The stock market continued to strengthen this week, pushing the S&P to within 1% of its all-time high. The major indexes’ mild response to Friday’s lousy employment report—which showed hiring slowed in May—was a welcome sign of strength. If the S&P can break through its 52-week high of 2,128 set back in July 2015, a very strong rally could follow.
Oil prices also rose this week, hitting a 10-month high, and are expected to remain strong as the summer driving season ramps up. Energy stocks are the major beneficiaries, but the rally has also all but erased fears of cascading defaults in junk bonds.
Treasury bond yields have declined, erasing late-May gains, following the weak jobs report and Janet Yellen’s ensuing comments. The pullback has provided a boost to our utilities while once again stymieing the progress of our financials.
And the U.S. dollar’s pullback resumed, good news for multinationals like Costco that have been struggling with unfavorable exchange rates.
But as ever, I recommend you take rate hike expectations and macro-economic predictions with a grain of salt (they’re fickle things), focus on stocks that are working well, and keep your goals and risk tolerance in mind.
HIGH YIELD TIER
BUY – General Motors (GM 30 – yield 5.0%) – GM pulled back sharply last Wednesday after the automaker released disappointing May sales numbers. The automaker sold 240,753 cars and trucks in the U.S. last month, 18% fewer than last May. Even excluding GM’s planned reduction in sales to rental fleets, sales declined 13%. However, the numbers were also impacted by two fewer selling days this year and production delays that limited supplies of new models. Management said demand for some models—including the Cruze and Malibu—outpaced supply.
Adjusted for the two fewer selling days, industry-wide sales rose only slightly (less than 1%) last month. Ford’s sales fell 6%, while Fiat Chrysler eked out a 1% gain thanks to strong Jeep sales.
After Wednesday’s loss, GM fell as low as 29.50 at the end of last week, just a few points above where the stock found support in early April. But the broad market’s strong start to this week has already pulled the stock back above 30. GM continues to execute well, sales in China (its largest market) remain strong, and it remains to be seen if the sales decline in the U.S. was a blip or the beginning of a new trend. We’ll keep the automaker on Buy for now. Risk-tolerant high yield investors can buy a little here.
Next ex-div date: June 8, 2016
BUY – Mattel (MAT 32 – yield 4.7%) – MAT remains just under its 50-day moving average, trading quietly on low volume. The stock appears to have solid support around 30, and is a Buy for high yield and total return investors.
Next ex-div date: August 15, 2016 est.
BUY – Pembina Pipeline (PBA 32 – yield 4.6%)
– The surge in the price of oil this week contributed to a nice advance in PBA, which is now at its highest levels since last July. The stock could hit some resistance at 35-36, where the big slide started last May. On the other hand, if the price of oil continues to advance strongly, it may not. The company declared its June dividend yesterday, buy by June 21 to receive the next monthly payment. PBA is appropriate for risk-tolerant high yield investors.
Next ex-div date: June 22, 2016
DIVIDEND GROWTH TIER
BUY – Amgen (AMGN 159 – yield 2.5%) – Amgen was added to our portfolio at the stock’s average price of 157.76 last Wednesday. The company didn’t report any news this week, and mostly followed the choppy progress of the biotech sector overall. AMGN is above its 50-day moving average, and faces resistance at 165 but has solid support at 140. The company is improving operating margins, has a steady and growing stream of cash flow from its approved therapies, and has several promising new drugs in late-stage trials. AMGN is a Buy for medium- and long-term investors with moderate risk tolerance seeking dividend growth and total return.
Next ex-div date: August 10, 2016, est.
HOLD – Costco (COST 153 – yield 1.2%)
– Costco appears to have developed some resiliency after its earnings gap up, maintaining its gains despite a mixed bag of news this week. Goldman Sachs upgraded the stock last Wednesday, citing valuation and catalysts for improved performance later this year, including the completion of the credit card switchover. On the other hand, Costco reported May sales results that fell short of expectations. May comp sales rose 4% excluding the effects of gas-price and exchange-rate changes, but were flat with those effects included. Adjusted comp sales growth seems to have stabilized around 4% for now, lower than the growth rate of a year ago but still solid. If currency headwinds abate, the return of real growth could be a catalyst for a rally later this year. COST is also looking healthier technically, maintaining all its post-earnings gains despite this week’s volatility. We’ll continue to hold our half position.
Next ex-div date: August 10, 2016, est.
BUY – CVS Health (CVS 97 – yield 1.8%) – CVS looks to have found support at 96, and I think investors who haven’t bought yet can start a position here. CVS is a high-quality stock with a 12-year dividend history and a five-year dividend growth rate of 28%. The company has been diversifying through acquisitions and organic growth to provide more health care and pharmacy services. Analysts expect EPS growth to average 15% annually over the next five years.
Next ex-div date: July 20, 2016 est.
