Summer is over and volatility is back! Markets were actually quiet for most of last week, but then a Fed official gave a hawkish speech on Friday, spiking the odds of a rate hike this month to 40% and sending the S&P 500 into a tailspin. It was the first decline of over 1% for the S&P since the post-Brexit selloff.
Then on Monday, another Fed member gave a speech urging “caution” and making a September rate hike seem pretty unlikely—especially since her talk was the last public comment by a Fed member before the central bank’s September meeting (next Tuesday and Wednesday). The S&P recouped over half of Friday’s losses in the wake of her comments ... before collapsing again Tuesday.
Right now, the S&P 500 is back where is started July, just before blasting out of its 17-month trading range. Whether this is a quick V-shaped pullback like we saw after Brexit or a more serious correction will become apparent in coming weeks, but I suggest you become a little more conservative while we wait and see. We’re selling half of CVS Health (CVS) and J.M. Smucker (SJM) today and putting Home Depot (HD) on Hold.
HIGH YIELD TIER
HOLD – General Motors (GM 31 – yield 4.9%) – GM conducted the first press test drives of its all-electric Chevy Bolt this week, and the coverage has been nearly universally glowing. The compact car can go over 230 miles on a single battery charge, further than most Teslas, and yet will likely cost less than the Tesla Model 3, Tesla’s mass-market offering out next year. The Bolt will available in coming months, with Lyft drivers and GM’s Maven car-sharing service getting first dibs. GM’s stock is pulling back with the market this week, but remains a solid undervalued Hold.
Next ex-div date: December 8, 2016 est.
BUY – Mattel (MAT 32 – yield 4.8%)
– After the pullback of the last few days, MAT is back near the middle of its trading range, in between its 50- and 200-day moving averages. The stock has typically found solid support in the 28 to 30 area, which is still below us.
Next ex-div date: November 21, 2016 est.
BUY – Pattern Energy (PEGI 23 – yield 6.9%) – Rate hike anxiety can push PEGI around a little bit, since high-yielding stocks are often seen as bond alternatives. This week’s flip-flopping Fed odds have brought the stock down to 23, where it last traded in mid-August. PEGI is a yieldco, a type of renewable energy company that passes high distributions on to investors (although they are classified as return of capital). The stock is a good high-yield option for income-oriented short- and medium-term investors.
Next ex-div date: September 28, 2016
BUY – Pembina Pipeline (PBA 29 – yield 5.1%) – Energy stocks got hit hard this week by a sharp pullback in oil prices, triggered by a downward revision of demand growth. Demand in developed countries is now expected to stagnate, and even in developing countries, demand will likely grow more slowly than in recent years. Pembina is not directly affected by lower prices; the majority of the company’s revenue comes from fees for using its transportation and processing network. However, lower production in the oil-producing regions Pembina serves could eventually trickle down to affect Pembina’s pricing and volumes. PBA is now in the middle of its multi-month trading range so we’ll keep the stock on Buy for now, but keep positions small.
Next ex-div date: September 21, 2016
DIVIDEND GROWTH TIER
BUY – AbbVie (ABBV 63 – yield 3.6%) – Pharma stocks pulled back sharply on Thursday after the Senate announced an investigation into Mylan’s EpiPen pricing. ABBV fell about 1% on the news but has traded mostly sideways since, showing decent support. The controversy over high drug prices continues to expand, delaying ABBV’s recovery, but investors aren’t fleeing by any measure. I’ll keep the stock on Buy for investors with medium risk tolerance.
Next ex-div date: October 13, 2016 est.
BUY – Amgen (AMGN 169 – yield 2.4%)
– AMGN continues to hold up better than ABBV, despite making several drugs with prices over $1,000. The stock pulled back on Friday but rebounded with such strength on Monday that it hit it highest level in two weeks. AMGN is a Buy for dividend growth investors with medium risk tolerance.
Next ex-div date: November 10, 2016 est.
HOLD – Costco (COST 151 – yield 1.2%) – COST’s pullback continues, dragging the stock back to where it started the summer. The stock should have plenty of support around here, although it’s unclear if COST will be able to find buyers going forward. We took half our position off the table earlier this year though, so we’ll continue to Hold.
Next ex-div date: November 9, 2016 est.
SELL HALF – CVS Health (CVS 91 – yield 1.9%)
– It might be time to cut CVS loose—the stock has fallen through support at 92 to its lowest levels since February. We’ll sell half our position today and watch to see what happens with the rest. SELL HALF.
Next ex-div date: October 20, 2016 est.
HOLD – Equifax (EFX 131 – yield 1.0%) – EFX continues to consolidate between 130 and 135. We’re holding our half position for long-term gains.
Next ex-div date: November 21, 2016 est.
