We’re adding a new 5.3% yielding stock to the High Yield Tier. Most of our other positions are rated Buy as well, and the market is strong, so if you’re underinvested, it’s time to put some money to work.
Cabot Dividend Investor 1017
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Dividend Stocks Lead the Way
The stock market remains strong, and dividend stocks are some of the strongest stocks in it! Over the past two weeks, the market’s advance has broadened out, and the Dow has been outperforming the S&P and Nasdaq since mid-October. That’s largely thanks to outperformance in the industrial sector, which still dominates the Dow. Economic growth expectations are rising around the world, including in the hurricane-ravaged U.S., and economically-sensitive industrial stocks are rising as a result.
One red flag for the broad market is that some other defensive stocks, like utilities, are also doing well. But we’re still not seeing a major risk-off trade—consumer staples, for example, are still underperforming.
On the fixed income side, expectations of a December rate hike remain over 90%. That’s helped financials to break out after several months of trying, but put REITs under pressure again.
[highlight_box]What To Do Now: I don’t have any rating changes today. Most of the stocks in our portfolio are rated Buy, so if you’re underinvested, you should start finding and adding positions that meet your risk tolerance and investing goals. If you haven’t yet, consider getting in on the financial and industrial rallies with BB&T Corp. (BBT) and Cummins (CMI) or 3M (MMM). Or add some growth potential with Broadridge Financial (BR), CME Group (CME) or Wynn Resorts (WYNN). And for High Yield investors, we have a new addition today, profiled below. [/highlight_box]
Featured Buy
ONEOK (OKE)
This month I’m adding a 5.3%-yielding pipeline company to the High Yield Tier. While we already have one pipeline company in the portfolio, ONEOK operates in a different geographical area and a different segment of the industry. More importantly, OKE boasts an unusually strong dividend history for a high-yield stock.
The Company
ONEOK is a natural gas pipeline and midstream processing company. The company has over 38,000 miles of natural gas and natural gas liquids (NGL) pipelines, running from North Dakota to Texas and from Kansas to Illinois. ONEOK also owns natural gas and NGL storage, processing and fractionation facilities in Kansas, Oklahoma, North Dakota, Wyoming, Montana and Texas. (Fractionation is the breaking down of NGLs into component liquids like ethane and propane.)
ONEOK has invested $9 billion in its network over the past decade, and continues to steadily add processing capacity, well connections and pipeline miles. Major drivers of growth this year and next will be the addition of almost 400 new well connections in the Williston Basin and the expansion of processing capacity in Oklahoma.
ONEOK has also invested in making earnings more predictable, shifting most customers to fee-based contracts over the past five years, reducing exposure to commodity prices. In 2013, 66% of earnings were fee-based; by the end of this year, that number is expected to reach 90%.
This summer, the company acquired its associated MLP (master limited partnership), ONEOK Partners L.P., bringing the two firms’ assets under one roof and lowering their cost of funding. Following the transaction, the combined company raised its dividend to 75 cents per quarter, vaulting its yield over 5%.
The past few years of groundwork have put ONEOK on a solid footing to take advantage of rebounding demand for ethane and other NGLs, driving strong earnings growth. Analysts expect revenues to rise 25% this year and 10% next year. EPS are expected to increase 4% and 22%.
The Dividend
ONEOK has paid dividends consistently since 1989, and has increased the dividend every year since 2003. Over the past five years, dividend increases have averaged 18% per year. Through 2021, management is targeting 9% to 11% dividend growth per year.
The company’s payout ratio is over 100% because of the impact of non-cash charges like depreciation on EPS. (Depreciation is the write-down of the value of physical assets—like pipelines—over time.) ONEOK reports a metric called Distributable Cash Flow, which adds non-cash expenses like depreciation back to earnings, to give investors a better picture of cash flow. This year, management expects Distributable Cash Flow, or DCF, to hit $1.3-$1.4 billion. Comparing dividends paid to DCF provides the dividend coverage ratio, which ONEOK tries to keep at or above 1.2. The ratio was 1.5 in the latest quarter, indicating ample dividend coverage.
