The major indexes ran into resistance last week, although so far the pullback looks normal. The S&P and Dow are both about 2% off their April 20 highs after hitting 2015 resistance around 2,100 and 18,100, respectively. The Nasdaq continues to be the weakest of the major indexes due to significant selling in some major tech stocks, which has dragged the Nasdaq below both is 200- and 50-day moving averages.
The cool-down in the broad market has given some conservative sectors a chance to get back on their feet. Utilities and consumer staples stocks, as measured by the XLU and XLP, have outperformed the major indexes and the off-the-bottom stocks (XLF and XLE for example) over the past five days. However, the rotation out of richly valued stocks appears to be persisting—the S&P 500 value index has outperformed the growth index since April 21.
In addition, the strong dollar that defined 2015 continues to weaken—the WSJ Dollar Index has fallen almost 8% from its 52-week high hit at the end of January. A weaker dollar is good news for American multinationals like Mattel and Costco, whose international sales have struggled to overcome weaker foreign currencies for over a year.
We’re switching Target (TGT) and ConEd (ED) from Buy to Hold today, for different reasons. The rest of our ratings remain unchanged.
HIGH YIELD TIER
BUY – General Motors (GM 31 – yield 4.9%) – GM reported a 3.5% decline in April sales yesterday, due to lower sales to rental fleets. However, the shift is intentional—part of GM’s strategy to boost profit margins. Sales to rental fleets are both low margin and eventually increase the supply of used GM cars as rental companies upgrade. Higher sales elsewhere compensated for most of the decline in rental fleet sales. The 18,000-unit decline in sales to rental companies would have been enough to cause an overall sales decline of 6.6%, but sales only declined 3.5%. That’s thanks to growth elsewhere, including a 3% increase in retail sales, and 4% and 21% increases in sales to commercial and government fleets, respectively. In addition, demand remains strong for high-margin trucks and SUVs; pick-up truck sales were up 19% year-over-year. GM is pulling back normally from the multi-month high it hit after earnings, and looks buyable here, just above its 50-day moving average.
Next ex-div date: June 8, 2016
BUY – Mattel (MAT 31 – yield 4.9%) – Mattel remains below its 50-day moving average. The buying pressure that followed Mattel’s post-earnings drop dried up after three days, halting the stock’s advance just below the 50-day. MAT has now pulled back to just above 30, around where it traded following the company’s disappointing earnings announcement. We’ll look for support to hold around 30 (a key level from February) if all is well at Mattel. Fundamentally, the company’s turnaround appears on track, and the dollar’s continued decline should benefit the multinational’s results in the second half of this year. However, we do want to see investors step in to support the stock soon.
Next ex-div date: May 17, 2016
BUY – Pembina Pipeline (PBA 29 – yield 5.0%) – PBA was added to our portfolio at Monday’s average price of 29.80. We didn’t get the pullback we’d hoped for, but you have more flexibility. If you don’t own PBA yet, feel free to wait for a better price, likely to be available on a pullback in the coming days (possibly as far as the 50-day moving average, currently around 27). PBA is appropriate for you if you’re a fairly active investor with high risk tolerance, and high monthly income is among your top priorities. As a reminder, we own the NYSE listing, but Pembina can also be bought on the Toronto Stock Exchange.
Next ex-div date: May 23, 2016 est.
DIVIDEND GROWTH TIER
HOLD – Costco (COST 151 – yield 1.2%) – Costco got hit hard by Friday’s selloff, along with peers Wal-Mart (WMT) and Target (TGT), underperforming both the broad market and the broader consumer staples sector (XLP). This looks like more of the rotation out of overvalued stocks that we discussed last week, although COST stands out for already being a year-to-date underperformer. COST remains on Hold—investors with money to put to work should look elsewhere.
Next ex-div date: April 27, 2016
BUY – CVS Health (CVS 104 – yield 1.6%)
– CVS reported estimate-beating earnings yesterday, and the stock reacted well. Adjusted EPS of $1.18, up 3.5% year-over-year, beat estimates by two cents. Revenue growth of 19% also beat expectations slightly. The acquisition of Omnicare and of 1,600 in-store pharmacies boosted pharmacy services revenue by 21% and retail sales by 19%. In addition, same-store sales rose 4.2%, thanks largely to a 5.9% increase in prescription volumes. Front-of-store sales remain relatively weak, but represent only 11% of CVS’ overall sales today. CVS is a Buy on pullbacks for medium- and long-term investors interested in dividend growth.
Next ex-div date: July 20, 2016 est.