HOLD – Reynolds American (RAI 47 – yield 3.9%) – RAI dropped sharply on Friday, likely thanks to the stock’s connection to interest rates (conservative dividend paying stocks are seen as bond alternatives). In addition, the stock traded ex-dividend on Thursday (after raising the dividend for a second time in a year). We sold half our position in RAI in July, so we’ll hold the rest through this turbulence for now. However, if you still have a large position, at least some of your funds would likely be treated better elsewhere.
Next ex-div date: December 6, 2016 est.
HOLD – U.S. Bancorp (USB 43 – yield 2.4%)
– USB remains near its highs from earlier this month, despite chopping around in recent days. As I’ve said before, we don’t even try to predict which way interest rates are going, and U.S. Bancorp remains a Hold for now. The “super regional” bank has used the last few years of low interest margins to improve operations elsewhere, and is well positioned to thrive once the pressure on financials lifts.
Next ex-div date: September 28, 2016 est.
HOLD – Wynn Resorts (WYNN 104 – yield 1.9%)
– Our profit in WYNN soared from 1% to 13% over the past week, as the stock marched quickly from 93 to 103 in just five trading days. The company’s new Wynn Palace resort in Macau is receiving rave reviews, and even getting some of the credit for Macau’s comeback in August. The Chinese territory saw gambling revenue rise last month for the first time since May 2014. While the strength of the past week is a great sign, the stock remains within its multi-month trading range. I’ll wait for a decisive breakout before putting WYNN back on Buy.
Next ex-div date: November 9, 2016 est.
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 73 – yield 3.7%) – As we’ve been saying for months, higher interest rates are a negative for utilities, because they raise their borrowing costs and provide more options for income investors (to a degree). So ED’s pullback over the last few weeks has been no surprise. Long-term investors can Hold a small position, possibly with downside protection; shorter-term traders should have their money elsewhere.
Next ex-div date: November 7, 2016 est.
HOLD – Guggenheim BulletShares 2016 High Yield Corporate Bond ETF (BSJG 26 – yield 1.8%)
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%)
Even though they’re bond funds, the BulletShares ETFs aren’t really affected by interest rate changes because of their defined maturities. For full details on how to create your own bond ladder using the BulletShares funds, see the August 31 issue. The 2016 fund is rated Hold because it’s maturing at the end of this year—at which point we’ll reinvest the proceeds in a 2020 fund (specifically, the BulletShares 2020 High Yield Corporate Bond ETF, BSJK) to keep the bond ladder intact.
Next ex-div dates: all October 3, 2016, est.
HOLD – Home Depot (HD 126 – yield 2.2%)
– Housing-related stocks got hit hard by the selloff at the end of last week, sending HD all the way to its lows from June. The homebuilders ETF (XHB) dove over 4% on Friday alone. Analysts appear to fear that rising interest rates will make mortgages less attractive or harder to get, and that housing demand will slow down as a result. This fear triggered a selloff in everything related to housing on Friday, including homebuilders, home furnishing companies, construction material stocks and real estate stocks. While mortgage application rates are certainly tied to interest rates, housing stocks have rarely been highly leveraged to interest rate expectations, so the ferocity of Friday’s drop was surprising. Still, HD’s collapse is a major sign of weakness, so I’ll put the stock on Hold today. We still have an 11% profit, but obey your stops if you have a loss now. We’ll look for HD to find support here and watch to see if housing rebounds or if this is the start of a longer rotation out of the sector.
Next ex-div date: December 6, 2016 est.
HOLD – PowerShares Preferred Portfolio (PGX 15 – yield 5.7%)
– Friday’s selloff brought PGX a little closer to 15, but the preferred stock ETF is still a Hold until it becomes less overbought. PGX pays monthly dividends, usually of about seven cents per share, but offers no capital appreciation potential.
Next ex-div date: September 15, 2016 est.
SELL HALF – J.M. Smucker (SJM 136 – yield 2.2%)
– SJM broke through support at 140 last week, and we’re going to sell half our position today. Long-term, the stock’s uptrend is still intact, and the company is executing very well in most areas. However, Smucker’s recently acquired pet food brands aren’t thriving, and the hiccup has brought the stock back to earth for now. We’ll reduce risk by taking half our position off the table while we wait to see if the stock can find its footing. SELL HALF.
Next ex-div date: November 9, 2016 est.
BUY – UPS (UPS 107 – yield 2.9%) – UPS is pulling back about in line with the broad market. U.S. economic data remains mostly good and I’m optimistic about the shipper’s future. Buy.
Next ex-div date: November 23, 2016 est.
HOLD – Xcel Energy (XEL 41 – yield 3.3%)
– The near-term outlook for XEL is dim (although the worst damage to the stock often comes before, not after, rate hikes) but the utility is a long-term holding, so we’ll keep our half position on Hold for now.
Next ex-div date: September 13, 2016
Closing prices as of September 13, 2016.