Combined with analysts’ solid growth expectations, ONEOK’s dividend history earns the pipeline company a Dividend Safety Rating of 8.3 and a Dividend Growth Rating of 8.7 (both out of a possible 10 points.)
The Stock
OKE’s all-time highs date back to late 2014, when it peaked at 71. But the stock lost 70% of its value during the energy stock selloff over the next 15 months, bottoming at just under 20 in December 2015.
The next year saw OKE make up most of those losses, making it to just under 60 by December 2016. The stock then lost momentum, and has been trading in a range between 48 and 60 since the start of this year. OKE is now near the top of its trading range, waiting for a catalyst to push it past resistance at 60.
That catalyst could come Tuesday, when ONEOK will report third-quarter results (after the close). To reduce risk, you may want to buy a half-size position ahead of earnings, which you can add to if the stock reacts to earnings positively. Although we typically add new positions on the first trading day of the month, we’ll make an exception this month, and follow our own advice. I’ll be adding a half position in OKE to the High Yield Tier tomorrow, and will plan to add to it after earnings are announced next week.
| ONEOK (OKE) | ||
|---|---|---|
| Price: 56 52-week range: 45.41–59.47 Market cap: $21.26 billion P/E: 35 | Current yield: 5.4% Annual dividend: $3.00 Most recent dividend: $0.75 Dividend Safety rating: 8.3 Dividend Growth rating: 8.7 | |
| Dividends since: 1989 Consecutive years of increases: 14 Qualified dividends? Yes | Payment Schedule: Quarterly Next ex-dividend date: January 2018 | |
Portfolio at a Glance
Portfolio Updates
High Yield Tier
The investments in our High Yield tier have been chosen for their high current payouts. These ?investments will often be riskier or have less capital appreciation potential than those in our other ?two tiers, but they’re appropriate for investors who want to generate maximum income from their? portfolios right now.
BUY – General Motors (GM 46 – yield 3.3%) – GM jumped 3% after reporting estimate-beating earnings yesterday. Both sales and earnings fell year-over-year, as expected, due to volume declines. But both beat estimates; adjusted EPS of $1.32 were 15% above analysts’ expectations. GM’s efforts to grow higher-margin businesses while shrinking less-desirable segments, like fleet sales, are showing results. All of GM’s business segments were profitable for the first time in two years. Investors are excited about how quickly GM has started to roll out new technology; the company will start selling a Cadillac with hands-free highway driving technology this quarter. GM is in a strong uptrend, so I’ll keep it on Buy, but try to start new positions on pullbacks.
BUY – Pembina Pipeline (PBA 32 – yield 5.3%) – Pembina is a Canadian pipeline company. The stock has declined on each of the past seven trading days, and is back at its 200-day moving average. So far, this looks like just another pullback in Pembina’s choppy uptrend; volume isn’t elevated and the weekly chart still looks fine. Pembina will report third-quarter results on November 2 after the close. Analysts are expecting 37% revenue growth, to $1.06 billion, and 50% EPS growth, to $0.30. Risk-tolerant high yield investors can buy a little here.
HOLD – Welltower (HCN 67 – yield 5.2%) – HCN is a health care REIT that owns senior housing, post-acute care and outpatient medical facilities. Interest rates have risen to their highest level since March, causing yet another selloff in REITs over the past week. The iShares U.S. Real Estate ETF (IYR), which is composed largely of REITs, is 1.5% lower since our last update, while HCN is close to 2% lower. The selloff has brought our loss to 10%, but as I wrote last week, we’ll hold as long as the stock remains above its first-quarter support level, around 65. We could see more volatility ahead of the Fed’s December meeting though, so set your own loss limit in your portfolio.
Dividend Growth Tier
To be chosen for the Dividend Growth tier, investments must have a strong history of dividend increases and indicate both good potential for and high prioritization of continued dividend growth.
