After a mixed performance last week, the market opened significantly lower yesterday, and the Dow and S&P 500 both hit their lowest level since the start of October. The S&P 500 has now fallen more than 6% since the start of the month, and has closed lower on 12 of the last 14 trading days.
And although earnings season is going well, earnings beats are increasingly being rewarded with selling.
Most important, one of Cabot’s long-term market timing indicators just turned negative, which tells us it’s time to get more defensive.
That means curtailing new buying, maybe taking some profits where you have them, and selling your weakest stocks.
How to know what to sell?
Cut losses short.
Sell stocks that have the least support, and therefore the most potential downside.
Hold on to stocks that are going in the right direction.
In our case, that means selling the rest of McGrath RentCo (MGRC) and Occidental Petroleum (OXY), which has no obvious support level, and in which we have a 15% loss. I’m also selling half of CSX Corp. (CSX), which has fallen 7.5% over the past week despite reporting estimate-beating earnings.
In addition, Dunkin’ Brands (DNKN) and UnitedHealth Group (UNH) move to Hold.
Finally, if you still have a significant position in BB&T (BBT) or General Motors (GM), you may want to lighten your exposure today.
HIGH YIELD TIER
HOLD – AllianceBernstein (AB 30 – yield 8.7%) – AllianceBernstein reported third-quarter earnings that beat estimates by a good margin this morning. Revenue rose 9.7%, to $727.14 million, well more than expected. And adjusted EPS of $0.69 beat estimates by 11%. However, many stocks that beat estimates are still being punished after earnings, so there’s no telling what the stock will do. AB has solid support from its 200-day line, though, currently down at 28.30.
Next ex-div date: November 1, 2018 est.
HOLD – Community Health Trust (CHCT 30 – yield 5.5%) – Community Health Trust will report third-quarter earnings November 6, after the close. Analysts are expecting the healthcare REIT to report FFO (funds from operations, a widely-used measure of REIT cash flow) per share of $0.43, up 40% year-over-year. Revenues are expected to rise 37%, to $12.94 million. The stock pulled back just to its 200-day moving average last week but has bounced nicely since; REITs are holding up well relative to the broad market. The stock will likely spend some time between 29 and 31 for now, given the market environment.
Next ex-dividend date: November 15, 2018 est.
HOLD – General Motors (GM 32 – yield 4.7%) – Bargain-hunters stepped in to scoop GM up off the floor this week, and the stock has closed higher each of the past three trading days. The stock is still in a downtrend, but we only have a small position left, and a double-digit profit, so we’ll Hold for the yield and eventual rebound. The automaker will release third-quarter earnings October 31, before the market open. Analysts are expecting GM to report a 3.6% bump in sales, to $34.84 billion, but a 5.3% drop in EPS, to $1.25. Ford releases earnings today, which could cause some short-term movement.
Next ex-div date: est. December 6, 2018
HOLD – ONEOK (OKE 66 – yield 4.8%) – OKE is bouncing around between its 200-day and 50-day lines, but looks like it has good support from the lower of the two moving averages. ONEOK will report third-quarter earnings after the market closes on October 30. Analysts are expecting to see 7.3% sales growth, to $3.12 billion, and 61% EPS growth, to $0.69. Natural gas prices remain near their highest levels since January, boosting ONEOK’s business.
Next ex-div date: November 2, 2018 est.
HOLD – STAG Industrial (STAG 26 – yield 5.4%) – STAG will report third-quarter results November 1, after the close. Analysts are expecting the warehouse REIT to report FFO of $0.45 per share, up 4.3% year-over-year. Revenues are expected to rise 12.3%, to $87.73 million. The stock dropped briefly through its 200-day moving average two weeks ago, but has rebounded and been above it since the middle of last week. Hold.
