Bed Bath & Beyond Inc.’s stock jumped 34.4% in morning trading Wednesday, as shares of the troubled home-goods retailer extended their meme-like bounce to a third straight session.
Shares of the embattled company and sometime meme stock ended Tuesday’s session up 22.5%, which followed a 17.6% surge on Monday. The rally was fueled by social-media speculation, according to retail trading platform Capital.com, which said that the bounce was not likely to last.
A three-day win streak would be the longest such streak since the four-day stretch that ended Jan. 12, 2023.
The rally came after Bed Bath & Beyond’s BBBY, +30.90%
stock closed at a record low of 24 cents on Friday following a 22.6% plunge in three days after the company disclosed a sale of more than 100 million shares. The retailer, which is attempting to stave off bankruptcy, said it could sell up to $300 million worth of stock.
The company’s stock has fallen 81.6% in 2023, compared with the S&P 500’s SPX, -0.03%
gain of 8%.
It has been a tumultuous few months for the retailer, which announced another equity offering earlier this year. That came after a troubled couple of years marked by strategic missteps, cash burn, challenging underlying business trends and the impact of the COVID-19 pandemic. Earlier this month, the company issued a sales warning that sent the stock to a then-record low.
Bed Bath & Beyond is also pushing for a reverse stock split. In a recent filing, the company said a special meeting of shareholders would be held May 9 to vote on the proposal. The vote is on whether to effect a reverse stock split “at a ratio in the range of 1-for-10 to 1-for-20, with such ratio to be determined at the discretion of the Board,” according to the filing.
Stocktwits, a social platform for investors and traders, has been seeing plenty of activity related to Bed Bath & Beyond. “Sentiment and message volume on the platform saw an uptick yesterday and today compared to last week,” Tom Bruni, lead writer of the Daily Rip & Markets, Stocktwits’ newsletter, told MarketWatch.
“It’s important to point out that many retail investors’ positions with meme stocks are so underwater that the narrative is more so self-deprecating than enthusiastic, with tons of comments like ‘only needs to move up 5000% more, and I would break even!’,” he added.
Bruni also noted that companies that file for bankruptcy often end up rallying afterward, citing the recent example of National CineMedia Inc. NCMI, +6.89%,
whose stock popped last week after filing for Chapter 11 bankruptcy protection.
“A potential reason for this is investors may think that a reorganization may be the company’s best shot at surviving,” he told MarketWatch. “Investors may be betting that Bed Bath & Beyond might eventually have to take this route. However, we won’t know until next month’s reverse stock split vote takes place.”
Additionally, bankruptcy often sparks a short covering rally, according to Bruni, who notes that bearish investors don’t want to risk their profits in an attempt to squeeze the last bit of juice out of the stock. “When a company files for bankruptcy, it’s generally a sign your bearish thesis was correct, and you can take some chips off the table,” he added. “Very few investors will ride a stock to zero, as the risk isn’t worth it in many cases.”
“Also, at that point, there are few incentives for people down a lot on their investment to sell for a loss,” Bruni said. “They’d rather hold and see what happens.” Between “bag holders” and shorts covering, there’s more demand than supply for the stock, so prices go up, according to Bruni. “Then, that can feed on itself if that lasts for more than a few hours/days,” he added.
Earlier this month, Bed Bath & Beyond announced a new vendor consignment program with ReStore Capital in an attempt to boost its inventory. Carol Spieckerman, president of retail advisory firm Spieckerman Retail, told MarketWatch that the consignment plan feels like “a Hail Mary pass.”
Spieckerman said Bed Bath & Beyond is continuing “a mighty fight” amid mounting distractions, such as former chief executive Mark Tritton’s recent compensation lawsuit against the company. The lawsuit alleges that in January, Bed Bath & Beyond ceased making payments owed under Tritton’s separation agreement. Under the terms of the agreement, Bed Bath & Beyond was required to pay Tritton $6,765,000 in ratable installments over a 24-month period beginning in July 2022, according to the lawsuit. The payments were made from July 2022 to January 2023, it said.
Bed Bath & Beyond told MarketWatch that the company does not comment on legal matters.
Of eight analysts surveyed by FactSet who cover Bed Bath & Beyond, two have the equivalent of hold ratings and six have the equivalent of sell ratings.
During a period of high interest rates, it might be more difficult to impress investors with dividend stocks. But the stocks can have an important advantage over the long term. The dividend payouts can increase over the years, helping to push share prices higher over time.