BUY – Equifax (EFX 120 – yield 1.1%) – EFX surged to a new 52-week high after reporting earnings last week. Revenue and EPS growth of 12% and 16% both beat analyst estimates substantially. Management also raised full-year estimates for both revenue and EPS. Credit-reporting agency Equifax is expanding through acquisitions and new products, and remains a great Buy on pullbacks for growth-focused dividend investors.
Next ex-div date: May 20, 2016 est.
HOLD – Reynolds American (RAI 49 – yield 3.4%) – RAI rebounded to within a stone’s throw of its 50-day moving average this week, strengthening as the broad market weakened. Shorter-term investors could use this opportunity to take some profits, but RAI still looks okay long-term. Hold.
Next ex-div date: June 6, 2016 est.
HOLD – U.S. Bancorp (USB 43 – yield 2.4%) – USB hit a new year-to-date high last Wednesday, and is now pulling back to its 200-day moving average. As noted in last week’s issue, the rotation back into financials is influenced by interest-rate expectations, which are notoriously fickle. USB is a high-quality stock but may be a little jumpy short-term. Hold.
Next ex-div date: June 28, 2016 est.
BUY – Wynn Resorts (WYNN 94 – yield 2.1%) – WYNN popped nearly 7% on Monday thanks to good news from Macau, where the company has one resort and another on the way. Month-over-month, Macau gaming revenue stayed relatively stable in April, the region’s gaming bureau announced. Gaming revenue declined 9.5% year-over-year, the 23rd consecutive year-over-year decline since the Chinese government’s corruption crackdown began. However, the decline was smaller than most analysts expected, and daily gaming revenue was about the same as last month, confirming hopes that the market is stabilizing. WYNN is now back above its 50-day moving average, after spending three days below it last week. Volatile but high-potential WYNN is a Buy for risk-tolerant dividend growth investors.
Next ex-div date: May 11, 2016, est.
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 75 – yield 3.6%) – Utilities have rebounded strongly since their selloff at the market top, and ED is back above its 50-day moving average. The utility will report earnings after the market closes tomorrow, May 5. Analysts currently expect EPS to decline 3.2%, to $1.21, on a 1.5% contraction in revenue, to $3.56 billion. With the stock near 52-week highs again, I think it’s time to put ED on Hold. Investors looking to add conservative, safe income positions to their portfolio can find lower-risk opportunities elsewhere right now. ED is a long-term Hold.
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 24 – yield 4.8%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.0%)
Our bond ladder remains a solid option for investors who want to add an ultra-conservative segment to their portfolios. Please note that the 2016 fund is now on Hold as Guggenheim begins to wind it down for maturity, and the yield will decline as the end of the year approaches. Investors starting a new bond ladder can add a 2020 fund as their longest-dated rung instead.
Next ex-div dates: all June 1, 2016, est.
BUY – Home Depot (HD 135 – yield 2.1%) – HD remains quiet and range-bound ahead of the company’s May 17 earnings report. Consensus estimates now call for EPS of $1.34 on revenue of $22.22 billion, up 15.5% and 6.4%, respectively. The home improvement retailer is a good long-term Buy for all investors.
Next ex-div date: June 7, 2016 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.9%) – PGX, an ETF that holds preferred shares, remains a decent Buy for investors whose priority is monthly income and low volatility.
Next ex-div date: May 13, 2016 est.
HOLD – J.M. Smucker (SJM 127 – yield 2.1%) – SJM has been trading sideways for the past five days. Like ConEd (ED), the grocery company sold off sharply just after the market peaked on April 20, as bullish investors dumped conservative income stocks. Unlike ED, SJM hasn’t rebounded very far, and remains below its 50-day moving average. SJM is a Hold. Smucker won’t report earnings until June, but trades ex-dividend next week.
Next ex-div date: May 11, 2016
HOLD – Target (TGT 80 – yield 2.8%) – TGT got caught in the same selloff as Wal-Mart (WMT) and dividend-growth holding Costco (COST) last week. I’m going to put the stock on Hold until the company releases earnings in two weeks. Analysts expect EPS to rise 9.1% to $1.20, while revenue is expected to come in around $16.3 billion, which is 4.7% lower than in the same quarter last year, due to the sale of the company’s pharmacies to CVS. Stay tuned for earnings on May 18.
Next ex-div date: May 16, 2016
BUY – Xcel Energy (XEL 41 – yield 3.4%) – Like ConEd, XEL has been climbing back from its mid-April selloff. The utility stock is now right at its 50-day moving average, and still a few points below its 52-week high hit in early April. Xcel Energy will announce earnings on May 9. Analysts expect EPS of $0.47, up 2.2% year-over-year, and revenue of $3.0 billion, up 1.4%. I’ll keep XEL, which has slightly better growth credentials than ED, on long-term Buy for now.
Next ex-div date: June 14, 2016 est.
Closing prices as of May 3, 2016.