BUY – BB&T Corp (BBT 48 – yield 2.8%) – BB&T Corp is a regional bank offering a broad range of financial services in the South, the mid-Atlantic region, Texas and some of the Midwest. BB&T reported third-quarter earnings before the open on Thursday. Revenues rose 1.4% year-over-year, and EPS rose 2.6%, meeting estimates. While the stock opened lower, it closed higher, as analysts shifted their focus to the bank’s forward-looking announcements. BB&T continues to optimize its loan portfolio, replacing fixed-rate mortgages with floating rate loans in anticipation of rising rates. The company is also closing some branches due to declining demand for in-person banking services, and will use the savings to invest in improving its digital offerings. CEO Kelly King also noted the company is actively looking to invest in or acquire fintech companies. The company announced a 10% dividend increase, to $0.33 per quarter. Dividend growth investors can Buy BBT on pullbacks for long-term gains and steady dividends.
BUY – Broadridge Financial Solutions (BR 84 – yield 1.6%) – Broadridge is a tech company that provides information and services to financial companies. The stock is hitting 52-week highs and looks very healthy. Dividend growth investors who don’t own it can buy a little here, or on a pullback to the 50-day. Note that the chart at left does not reflect Broadridge’s full dividend history.
HOLD – Carnival (CCL 66 – yield 2.7%) – CCL surprised investors with a second 2017 dividend increase on Thursday; the company already increased the dividend 14% in May, from $0.35 to $0.40. The latest 12% boost brings Carnival’s quarterly dividend to $0.45 per share, for an annual yield of 2.7% (our yield on cost is currently 3.7%). CCL has gotten weaker technically since Hurricane Irma slammed the Caribbean, but we took partial profits in September, so we’re giving the rest of our shares a slightly longer leash. Hold.
BUY – CME Group (CME 134 – yield 2.0%) – CME Group, which owns options, commodity and other financial exchanges, is the latest addition to our portfolio. The company will announce third-quarter earnings tomorrow, October 26, before the open. Analysts are expecting 6.0% revenue growth, to $892.45 million, and 10.5% EPS growth, to $1.16. The stock is pulling back toward its 50-day moving average but still looks healthy. Dividend growth investors can buy after earnings for steady growth, regular dividends and the annual special dividend, visible as the large spikes in the chart at left.
BUY – Cummins (CMI 178 – yield 2.4%) – Cummins makes heavy-duty engines for trucks, ships, mining equipment and more, and is one of the leaders of the recent rally in industrial stocks. The stock is in a strong uptrend and hitting new 52-week highs daily. The company will announce third-quarter earnings on October 31. Analysts expect sales will rise 5.73%, to $889.97 million from $841.70 million in the same quarter last year. EPS are expected to rise 10.64%, to $1.16 from $1.05. Dividend growth investors who don’t own CMI yet should try to start new positions on pullbacks.
BUY – Wynn Resorts (WYNN 145 – yield 1.4%) – Wynn owns two casino resorts in Macau and two in Las Vegas, and is building the first major casino in the Boston area. The company will announce third-quarter results after the market close tomorrow. Wynn opened a new Macau resort this year, and growth expectations are high: analysts are expecting sales to surge 40.9%, from $1.11 billion to $1.56 billion. EPS are expected to increase 88.0%, from $0.75 to $1.41. WYNN is chopping around between 140 and 150 ahead of the announcement, while its 50-day moving average catches up to the stock. Dividend growth investors can buy if the reaction to earnings is positive.
Safe Income Tier
The Safe Income tier of our portfolio holds long-term positions in high-quality stocks and other investments that generate steady income with minimal volatility and low risk. These positions are appropriate for all investors, but are meant to be held for the long term, primarily for income—don’t buy these thinking you’ll double your money in a year.
BUY – 3M (MMM 235 – yield 2.0%) – MMM surged 6% yesterday after the industrial conglomerate announced third-quarter earnings that beat expectations and raised full-year guidance. Revenues of $8.17 billion were 6% higher year over year and beat estimates by $240 million. Adjusted EPS of $2.33 beat estimates by 12 cents and rose 8% year over year. And management raised its 2017 EPS guidance to $9.00–$9.10 per share, from previous guidance of $8.80–$9.05. The growth was led by the electronics and energy segment, and higher sales in emerging markets. But organic sales rose in all business groups and geographic areas, and operating margins edged higher thanks to efficiency investments. MMM is very healthy and has great momentum. Try to buy on pullbacks.
