Turbulence returned to the stock market this week. Propelled by hawkish comments from two Fed officials and stronger-than-expected inflation numbers, the odds of a June rate hike (as measured by futures markets) rose from 4% to 14% yesterday, shaking up a variety of markets. The dollar rose to its highest level since March yesterday, and the stock market dealt investors heavy losses, with all sectors except energy and transports declining. Crude oil prices are also rising, hitting a seven-month high on Tuesday.
Cabot’s intermediate-term market timing indicators are now on the fence, and I recommend holding off on significant new buying for now, unless you’re substantially underinvested. Odds are still on this being a normal market correction, but, as always, we’ll simply wait for evidence rather than trying to predict what happens next. The Fed will release the minutes of its last meeting this afternoon, and we continue to get earnings reports from the retail sector.
We’re not selling anything today, but I am putting Xcel Energy (XEL) on Hold, and investors who are overexposed, especially to retail, may want to take some profits in Costco (COST) or Target (TGT).
HIGH YIELD TIER
BUY – General Motors (GM 31 – yield 5.0%) – GM notched another week nearly unchanged. The automaker’s stock remains undervalued, trading at a forward P/E of just 5, and risk-tolerant investors can buy here.
Next ex-div date: June 8, 2016
BUY – Mattel (MAT 31 – yield 5.0%) – MAT is trading just above support at 30 on low volume. MAT remains on Buy for risk-tolerant high yield and total return investors.
Next ex-div date: August 15, 2016 est.
BUY – Pembina Pipeline (PBA 29 – yield 5.1%) – PBA has been quiet since announcing earnings two weeks ago, trading on low volume slightly above its 50-day moving average. Risk-tolerant investors whose goals are high (though variable) yield and total return can buy here.
Next ex-div date: May 23, 2016
DIVIDEND GROWTH TIER
HOLD – Costco (COST 144 – yield 1.3%) – Dragged down by the massive rotation out of retail, COST is close to revisiting its February lows, making it the weakest stock in our portfolio. The warehouse retailer will report earnings after the market close on May 25, with a conference call the next morning. Analysts are expecting 5.1% EPS growth, to $1.23, and 3.9% revenue growth, to $27.1 billion. Facing strong headwinds from currency translation, Costco has missed earnings estimates in the last two quarters. And estimates for the current quarter have drifted downward in recent months. We sold half our Costco position in early February at around 149, so we’ll continue to Hold here and look for support to hold at the February lows (142 at the lowest). However, if you still have a full position in Costco or are looking to reduce risk, take some profits now.
Next ex-div date: August 10, 2016, est.
BUY – CVS Health (CVS 102 – yield 1.7%) – CVS is pulling back to its 50-day moving average this week, after pushing to a multi-month high post-earnings. CVS is an excellent Buy on pullbacks (like this one) for both medium- and long-term investors.
Next ex-div date: July 20, 2016 est.
BUY – Equifax (EFX 123 – yield 1.1%) – EFX has barely even flinched during the market’s latest turbulence. Investors whose goals include dividend growth and total return can buy on pullbacks. I wouldn’t be surprised to see this credit reporting company—whose products and services are becoming part of ever more facets of modern life—evolve into a blue chip of the future.
Next ex-div date: May 20, 2016 est.
HOLD – Reynolds American (RAI 50 – yield 3.3%) – RAI is has remained above its 50-day moving average for the past five trading days. Thanks in large part to the recent acquisition of Lorillard, the tobacco company is expected to post 19% EPS growth this year, followed by 12% growth next year. Reynolds has proven committed to translating that growth into dividend growth for investors. RAI is a solid long-term Hold and I’ll likely put the stock back on Buy once the market firms up.
Next ex-div date: June 8, 2016
HOLD – U.S. Bancorp (USB 41 – yield 2.5%) – Oddly enough, financial stocks participated in yesterday’s rate-hike-scare selloff, despite the fact that higher interest rates boost profitability at most financial institutions. This latest knee-jerk reaction is just another reminder of how unpredictable and volatile investing in anything interest rate-related can be these days. USB is a Hold.
Next ex-div date: June 28, 2016 est.
