; analysts expect EPS to decline 5% due to a 2% drop in sales. GM is a Hold.
Next ex-div date: March 2017
HOLD – Mattel (MAT 28 – yield 5.3%) – Mattel’s slide persisted into the last week of 2016, but the stock got a nice New Year’s boost yesterday, rising over 3%. My colleague Crista Huff, chief analyst of Cabot Undervalued Stocks Advisor, has just added Mattel to her Buy Low Opportunities Portfolio, citing the stock’s high yield, low valuation and double-digit 2017 EPS growth estimates. She thinks institutional investors could drive the stock as high as 48 in 2017 for a 70% return. Mattel will likely report full-year 2016 results at the end of January, and analyst expectations are low: EPS growth of 2% and a 2% contraction in revenue. However, Mattel’s performance accelerated in the latter half of the year—fourth-quarter EPS are expected to be 14% higher than in the same quarter last year—and analysts expect 38% EPS growth and 8% revenue growth in 2017.
Next ex-div date: February 2017
BUY – Pembina Pipeline (PBA 31 – yield 4.7%) – Pembina won’t report 2016 results until February 24. Sales and earnings are both expected to decline due to the year’s persistently low oil prices and weaker Canadian dollar. However, revenues are expected to surge a whopping 42% next year while EPS expand 47%, and the stock is looking ahead. PBA is a Buy for medium-term investors seeking high monthly income. (It’s not appropriate for long-term holding because of the cyclicality of the industry.)
Next ex-div date: January 23, 2017 est.
DIVIDEND GROWTH TIER
HOLD – AbbVie (ABBV 62 – yield 4.1%) – After a strong post-election rally, biotech stocks cooled off in December amid uncertainty over the new administration’s policy toward high drug prices. AbbVie is solidly in the middle of its two-year trading range between 50 and 70, with mostly sideways momentum. Hold.
Next ex-div date: January 11, 2016
BUY – Carnival (CCL 52 – yield 2.7%) – Carnival’s fiscal year ends in November, so the company’s next earnings announcement will be the first-quarter 2017 report, likely in March. The stock has been in a high consolidation pattern since the full-year 2016 report was released in late December. Bookings and ticket prices for next year look very strong, but management predicted significant headwinds from rising oil prices and the strengthening dollar. My colleague Crista Huff, chief analyst of Cabot Undervalued Stocks Advisor, recommended her followers to sell Carnival two weeks ago because of the damage these two forces are expected to do to 2017 earnings growth. We’ll keep a close eye on the stock, but for now, it’s taking this new reality in stride, so I’ll keep CCL cautiously on Buy.
Next ex-div date: February 2017
BUY – Costco (COST 160 – yield 1.1%) – Costco will report December sales results after the market close today. In the last quarter, net sales were running about 3% higher than in the same period last year. Comp sales were about 2% higher, excluding the impact of changes in gas prices and exchange rate.
Next ex-div date: February 2016
BUY – Prudential Financial (PRU 105 – yield 2.7%) – Prudential will report full-year and fourth-quarter 2016 results on February 8. Analysts expect revenues to be 3% higher than in 2015, but are anticipating a 10% drop in EPS. However, the stock is looking ahead, to the higher interest rates of the next few years. PRU is buyable here.
Next ex-div date: February 2017
BUY – U.S. Bancorp (USB 51 – yield 2.2%) – U.S. Bank will announce full-year and fourth-quarter 2016 earnings on January 18. Analysts are anticipating EPS of $3.24, up 2.9%, on revenue of $21.14 billion, up 5.2%. USB is a Buy.
Next ex-div date: March 2017
HOLD – Wynn Resorts (WYNN 87 – yield 2.3%) – WYNN remains near the bottom of its multi-month trading range. The Chinese government’s decision to rein in the growth of Macau’s gaming sector has dampened expectations for the tourism recovery there. However, it’s worth noting that WYNN fell 70%—from 250 to 50—as Macau’s gaming revenues collapsed in 2014 and 2015, but the stock’s early 2016 rebound brought the stock only back to 110. In other words, a return to the good old days in Macau is far from priced into the stock. For now, WYNN is a Hold for investors with high risk tolerance.
Next ex-div date: February 2017
SAFE INCOME TIER
BUY – Automatic Data Processing (ADP 104 – yield 2.2%) – ADP’s fiscal year ends in June, so the company’s next earnings report, out before the market opens on February 1, will be for the second quarter of fiscal 2017. For the quarter, analysts expect EPS to rise 12.5% to $0.81, and revenues to increase 7.4% to $3.01 billion. Dividend aristocrat ADP is a Buy for all investors.
Next ex-div date: March 2017
HOLD – Consolidated Edison (ED 74 – yield 3.6%) – 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 4.4%)
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%)
These four BulletShares funds make up our bond ladder. Each matures at the end of one of the next four years, at which time Guggenheim distributes the fund’s net asset value to shareholders. In the meantime, the funds all pay monthly dividends.
Next ex-div dates: all January 4, 2017, est.
BUY – Home Depot (HD 134 – yield 2.1%) – After strong advances in 2014 and 2015, HD spent most of 2016 stuck in a trading range between 120 and 140. The home improvement chain continues to deliver excellent revenue and earnings growth, but investors are anticipating some deceleration going forward. Over the past five years, HD’s EPS growth averaged 22% per year, fueled by an improving housing market and operational improvements. This year (ending this month), EPS are expected to be 17% higher than in 2015, but growth is expected to slow to about 13% in 2017, and to average 14% over the next five years. However, management continues to improve operating margins—reaching 14% over the past 12 months—and the housing market remains robust. Home Depot could also be a beneficiary of corporate tax reform; the company pays the top corporate tax rate of 36%. For now, I’ll keep HD on Buy for long-term investors. Shorter-term traders should focus on stocks with stronger momentum.
Next ex-div date: March 2017
BUY – PowerShares Preferred Portfolio (PGX 14 – yield 6.0%) – No news.
Next ex-div date: January 13, 2017 est.
HOLD – J.M. Smucker (SJM 129 – yield 2.3%) – No news.
Next ex-div date: February 2017
BUY – UPS (UPS 115 – yield 2.7%) – UPS’ holiday pullback has brought the stock just to its 50-day moving average, which looks like a good buying opportunity for investors still looking to start a position. Package volumes continue to hit records every year, and UPS has excellent management that has guided margins to their highest levels in nine years. UPS will report 2016 results on January 13. Analysts are expecting EPS of $5.82, up 7.2%, and revenue of $61.03 billion, up 4.6%.
Next ex-div date: February 2017
HOLD – Xcel Energy (XEL 41 – yield 3.3%) – Xcel will report 2016 results before the market opens on February 2. Analysts are expecting revenues to have increased 4.8% year-over-year, to $11.55 billion, while earnings are expected to rise 5.3%, to $2.20 per share.
Next ex-div date: March 2017
Closing prices as of January 3, 2017