BUY – Equifax (EFX 125 – yield 1.1%) – EFX didn’t report any news this week, and the stock hasn’t budged—which is fine for a stock at all-time highs that has advanced 18% in three months! Investors who don’t own Equifax yet can use this consolidation as an opportunity to start a position. Equifax is one of the big-three U.S. credit reporting agencies, and is also expanding internationally through acquisitions. Analysts expect the company to report revenue growth of 17% this year, and for EPS growth to average 12% over the next five years.
Next ex-div date: August 19, 2016 est.
HOLD – Reynolds American (RAI 51 – yield 3.3%)
– RAI got a boost from the lousy jobs report on Friday morning, since slower economic growth and lower interest rates translate (roughly) into more interest in ultra-conservative sectors like tobacco. It’s tempting to finally take some profits in RAI here—we’re sitting on a 68% unrealized capital gain—but with the overall market getting healthier, we’re not looking to reduce risk, and long-term RAI still looks healthy. So we’ll hold for now. Note that RAI trades ex-dividend today.
Next ex-div date: June 8, 2016
HOLD – U.S. Bancorp (USB 43 – yield 2.4%) – Higher interest rates are good news for U.S. Bancorp and other financials, so the stock pulled back after rate hike expectations tanked Friday. Constantly changing interest-rate expectations mean our investment in USB is taking longer to turn profitable than expected, but the bank remains a high-quality player in an industry that will eventually come back into favor. Analysts still expect EPS to grow 4.1% this year, despite persistent low interest rates, and are hoping for an expansion to 7.6% growth in 2017. And U.S. Bank has been increasing its percentage of fee-based revenues, which stabilize cash flow, and maintains a very sound balance sheet. USB is a Hold.
Next ex-div date: June 28, 2016 est.
BUY – Wynn Resorts (WYNN 101 – yield 2.0%)
– WYNN is back at the top of its multi-month trading range, which could become a solid launching pad for the next stage of the stock’s rebound. WYNN is buyable here for risk-tolerant dividend growth and total return investors. Consider starting a small position here and adding to it if the stock successfully breaks out above 102.
Next ex-div date: August 11, 2016 est.
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 75 – yield 3.6%) – ED, trading near 52-week highs, is long-term hold for safe income investors, but I don’t recommend buying at this level. The New York-area utility company generates reliable single-digit annual earnings growth that supports a stable dividend. But it’s not a growth stock, despite its behavior earlier this year. Interest rate news is still creating volatility here, but long-term investors can ignore the day-to-day fluctuations.Next ex-div date: August 8, 2016 est.
HOLD – Guggenheim BulletShares 2016 High Yield Corporate Bond ETF (BSJG 26 – yield 2.6%)
BUY – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.3%)
BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.5%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
No news.
Next ex-div dates: all July 1, 2016, est.
BUY – Home Depot (HD 130 – yield 2.1%) – Last week, I noted that HD was in “consolidation mode,” which remains true. However, the stock’s pullback and break through 130 Monday raises the possibility of this consolidation turning into a correction for the time being. Weak jobs data seems to have investors concerned about the state of the U.S. economy, and the housing market by extension. That broader fear is combined with concerns about the decelerating same-store sales growth Home Depot saw toward the end of the last quarter. But no analysts have revised their earnings estimates for Home Depot downward yet (in fact, 24 analysts have raised their 2016 estimates in the last 30 days), and trading based on changing macro-economic expectations is notoriously fickle. So I don’t think it’s wise to overreact to the pullback, although it is worth noting as a sign of weakness in a stock that has been remarkably solid up to this point. If you bought HD above this level and have a loss, I encourage you to place a stop loss (mental or otherwise) at a price that limits your risk to an amount you’re comfortable with. We’ll hold on.
Next ex-div date: September 6, 2016 est.
HOLD – PowerShares Preferred Portfolio (PGX 15 – yield 5.7%)
– PGX is a Hold as long as the preferred share ETF is trading at a premium to its net asset value. With very limited potential for price appreciation, it’s best to buy PGX on dips below 15. We’ll put it back on Buy once it pulls back again.
Next ex-div date: July 15, 2016 est.
BUY – J.M. Smucker (SJM 133 – yield 2.0%) – SJM has risen to a new 52-week high over the past few days, just ahead of the company’s earnings announcement before the market opens tomorrow. Analysts are currently expecting EPS of $1.19, up 21.4%, on revenue of $1.74 billion, up 20.5%. I don’t recommend buying right before earnings, but SJM is still a solid longer-term Buy. The company is known for its eponymous jams, but has been doubling down on faster-growing grocery categories through acquisitions, and now owns numerous pet food brands as well as the Dunkin’ Donuts and Folgers at-home coffee brands.
Next ex-div date: August 10, 2016 est.
HOLD – Xcel Energy (XEL 42 – yield 3.2%) – Xcel got a nice boost from lowered interest rate expectations this week, but the utility remains on Hold due to valuation. Long-term safe income investors can hold for the steady long-term returns delivered by predictable single-digit earnings growth.
Next ex-div date: June 14, 2016
Closing prices as of June 7, 2016.