When considering stocks for dividend income, yield shouldn’t be the only thing you consider. If a stock’s price has tumbled because investors are worried about the company’s business prospects, the dividend yield might be very high. A double-digit yield might mean investors expect to see a cut to the dividend soon.
There are many ways to look at companies’ expected ability to maintain or raise their dividend payouts. But one can also take a simple approach to begin researching stock choices.
For investors who would rather aim for long-term growth to go along with dividend income, or take a relatively conservative approach to growth while reinvesting dividends, a screen of stocks in the S&P 500 SPX, +0.33%
produces only 10 stocks with dividend yields of 4.5% or higher with majority “buy” or equivalent ratings among analysts polled by FactSet. Here they are, sorted by dividend yield:
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
The dividend yields for this group of 10 companies are based on current annual regular payout rates, with all paying quarterly except for Realty Income Corp. O, +1.30%,
which pays monthly.
These two oil and natural gas producers would have passed the above screen based on their most recent dividend payments and analysts’ sentiment, however, they pay a combined fixed-plus-variable dividend every quarter, with the fixed portion relatively low:
Shares of Pioneer Natural Resources Co. PXD, -0.77%
closed at $230 on April 14. Among analysts polled by FactSet, 59% rate the stock a “buy” or the equivalent, and the consensus price target is $257.42. The company pays a fixed quarterly dividend of $1.10 a share, which would make for a dividend yield of only 1.91%. However, the most recent variable quarterly dividend was $4.48 a share, for a combined quarterly dividend of $5.58, which would translate to an annualized dividend yield of 9.70%. The consensus estimate for dividends in 2025 is $4.63 — the analysts are only estimating the fixed portion of the dividend. Pioneer has held preliminary merger discussions with Exxon Corp. XOM, -1.16%,
according to a Wall Street Journal report.
Devon Energy Corp.’s DVN, -0.72%
stock closed at $55.70 on April 14. The shares are rated “buy” or the equivalent by 55% of analysts and the consensus price target is $67.66. The fixed portion of Devon’s quarterly dividend is 20 cents a share, for an annualized dividend yield of 1.44%. The variable portion of the most recent quarterly dividend was 69 cents a share. The total payout of 89 cents would make for an annual dividend yield of 6.39%. Analysts expect the fixed portion of annual dividends to total $3.61 in 2025, according to FactSet.
After a long period of underperformance when compared with the U.S. equity market, stocks in other countries are holding their own this year. One way to lower your overall risk with real diversification is to add exposure to an active international management style that doesn’t mirror a broad stock index.
One example is the $2.7 billion Columbia Overseas Value Fund COSZX, which is rated four stars out of five by Morningstar in its Foreign Large Value category. Fred Copper and Daisuke Nomoto co-manage the fund and described…
Shares of Getty Images Holdings Inc. GETY got a 5.7% boost in premarket trading Tuesday, after activist investor Trillium Capital LLC urged the visual content creator to increase shareholder value by selling the company. Trillium, which said it owned “hundreds of thousand shares” of Getty stock and stock equivalents, said the company’s board has not acted on “obvious opportunities” to increase shareholder value, as the stock has tumbled since the Getty went public. After the $4.8 billion acquisition deal by special purpose acquisition company (SPAC) CC Neuberger Principal Holdings II closed on July 22, 2022, the stock…
The deep uncertainty that the COVID pandemic created in the workforce hasn’t waned. U.S. workers are struggling with inflation, burnout, and fresh waves of layoffs. This comes as people expect more from employers — more leadership, more urgency, more action, and better jobs.
The public’s perspective is clear and consistent: companies need to prioritize their employees. In today’s unstable economic climate, worker wages and treatment are more important to Americans than ever.
When it comes to creating U.S. jobs with strong wages, good benefits, safe environments and opportunities for upward mobility, a handful of companies lead the pack.
Bank of America BAC,
NVIDIA NVDA
and Microsoft MSFT
are the top-three companies in JUST Capital’s 2023 rankings of America’s most JUST companies. They all share one crucial thing in common — a clear commitment to addressing worker issues and investing in employees.
Since 2018, JUST Capital’s rankings have provided a snapshot of how U.S. companies are measuring up to the public’s priorities, as determined through an annual survey to identify issues that define principled business behavior. Companies that are just provide a clear benefit for investors. For example, If an investor purchased an index tracking the JUST 100 companies at its March 2019 inception, the index would have generated 13.3% in excess return versus the Russell 1000 as of December 2022.