BUY – Consolidated Edison (ED 86 – yield 3.2%) – ConEd is a New York-area utility. ED is chugging higher this week, despite the surge in interest rates. More interest-rate related volatility is possible ahead of the Fed’s December meeting, so try to buy on pullbacks toward 80.
HOLD – Ecolab (ECL 132 – yield 1.1%) – Ecolab provides cleaning, efficiency and sustainability technology and services to a wide variety of industries. The company will report third-quarter earnings on October 31 before the open. Analysts are expecting 6.2% EPS growth, to $1.36 from $1.28 last year, and 4.7% revenue growth, to $3.55 from $3.39 last year. After a strong rebound early this month that brought it within two cents of 52-week highs, ECL pulled back and bounced off its 50-day last week. A Dividend Aristocrat, ECL is a solid long-term hold for income investors. I’ll put it back on Buy if it can break out past 135.
BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.0%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
BUY – Guggenheim BulletShares 2020 High Yield Corporate Bond ETF (BSJK 25 – yield 4.8%)
BUY – Guggenheim BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.3%)
These four funds make up our bond ladder, which is a conservative strategy for generating income. Each fund matures at the end of the year in its name, at which point Guggenheim disburses the net asset value of the ETF back to investors. We recently sold our 2017 fund because the yield declines as the end of the year approaches and the fund’s bond holdings mature. So now our ladder is made up of high yield ETFs maturing in 2018 and 2020, and investment-grade ETFs maturing in 2019 and 2021. All the funds pay dividends monthly, at the start of the month. If you’d like to construct your own bond ladder, just buy a series of defined maturity bond funds with maturity dates over the next three to 10 years, and roll the proceeds into a longer-dated fund when each one matures—you’ll create a reliable income stream that can rise over time with interest rates.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.6%) – PGX is an ETF that holds preferred shares. It doesn’t have capital appreciation potential, but trades in a low-volatility range between 14 and 16 and pays monthly dividends of about seven cents per share. It’s currently trading just a hair above 15, so I’ll keep it on Buy for investors who want to add a source of reliable monthly income to their portfolios.
HOLD – Xcel Energy (XEL 49 – yield 2.9%) – Xcel Energy is a Minnesota-based utility and one of the largest producers of wind power in the U.S. The stock pulled back about 4% in September but has already bounced almost all the way back to its highs. I’d consider putting XEL back on Buy on a pullback to the stock’s 200-day, currently around 46. Long-term safe income investors who already own the stock can continue to hold.
Dividend Calendar
Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. See the Guide to Cabot Dividend Investor for an explanation of how dates are determined and what estimated dates mean.
Checking in with Our Exes
One of the most important lessons for individual investors to learn is how to let go of regret. Whether it’s that big winner you didn’t buy, the loser you should have got rid of sooner, or the stock you sold at the bottom, we all make mistakes. Good investors let them go, and focus on what they can do better in the future.
But moving on doesn’t have to mean forgetting, and it’s a good idea to check back with stocks you’ve sold occasionally to see what you can learn from your trades. I shared post mortems on our first group of sales about two years ago, and in at least seven out of nine cases, selling protected us from further losses.
Today, I take a look back at our last two years of sales: every stock we sold between the start of May 2015, when my first study ended, and the start of May 2017 (on the assumption that it’s too soon to know the fate of stocks we sold in the last six months).
Omega Healthcare Investors (OHI)
In May 2015, we sold Omega Healthcare Investors, a healthcare REIT, for a small 6% loss. We’d owned the stock for just under a year; we sold because earnings growth started to slip and the stock had weakened, sliding 20% off its highs and breaking through support. I wrote at the time that “Some of the blame can be placed at the feet of rising interest rates, but not all of it—other REITs are holding up better.” The decision was a good one—OHI has continued to underperform peers, like High Yield Tier holding Welltower (HCN), and is 12% below our sale price today.