Next ex-div date: October 30, 2018
DIVIDEND GROWTH TIER
BUY – American Express (AXP 104 – yield 1.3%) – American Express reported estimate-beating third-quarter earnings last Thursday. Revenues rose 9% and EPS rose 25% year-over-year, solidly beating analyst estimates. The stock popped 4% to close above its 50-day, but was dragged back down by the broad market selloff over the next two days. Still, AXP remains above its 200-day, which is providing support, so I think some sideways trading is the most likely course here. If you own AXP, this could be a good time to sell covered calls to generate a little extra yield. For example, my colleague Jacob Mintz recommended selling January 110 calls around $2.75 in a recent Cabot Options Trader bulletin.
Next ex-div date: January 4, 2019 est.
HOLD – BB&T Corp (BBT 47 – yield 3.2%) – BBT reported solid third-quarter earnings Thursday. EPS rose 36% year-over-year and beat estimates by one cent. Revenue was up 4% year-over-year and also beat expectations. The results weren’t enough to insulate BBT from Monday’s fierce selloff, and the stock has dropped back to its lows from last week. We’re already down to a half position in BBT so if it bounces here we’ll keep holding, but if support fails to materialize it may be time to move on to other, stronger names. BB&T will host an Investor Day on Wednesday, November 14, which could be a positive catalyst.
Next ex-div date: November 8, 2018
BUY – Broadridge Financial Solutions (BR 117 – yield 1.7%) – If you look at a one-year chart of BR, you can clearly see when the stock broke out of trend to the upside in August, which was followed by a few months of the stock trading well above its 50-day line. But BR is a slow-and-steady dividend growth stock, not a glamour stock, and it came back to earth this fall. Two months later, the stock has finally met up with its 200-day line, and is consolidating right above it. I’ll keep BR on Buy for now, but don’t go overboard until the broad market stabilizes. Broadridge is the largest investor communications firm in the U.S., and delivers steady single-digit sales growth every year.
Next ex-div date: est. December 17, 2018
BUY – CME Group (CME 181 – yield 1.5%) – CME’s volatility-fueled uptrend continues. The company owns exchanges where derivatives on stocks, interest rates and commodities are traded, so market volatility is good for the bottom line. CME has been above its 50-day line since the start of this correction, but isn’t overextended. The company will report third-quarter results before the open tomorrow. Analysts currently expect CME to report EPS of $1.43, up 20.2%, and revenue of $913.25 million, up 2.5%. Dividend Growth investors can nibble on normal pullbacks. Also note that CME pays a large special dividend at the end of each year, which can more than double its normal yield.
Next ex-div date: est. December 7, 2018
SELL HALF – CSX Corp. (CSX 67 – yield 1.3%) – Rather than responding positively to last Tuesday’s earnings beat, as I expected, CSX has dropped 7.5% since my last update, bringing our loss to 10%. Right now, the stock is at its lowest level since July. CSX may still find support at its 200-day line, currently at 64. However, our loss puts the stock at the top of my sell list. I’ll Sell Half our positon today.
Next ex-div date: November 29, 2018
HOLD – Dunkin’ Brands (DNKN 73 – yield 1.9%) – Dunkin’ will report third-quarter earnings tomorrow, October 25, before the open. Analysts expect EPS of $0.73 and sales of $342.95 million, up 20% and 53%, respectively. Not much has changed with DNKN over the past week. The stock still looks okay; it’s trading sideways right around its 50-day moving average. I am going to move it to Hold today, though, given the market environment.
Next ex-div date: November 23, 2018 est.
SELL – Occidental Petroleum (OXY 71 – yield 4.4%) – I was hoping to see OXY rebound quickly following last week’s 4% selloff, triggered after the company announced the expiration of a Qatari oil field lease on Monday. The move is part of OXY’s strategy to redirect capital from overseas projects toward its much faster-growing assets in the U.S., so I thought the stock might rebound once investors had more time to digest the news. Instead, OXY has fallen another 3.4% over the past week. Following the stock’s big drop earlier this month, that brings our loss to 15%. There’s no clear support level for OXY in sight until way down at 62.50 (25% below our purchase price), and I don’t want our loss to get much bigger, so I’m going to sell our full position today. Sell.
Next ex-div date: December 7, 2018 est.