Worker issues have risen to the forefront of Americans’ vision for what is a just business. Paying a fair and living wage, supporting workforce advancement, protecting worker health and safety, and providing benefits and work-life balance are top priorities for the public. Notably, regardless of demographic differences including political affiliation, Americans agree that companies should do more to address worker needs.
What makes a great company?
Bank of Americademonstrates strong leadership on the top priority — paying a fair, living wage – by raising its minimum wage to $22 per hour, a key step in its pledge to offer a $25 starting wage by 2025. In addition, employees receive an extensive benefit package, including 16 weeks of paid parental leave for primary- and secondary caregivers, and career development opportunities through tuition assistance and professional training.
NVIDIA works to ensure equal pay for equal work, performing detailed pay equity analyses, and is one of only a few companies to disclose pay-analysis results separated by racial and ethnic categories. Like Bank of America, NVIDIA is one of 10% of Russell 1000 RUI
companies that offer at least 12 weeks of paid parental leave for both caregivers, providing 22 weeks of paid leave to primary caregivers.
Microsoft offers at least 12 weeks of parental leave for both caregivers, in addition many other generous paid-time-off benefits, including 15 days of paid vacation and an additional 10 days of paid sick leave for every worker — a policy still rare for many companies. Additionally, Microsoft discloses the results of its pay-equity analyses, going above and beyond other companies by disaggregating pay ratios for specific racial and ethnic categories — including Black, Asian and Latinx — all of whom are paid on par with their white counterparts.
“ When companies ensure the economic security, advancement, equity and safety of their workforces, employees are more engaged and productive. ”
These efforts provide tangible benefits to employees, but prioritizing workers offers much more to companies than just an assurance of moral good. When companies ensure the economic security, advancement, equity, and safety of their workforces employees are more engaged and productive, strengthening their companies’ business in turn.
Americans expect the private sector to better support employees. Effective business leadership today puts workers at the center of an organization’s strategy. When businesses take this approach, we get much closer to an economy that works for all Americans.
Alison Omens is chief strategy officer at JUST Capital.
Followers of the “Sell In May and Go Away” market-timing strategy may want to consider selling stocks before the end of April.
The “Sell in May and Go Away” strategy, which also goes by the “Halloween Indicator,” calls for being in the stock market for the six months between Oct. 31 and May 1, and out of the market the other half of the year. Investors who mechanically follow this seasonal strategy therefore wait until the close of the last trading day of April to sell and to the close of the last trading day of October to…
Despite quick action by regulators and policy makers, there’s a rising risk that banking-system stress will spill over into other sectors and the U.S. economy, “unleashing greater financial and economic damage than we anticipated,” said Moody’s Investors Service, one of the Big Three credit-ratings firms.
Simply put, the risk is that officials “will be unable to curtail the current turmoil without longer-lasting and potentially severe repercussions within and beyond the banking sector,” Atsi Sheth, Moody’s managing director of credit strategy, and others wrote in a note distributed on Thursday. Still, the agency’s baseline view is that U.S. officials will “broadly succeed.”
Moody’s warning came as Treasury Secretary Janet Yellen indicated that the U.S. could take additional actions if needed to stabilize the banking system, and after Federal Reserve Chairman Jerome Powell assured Americans on Wednesday that the central bank would use its tools to protect depositors.
Beneath the surface, though, is lingering worry. Hedge-fund manager Bill Ackman, for example, is warning of an acceleration of deposit outflows from banks and the latest global fund manager survey from Bank of America BAC, -2.42%
found that 31% of 212 managers polled regard a systemic credit crunch as the biggest threat to markets.
Of the three ways in which banking-system troubles could spill over more broadly, one of them is potentially the “most potent,” according to Moody’s: That is a general aversion to risk by financial-market players and a decision by banks to retrench from providing credit. Such a scenario could lead to the “crystallization of risk in multiple pockets simultaneously,” the ratings agency said.
Source: Moody’s Investors Service
“Over the course of 2023, as financial conditions remain tight and growth slows, a range of sectors and entities with existing credit challenges will face risks to their credit profiles,” the Moody’s team wrote. Banks are not the only type of players with exposure to interest-rate shocks, and “market scrutiny will focus on those entities that are exposed to similar risks as the troubled banks.”