July and August 2015
Our first big cluster of sales took place in July 2015, when the market started flashing numerous warning signs ahead of a huge shakeout that August. Several more sales followed in August.
Omnicom (OMC)
In July 2015, as the broad market started to show signs of deterioration, we sold Omnicom (OMC), which we’d bought in January, for an 8% loss. I didn’t see any fundamental reason for worry, but the stock was trending down. OMC lost another 7% over the next three months, before finding its footing in 2016. The stock fell apart again this year though, falling 12% over the past two months due to ad industry turmoil.
E.I. Du Pont De Nemours (DD)
We sold DuPont for a tiny 4% profit in early July 2015. We’d owned the stock for a year and half, so our total return including dividends was better, about 8%. The sale was triggered by a sharp decline in DD, which got worse before it got better. The tumble followed several quarters of underwhelming earnings, and a warning from management that macro headwinds would continue to weigh on profits for the rest of the year. At the time, I wrote, “Very long-term, DuPont will eventually find its footing again. But for now, our money will be treated better elsewhere.” DuPont’s recovery actually started sooner than I expected, after the company decided to merge with Dow Chemical to form DowDuPont (DWDP). DD was trading around 85 when it was de-listed two months ago, 40% above where we sold it, but holding on would have meant enduring the 20% slide in the stock that immediately followed our sale.
Breitburn Energy Partners (BBEP, now BBEPQ)
Our trade in monthly-dividend-paying MLP Breitburn Energy Partners (BBEP) went seriously South due to the oil price crash of 2014-2015, and our total return was -66%. At least we bailed before BBEP’s bankruptcy and de-listing from the Nasdaq. And we learned a valuable lesson about cutting losses short, even in high-yielding stocks.
Ensco (ESV)
Another casualty of the year’s carnage in energy stocks, Ensco (ESV) was our second big loser. When we finally got wise and sold, I wrote, “With the market demonstrating broad weakness, now is a particularly dangerous time to hang on to a stock with this little support.” It was late, but it was the right decision: not only did we get out of ESV before August’s broad market correction, we also avoided the 93% dividend cut that followed that winter and the additional 71% decline in the stock since our sale.
PPG Industries (PPG)
We sold PPG on the same day we sold Ensco, for a total return of about 16%. At the time I wrote, “We had a good run with PPG, and the company’s growth remains on track. However, currency headwinds have affected results in recent quarters, and investors appear to have run out of patience. PPG crashed through the bottom of its multi-month trading range last week, and has just kept falling. The selling pressure means there’s more potential downside ahead if the market remains weak.” PPG fell another 20% during the market correction of the next two months and mostly chopped around for the next two years, but appears to have just started a new uptrend.
Seaspan (SSW)
I added Seaspan to the High Yield Tier at the start of June 2015, when it was yielding 7.5%. At the time, I noted that the container ship company was sensitive to credit conditions, and was 18% off its highs, but generated a predictable income stream and was an “appealing option for risk-tolerant investors whose priority is current income.” But we quickly accrued a loss as the market deteriorated over the next two months, and, learning from our mistakes with BBEP and ESV, we bailed in mid-August, taking a loss of 15%. At the time, I wrote, “Seaspan has a predictable revenue stream, but the company’s dependence on global economic growth and ties to the Chinese economy in particular spell trouble for the stock today.” Since then, SSW has declined another 60%, happily without us.
Invesco (IVZ)
We sold Dividend Growth Tier holding Invesco (IVZ) toward the end of August 2015, after the stock broke through significant technical support during a sharp pullback in the broad market. The broad market weakness plus our 13% loss provided enough reason to sell the investment management company. IVZ went on to decline another 27% before finally bottoming in July 2016; the stock has since recovered and is now slightly above where we sold it.
