After notching gains for five days in a row, the major indexes paused to cool off yesterday, although as I write this, a rebound in oil prices has futures predicting a sharply higher open for the market today.
Even if this rally turns out to be the real McCoy (which becomes more likely with each passing week), the major indexes still have serious overhead resistance to contend with. The S&P 500, Dow and Nasdaq are all above their 50-day moving averages but still below their 200-day moving averages, as well as their October-November highs and their 52-week highs from earlier in 2015.
The fact that last week’s best performers were rising from the bottom of the barrel (the best performers were financials, commodity and energy stocks) is also a small red flag; real market rallies take real leadership. But that bargain hunting is a sign that investor fear is waning (a necessary precondition for a rebound to become a sustained rally), as is the rally in the junk bond market over the past two weeks.
Given the generally improving health of the broad market, I’m putting General Motors (GM) and CVS Health (CVS) back on Buy today. We have no other changes to the portfolio.
HIGH YIELD TIER
BUY – General Motors (GM 31 – yield 5.0%) – GM finally broke through resistance at 30 this week, and has now risen about 14% off its February 11 lows, a solid demonstration of buying power returning to the stock. It’s now pulling back a bit with the broad market, providing a decent buying opportunity for investors who don’t own any yet. I’m putting GM back on Buy today for high yield investors. The stock is trading ex-dividend today.
Next ex-div date: March 9, 2016
BUY – Mattel (MAT 33 – yield 4.6%) – Mattel is consolidating after February’s big move—we have a 23% profit since January 4—and still looks like a decent buy for high yield investors.
Next ex-div date: May 16, 2016 est.
DIVIDEND GROWTH TIER
HOLD – Costco (COST 151 – yield 1.1%) – Costco reported second-quarter earnings that missed estimates last Wednesday, as foreign exchange rates and low gas prices dealt a blow to sales growth. Excluding the effect of both, comparable sales rose 5% in the latest quarter, but the strong dollar caused Canadian sales to decline 7% and other international sales to drop 3%. Combined with lower revenues from gasoline sales, the lower international sales meant real comp sales growth of only 1% in the quarter. Revenue fell short of expectations, rising 3% to $27.6 billion vs. the consensus estimate of $28.4 billion. And EPS also missed estimates, falling to $1.24 vs. the consensus estimate of $1.28. Even excluding the effects of lower gas prices and foreign exchange rates, there are some red flags in Costco’s earnings. Ignoring the effect of lower gas prices and foreign exchange translation, February sales still grew only 4%, continuing what seems to be a deceleration in Costco’s sales growth. Over the past six months, Costco’s comparable sales growth has slowed from averaging about 7% per month to the current 4% (both excluding gas and FX). However, while the stock’s initial reaction to the report was negative, it has traded sideways since then, so investors aren’t fleeing. Still, I’m concerned about the deceleration in sales growth and will keep COST on Hold for now.
Next ex-div date: May 11, 2016 est.
BUY – CVS Health (CVS 99 – yield 1.7%) – Not much changed with CVS this week—the stock continues to bang its head on resistance just under 100. The stock last crossed the century level in November, when it gapped down from 103 to 99 on high volume. That’s likely creating some resistance, but we still think the stock is a great long-term holding. Analysts expect 18% revenue growth this quarter, and 14% EPS growth over the next five years. Given the strengthening market, I’m putting CVS back on long-term Buy today for investors interested in value and dividend growth.
Next ex-div date: April 22, 2016
HOLD – Equifax (EFX 106 – yield 1.2%) – After a strong three-week rally, EFX is pulling back this week. The stock remains above its 200- and 50-day moving averages, however, the 50-day moving average is still trending down, a sign that technical strength remains lukewarm. So I’m keeping EFX on Hold for now, although long-term, the future of this small credit-reporting agency looks bright.
Next ex-div date: May 20, 2016 est.
BUY – Reynolds American (RAI 51 – yield 3.3%) – As usual, RAI hit new 52-week highs this week. We’re sitting on a 77% profit in RAI and haven’t taken any of the investment of the table—which is a little aggressive, but the stock has never pulled back enough to make us worry! The tobacco stock remains a Buy on pullbacks.
Next ex-div date: June 6, 2016 est.
HOLD – U.S. Bancorp (USB 40 – yield 2.6%)
– USB broke through its 50-day moving average to the upside last Wednesday as the financial sector began to rebound. The sector added to the gains on Friday, after the latest unemployment and jobs numbers came in strong, boosting the likelihood that the Fed will raise interest rates again soon. USB remains above its 50-day moving average, although the average is still trending down. USB remains a Hold for risk-tolerant investors.
Next ex-div date: March 29, 2016 est.
SAFE INCOME TIER
BUY – Consolidated Edison (ED 73 – yield 3.7%) – New York-area gas and electric utility ConEd is behaving nicely and remains a long-term Buy for safe income investors.
Next ex-div date: May 9, 2016 est.
BUY – Guggenheim BulletShares 2016 High Yield Corporate Bond ETF (BSJG 26 – yield 3.2%)
BUY – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.4%)
BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 24 – yield 4.9%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.0%)
Junk bond markets continue to strengthen, paring the losses in the high yield component of our bond ladder.
Next ex-div dates: all April 1, 2016, est.
BUY – Home Depot (HD 127 – yield 2.2%) – Home Depot is trading above its 50- and 200-day moving averages, although it is still below its highs from December. Earnings are strong, expectations are high, and solid housing and economic data continue to fuel investor interest. HD remains a Buy on pullbacks.
Next ex-div date: June 7, 2016 est.
HOLD – PowerShares Preferred Portfolio (PGX 15 – yield 5.8%) – No news.
Next ex-div date: March 15, 2016 est.
BUY – J.M. Smucker (SJM 126 – yield 2.1%)
– Smuckers announced the appointment of a new CEO this week, transferring control of the family business from the fourth to the fifth generation. New CEO Mark Smucker was previously the president of the company’s consumer and natural foods division, and is the son of current chairman emeritus Timothy Smucker and nephew of outgoing CEO Richard Smucker. SJM has pulled back to just above its 50-day moving average at 125, while it consolidates just below its 52-week highs at 130. Smuckers, which generates very reliable free cash flow and steady dividend growth, is a Buy here for all investors.
Next ex-div date: May 11, 2016 est.
BUY – Target (TGT 81 – yield 2.8%) – Target’s rally continues, propelling the stock straight through potential resistance at 80 last week. The stock now sits just 6% off its 52-week highs set back in June and above its 50- and 200-day moving averages, both of which are trending up. Target announced a new capital-spending plan this week that includes heavy investments in e-commerce beginning this year. The stock could stand to consolidate a little here while those moving averages catch up, but remains a Buy.
Next ex-div date: May 16, 2016, est.
BUY – Xcel Energy (XEL 41 – yield 3.3%)
– Utility XEL hit a new 52-week high yesterday as the market pulled back, but the stock’s strength doesn’t seem limited to periods of turmoil. XEL has been trading above its 50-day moving average since the beginning of the year, and has kept pullbacks small. XEL is a long-term Buy for safe income investors.
Next ex-div date: March 11, 2016
Closing prices as of March 8, 2016.