BUY – Wynn Resorts (WYNN 91 – yield 2.2%) – Often-volatile WYNN has cooled off a bit and is consolidating around its 50-day moving average on light volume. Analysts expect Wynn to report 4% EPS growth this year, followed by 38% growth next year as Macau’s recovery accelerates and the new Wynn Palace Macau begins contributing to earnings. WYNN remains a Buy for risk-tolerant dividend growth and total return investors.
Next ex-div date: August 11, 2016 est.
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 72 – yield 3.7%) – Utilities were some of the biggest losers in yesterday’s selloff, since rising interest rates both increase their costs and reduce investor interest in their stocks. We’ve had ED on Hold for several weeks because of valuation. Investors who still have a full position could also take some profits here (we sold a third of our position last February, although we could sell more if the stock breaks below 70).
Next ex-div date: May 16, 2016
HOLD – Guggenheim BulletShares 2016 High Yield Corporate Bond ETF (BSJG 26 – yield 2.9%)
BUY – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.4%)
BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.8%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.0%)
No news.
Next ex-div dates: all June 1, 2016, est.
BUY – Home Depot (HD 132 – yield 2.1%) – Home Depot reported first-quarter earnings that beat estimates yesterday, but the stock sold off due to decelerating same-store sales growth and, likely more important, pressure from the broad market. EPS rose 24% year-over-year, to $1.44, well above analysts’ expectations of $1.35. Revenue also beat estimates, rising 9% to $22.76 billion. Online sales rose 21.5%. And management boosted guidance for the rest of the year, forecasting revenue growth of 6.3% for the full year and EPS of $6.27. However, same-store sales growth decelerated throughout the quarter, from over 10% in February to 4% last month. Management attributed most of the deceleration to weather and the timing of Easter, and said they are already seeing comp sales growth pick back up this month. Overall, comp sales rose 6.5% year-over-year. The indiscriminate carnage in the retail sector raises risk here, but I’m going to keep high-quality Home Depot on Buy unless we see more serious technical weakness develop.
Next ex-div date: June 7, 2016 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.8%) – Preferred share ETF PGX is currently trading at a slight premium to its net asset value, so wait for a pullback before adding to or starting a new position. With very limited potential for price appreciation, it’s best to buy on dips below 15. PGX provides monthly income and low volatility.
Next ex-div date: June 15, 2016 est.
BUY – J.M. Smucker (SJM 128 – yield 2.1%) – Yesterday’s selloff brought SJM, which had been trading at 52-week highs, back to its 50-day moving average. We’ll keep the stock on Buy for now. Smucker’s will report earnings on June 9, and analysts are currently expecting EPS of $1.19, up 21.4%, on revenue of $1.75 billion, up 20.9%. Keep new positions small ahead of earnings.
Next ex-div date: August 10, 2016 est.
HOLD – Target (TGT 74 – yield 3.0%) – Target reported earnings this morning and the stock is trading sharply lower pre-market. EPS growth of 16.5%, to $1.29 beat the consensus estimate by nine cents. However, same-store sales growth of 1.2% fell short of analysts’ 1.6% target. Revenue of $16.2 billion was also slightly lower than anticipated. Online sales rose 23%, a solid showing but lower than the 38% increase last quarter. Management didn’t change their full-year guidance, but did adjust their second-quarter expectations, saying that they now expect second-quarter comp sales to decline between 2% and 0%. We’ve had TGT on Hold for several weeks because of technical weakness. We’ve been willing to give the stock some breathing room, since we took partial profits in August. However, the latest results, combined with the massive rotation out of the retail sector, mean it’s time to let the rest of our position go. Management’s lowered expectations for the next quarter are the most troubling new information. Combined with the significant selling pressure we saw in the stock over the past month, the new guidance suggests TGT’s near-term future is not bright. Today’s trading is likely to be reactive and disorderly, so we’ll watch for an opportunity to unload the rest of our TGT in coming days and send you an alert when we do.
Next ex-div date: August 22, 2016 est.
HOLD – Xcel Energy (XEL 41 – yield 3.3%) – XEL is still a solid long-term safe income investment, but if interest rates begin rising in the second half of this year, the stock is likely to give investors a rocky ride. I’m putting XEL on Hold today; long-term investors should hold on tight and shorter-term traders could take some profits.
Next ex-div date: June 14, 2016 est.
Closing prices as of May 17, 2016.