Aflac (AFL)
We’d owned AFL for over a year and a half by the time we finally decided we’d had enough in August 2015. At the time, I wrote: “Aflac has fallen nearly 10% in only the past three days. While I hate to sell a stock that has such a reliable dividend (and is now trading at a P/E of only 9), the complete absence of support here means unlimited downside could be coming, and sticking around is too risky for our Safe Income Tier.” That turned out to be about the bottom for Aflac shares, which have gradually climbed 42% since then. A little more patience with AFL would have paid off.
Quest Diagnostics (DGX)
One noticeable theme among our summer 2015 sales is the importance of timing your buys well. Some of the stocks we bought in the months before that summer’s selloff have turned out okay, but since they were relatively recent portfolio additions with no profit cushions, they got cut quickly when the going got rough. In the case of Quest Diagnostics (DGX), there was also the thorny issue of Theranos, Elizabeth Holmes’ upstart competitor, which had the potential to thoroughly disrupt Quest’s established blood testing business. Theranos’ claims have since been thoroughly discredited, and Quest has actually expanded its business a bit as a result, for example by providing more diagnostic services at in-store pharmacies. The stock is up 25% since we bought it, and 36% since we sold it.
October 2015
We did another round of house cleaning when the market re-tested its lows in early October 2015. In both cases, giving the stock a few more days to recover would have kept us in winning positions.
Main Street Capital (MAIN)
We sold Houston-based business development company Main Street Capital (MAIN) in October 2015, after watching the stock go nowhere for 10 months. Our loss was about 8%. Since then, MAIN has advanced about 45%, thanks to persistently low interest rates and a significant decline in the odds of a severe credit crunch. We sold very close to the bottom, so once again, a little more patience and a looser loss limit would have paid off.
Baxter International (BAX)
We sold Dividend Growth Tier holding Baxter (BAX) in October 2015 for a small loss (we’d already sold half our shares at breakeven in June.) The primary trigger was a 15% pullback in biotech stocks, after drug pricing became a political football. Baxter makes IV supplies used by hospitals and equipment for dialysis patients, but followed the index lower despite having little relation to the controversy. As with MAIN, that October turned out to be the worst of times for BAX, and the stock has almost doubled since. Giving the stock a few more days to recover could have given us confidence to hold on.
January and February 2016
After cleaning house in July and October, we spent the next few months building the portfolio back up, and didn’t sell any stocks until the next big market pullback in January 2016.
Agrium (AGU)
The first stock to go was Agrium (AGU), a Canadian fertilizer company that had been in the Dividend Growth Tier since May 2014. At the time, I wrote, “The fertilizer company’s stock is hitting new 52-week lows and our loss has grown to 9%. AGU is still deeply undervalued but the complete lack of support over the past week means the stock has become too high-risk for our portfolio.” Since then, AGU is up about 27%, though it’s only 15% above our initial purchase price. So we would have done better if we’d held on, but given the ups and down of the past three-and-a-half years, it would have been even better if we’d never bought AGU at all.
Royal Bank of Canada (RY)
We sold RY at the same time as AGU, during the market’s sudden selloff at the start of 2016. We’d only owned RY for a month, so the timing of the selloff—which handed us a quick 14% loss—was unlucky. RY has gone on to gain 35%, so it’s too bad we sold it—and bought it—when we did.
Baxalta (BXLT)
Baxalta wound up in our portfolio after being spun off from Baxter (BAX), and was never a great fit. So we were more than happy to unload our shares when the company received a takeover offer from Shire in January 2016, handing us a 26% gain in under six months. The acquisition eventually went through in June, a few dollars above where we sold.
Church & Dwight (CHD)
It was a little hard to let go of Church & Dwight (CHD) during the January 2016 pullback; we’d owned the stock for almost two years and it hadn’t given us much trouble. But by January, CHD was undeniably lacking in momentum, so when the stock eventually broke out of its year-long trading range to the downside, hitting a new 52-week low in the process, we decided to cut it loose. Our total return was 27%. Since then, CHD has advanced about 14%, but it’s currently in an intermediate-term downtrend.