SAFE INCOME TIER
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.4%)
BUY – Invesco BulletShares 2020 High Yield Corporate Bond ETF (BSJK 24 – yield 4.8%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.4%)
BUY – Invesco BulletShares 2022 High Yield Bond ETF (BSJM 24 – yield 5.3%)
The BulletShares funds make up our bond ladder, which is a conservative strategy for generating a steady income stream by buying a series of individual bonds or defined-maturity bond funds that mature in successive years. Because the BulletShares funds are short-term and mature at the end of the year in their name (at which point Invesco disburses the net asset value, or NAV, 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.
Next ex-div dates: November 1, 2018 est.
BUY – Consolidated Edison (ED 76 – yield 3.7%) – The turmoil in the stock market has sent some investors fleeing to conservative investments like utilities, and ED is holding up well. The stock is trading in a sideways range between about 74 and 81, and has decent support. Long-term investors can nibble here for safe income. ConEd will report third-quarter results November 1.
Next ex-div date: November 13, 2018 est.
BUY – Ecolab (ECL 148 – yield 1.1%) – Ecolab will report third-quarter results October 30, before the open. Analysts are expecting the chemical company to report revenues of $6.04 billon, up 35.5% from $4.45 billion last year. EPS are expected to rise a whopping 172.7%, from $0.22 to $0.60. The stock corrected sharply a couple weeks ago but is now trading calmly above its 200-day. I’ll keep it on Buy given how conservative the stock is; Ecolab makes cleaning chemicals and other products that generate reliable recurring revenues and has paid dividends for 32 years. But use caution.
Next ex-div date: est. December 17, 2018
BUY – Invesco Preferred ETF (PGX 14 – yield 6.0%) – PGX pulled back as interest rates spiked, but has support near these levels. PGX is an ETF that holds preferred shares (a type of debt) and pays monthly distributions. The fund has low overall volatility and usually trades between 14 and 16. Note that PGX offers no capital appreciation potential; instead, it’s a good store of value and source of regular income. Buy under 15.
Next ex-div date: est. December 14, 2018 est.
BUY – McCormick & Co (MKC 141 – yield 1.5%) – MKC continues to defiantly march to new highs; groceries are the classic counter-cyclical investment and conservative stocks are the hot ticket of the day. I wouldn’t load up here, given the market environment, but MKC isn’t overextended either, so I’ll keep my rating (which is aimed at long-term investors) Buy. The spices company is a Dividend Aristocrat and reported excellent third-quarter earnings three weeks ago, triggering a flurry of upward estimate revisions.
Next ex-div date: December 28, 2018 est.
SELL – McGrath RentCorp (MGRC 51 – yield 2.7%) – I sold half our shares of MGRC last week, and I’m going to sell the remainder today. The stock has been trending down since June, is below its 50- and 200-day moving averages, and has no obvious support level in sight. Finally, our loss has grown to 17%, the outer limit of what I’m comfortable with. Sell.
Next ex-dividend date: January 2019
HOLD – UnitedHealth Group (UNH 265 – yield 1.4%) – UnitedHealth is in the unfortunate club of companies that have reported excellent earnings over the past two weeks and seen their stocks rewarded with selling. UNH initially jumped 5% after the health insurer reported estimate-beating earnings and raised guidance last Tuesday, but sellers stepped in and the stock closed lower each of the next four trading days. I still think UNH is one of the healthiest stocks out there, but I am going to put it on Hold for now, since the stock has lost its momentum and the market environment has turned very unsupportive.
Next ex-div date: December 6, 2018 est.
BUY – Xcel Energy (XEL 49 – yield 2.9%) – Xcel will report third-quarter results before the market opens tomorrow, October 25. Analysts are expecting 19% revenue growth, to $3.58 billion, and 1% EPS growth, to $0.98. The rotation into utilities in recent weeks has pushed XEL nearly back to its year-to-date high. The stock is above both its 50- and 200-day moving averages and can be bought here for safe income.
Next ex-div date: est. December 13, 2018
Prices as of October 23, 2018