Horace Mann Educators (HMN)
I added Horace Mann to the portfolio in February 2015, reasoning that “volatility has been the defining trait of 2015 thus far, so this month I’m adding a conservative insurance stock to the Safe Income Tier of our portfolio. With moderate upside and risk and a reliable 2.9% dividend yield, Horace Mann Educators (HMN) is a stock that will reward you over time while also letting you sleep at night.” But we wound up selling the stock just a year later for about break even, explaining that “in addition to the lack of technical support, profitability issues in the insurer’s property & casualty division are expected to contribute to a 7% contraction in EPS this year.” The stock actually did quite well in 2016, but corrected for most of this year, and is now about 33% above where we bought it. In terms of what we could have done better, taking partial profits when the stock stumbled for the first time in summer 2015 may have given us the conviction to us to hold on through the later, deeper correction.
Maiden Holdings (MHLD)
On the other hand, there’s Maiden Holdings (MHLD), another insurer we sold in January 2016. We booked a small profit in MHLD, and would have a 31% loss if we were still holding the stock today. However, holding through the January 2016 correction could still have been the right choice: we would have had chance to get out of MHLD at a higher price earlier this year, before the stock’s six-week decline this spring.
Nordic American Tanker (NAT)
NAT was a mercifully short-lived but still disastrous trade. We added the oil tanker stock in November 2015, betting on continued recovery in tanker day rates. But concerns about global economic growth—in China in particular—triggered a sharp pullback a few months later, and we sold for a 22% loss in February. The stock bounced briefly in the second quarter, but then began a prolonged downtrend, accompanied by multiple dividend cuts. If we were still holding today, we’d be down 69%.
Novo Nordisk (NVO)
We owned Danish drugmaker Novo Nordisk for two years, and sold after its February 2016 earnings miss in for a 27% return. It was a good trade and a good call; increasing competition in the diabetes market caused the stock to fall 30% over the next 10 months.
Later 2016 and early 2017
Most of our sales from the past 14 months have turned out well so far, except for a few biotechs we tired of a bit too soon.
Target (TGT)
We sold the first half of our Target shares for a 35% profit in August 2015, then unloaded the second half in May 2016 for a total return of 36%. The primary reason was a bad earnings report, with a lousy retail sector environment in the background. Target has been struggling ever since, and is currently about 8% lower than when we sold it.
CVS Health (CVS)
We sold CVS in September and October 2016, for a small loss, after the downtrending stock broke through support. The pharmacy benefit manager got dragged into the political debate around prescription drug pricing at the height of the EpiPen controversy, and never recovered. The stock has declined another 15% since we sold it.
Reynolds American (RAI)
We sold cigarette company Reynolds American (RAI) in two tranches, for a superb total return of 83%. We had bought RAI back in July 2014 for its high dividend, predictable cash flow stream and technical strength, and held through the company’s merger with Lorillard later that year. The stock benefited from low oil prices, which left smokers with extra cash to spend on cigarettes (often at the gas station) and the market panic of early 2016, which drove investors into conservative stocks. We took some profits after a late July earnings miss, and were ready to sell the rest of our shares in October when British American Tobacco made a buyout offer for the company. As I wrote at the time, the biggest lesson we learned was to “beware of slowing earnings growth. Reynolds’s best days were behind it, at least for now, and selling after the first missed earnings report was the right call. The picture didn’t get prettier. The buyout offer was a stroke of luck.”
Amgen (AMGN)
We bought Amgen (AMGN), a biotech company, in June 2016. The stock immediately shot higher, and we were sitting on a 10% profit within a few months. However, it disappeared during October’s biotech selloff, triggered by political posturing over drug prices. We wound up selling AMGN for a small loss at the end of October, after management painted a muddy picture of the next year on their third-quarter earnings call. Of course, there’s been zero political action on drug prices (unless tweets count) since, and AMGN has recovered nicely and is now trading about 15% above where we bought it.
Equifax (EFX)
We sold Equifax (EFX) well before the recent scandal, and although our timing wasn’t perfect, it worked out well. We first took some money off the table in August 2016, when the stock started to underperform the market, banking a 40% profit. We sold the second half of our position in November, citing decelerating growth and “potentially toppy” action, for a total return of 37%. Equifax actually went on to hit new highs earlier this year, but then came the massive data breach and September’s 30% drop.
Pattern Energy Group (PEGI)
We sold Pattern Energy Group (PEGI), a wind power yieldco, after only two-and-a-half months. We added the stock to the High Yield Tier in September 2016, and it got slammed after the election as interest rates rose and analysts soured on renewable energy companies’ prospects under the new administration. The stock struggled for the next few months before eventually starting a recovery in April, but so far it’s nothing we regret missing out on—and interest rates remain a concern.
AbbVie (ABBV)
AbbVie was a fairly quiet stock when we knew it, offering a 3.5% yield and a reasonable valuation, and generally trading in a choppy range between 50 and 70. Revenue growth started to slow down early this year, and we sold it in February for a small loss. The stock suddenly became a Wall Street darling this fall, after it won a significant patent battle. Analysts have been steadily raising their earnings estimates ever since. Holding on to this one wouldn’t have cost us much, but to be fair, biotech ups and downs are famously hard to predict.
United Parcel Service (UPS)
UPS was another February 2017 sale. Earnings missed expectations and the company issued disappointing 2017 guidance, as low industrial production weighed on margins. After four months of sideways action, UPS started to recover from the miss this summer, and is now back near its highs from late 2016. The stock is looking much healthier, but big-picture concerns about direct competition from Amazon, Wal-Mart and others remain.
Costco (COST)
We sold the first half of our COST shares in February 2016, for a 33% profit. We held on to the second half of our position until March 2017, when we unloaded them for a 49% gain after a big earnings miss. COST hasn’t fallen apart, but has been lagging the market since, so we think we made the right move.
J.M. Smucker (SJM)
We owned SJM for one year, and while we had a 20% profit at one point, we failed to take profits and it melted away. We eventually sold for a small profit this March. The stock has gone almost straight down since then, so we’re happy with the decision. The highlight of the position was probably the opportunity to dive into the nitty gritty of pet food branding and peanut butter demand.
U.S. Bancorp (USB)
We sold USB in March and April, after the bank reported earnings that beat expectations but created concerns about the rest of the year. More importantly, the stock was technically weak, falling seven weeks in a row and underperforming other financials. We booked a 20% profit, and are glad we did: USB has continued to underperform peers since April, and is still below its highs from March.
Schlumberger (SLB)
Another short-lived attempt to play the long-awaited energy stock rebound, we bought oil services company Schlumberger in February but sold it before the end of April for a 10% loss. I wrote at the time, “SLB’s gap down came after first-quarter revenue growth failed to meet expectations. In addition, 2017 and 2018 estimates have been revised downward. Even though the earnings report wasn’t a disaster, SLB is acting like a loser, and we can do better.” The stock has slid another 17% since we sold it.
Mattel (MAT)
Lastly, we sold Mattel (MAT) for a 12% loss on the same day as Schlumberger, and avoided the dividend cut and 30% decline that followed. We had once had a profit of over 20% in MAT, but didn’t take any off the table, and the stock slowly fell apart in front of our eyes over the next nine months. When we sold in April, I had a bevy of reasons, citing MAT’s lack of technical support, falling analyst estimates, management’s failure to acknowledge deeper problems with demand, and a weakening margin of dividend safety. All look to have been right on the money, and we’re happy we got out when we did.
Every stock is different, and as our Vice President of Investments Mike Cintolo likes to say, you shouldn’t invest using the last lesson the market taught you. But there are a few good ideas to take away from our review of the last two years’ sales, including:
• Give high-quality stocks that suffer sharp but short-lived declines at least a few days to recover, especially during market pullbacks.
• Use loss limits, especially in riskier, high-yield stocks.
• When you buy matters. Positions we started in the months before market pullback had a much lower chance of staying in the portfolio.
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