A second potential channel for spillover is through the direct and indirect exposure to troubled banks that private and public entities have — via deposits, loans, transactional facilities, essential services, or holdings in those banks’ bonds and stocks. And a third way in which banking problems could spread more broadly is through a misstep by policy makers, who have been focused on inflation and may not be able to respond effectively enough to evolving developments, Moody’s said.
COMP, +1.01%
finished higher as investors continued to weigh the risks to the banking sector. The policy-sensitive 2-year Treasury yield TMUBMUSD02Y, 3.833%
fell to its lowest level this year, while gold futures settled at a more than one-year high.
Last week, Fitch Ratings said that nonbank financial institutions, insurers, and funds were experiencing a variety of “knock-on effects” as the result of the sudden deterioration of a few U.S. banks.
The run on Silicon Valley Bank (SVB) SIVB— on which nearly half of all venture-backed tech start-ups in the United States depend — is in part a rerun of a familiar story, but it’s more than that. Once again, economic policy and financial regulation has proven inadequate.
The news about the second-biggest bank failure in U.S. history came just days after Federal Reserve Chair Jerome Powell assured Congress that the financial condition of America’s banks was sound. But the timing should not be surprising. Given the large and…
Heavy trading in SVB Financial Group’s SIVB,
debt pulled its BBB-rated 10-year bonds as low as 31 cents on the dollar on Friday after subsidiary Silicon Valley Bank was closed by regulators, marking the biggest bank failure since the financial crisis.
The Santa Clara, Calif.–based financial-services company has been reeling in recent days, with both its stock and bond prices hit hard, after it on Thursday disclosed a $1.8 billion loss from a sale of about $21 billion in securities.
Its bond prices lost further ground Friday after the California Department of Financial Protection and Innovation closed Silicon Valley Bank, placing the Federal Deposit Insurance Corp. in control of its assets.
Silicon Valley Bank had an estimated $209 billion in total assets and about $175.4 billion in deposits as of Dec. 31, according to the FDIC.
SVB Financial’s 4.57% bonds due April 2023 traded as low as 31 cents on the dollar on Friday in heavy trading, according to BondCliq. Since the low, the debt traded up to 38.50 cents. A week ago it was fetching 90 cents. Prices on U.S. corporate bonds below 70 cents on the dollar are broadly considered distressed.
Worries about distress at Silicon Valley Bank, and potential risks in the broader distress in the banking system, have weighed on shares and the debt of financial companies.
Bonds in the financial sector were broadly under pressure Friday, including debt issued by Bank of America Corp. BAC, -0.97%,
JPMorgan Chase and Co. JPM, +2.70%,
Goldman Sachs Group Inc. GS, -3.69%,
Morgan Stanley MS, -1.56%
and other major banks, according to BondCliq.
Shares of the Invesco KBW Bank ETF KBWB, -3.26%
were down 16% on the week through midday Friday, with some investors expressing concern about potential cracks in the financial system following a year of aggressive interest-rate hikes by the Federal Reserve.
Barclays analysts said Friday that they viewed the collapse of Silicon Valley Bank as an “isolated event, but that it still “raises risks of broader distress within the banking system” that could throw cold water on talk of a Fed interest-rate hike in March of 50 basis points vs. 25 basis points.
“Indeed, the possibility of capital losses at other institutions cannot be completely dismissed, with rising policy rates raising banks’ funding costs, more elevated longer-term rates exerting pressure on asset valuations, and potential loan losses related to idiosyncratic credit exposures.”
Shares of SBV Financial were halted Friday, but they are down about 54% on the year, according to FactSet. The S&P 500 index SPX, -1.11%
was down about 1.2% Friday afternoon, while the Dow Jones Industrial Average DJIA, -0.82%
fell 0.8% and the Nasdaq Composite COMP, -1.47%
was 1.7% lower.
Shares of Silicon Valley Bank parent company SVB Financial Group plummeted Thursday toward the biggest one-day selloff since the dotcom boom, after the Santa Clara, Calif.-based financial-services company disclosed large losses from securities sales and a stock offering meant to provide a boost to its balance sheet.
The bank SIVB, -43.86%,
which helps fund technology startups backed by venture-capital firms, said it took the “strategic actions” to strengthen its financial position as rising interest rates increase pressure on public and private markets and as clients face elevated cash burn levels.
SVB also cut its first-quarter guidance ranges for net interest income (NII) to $880 million-$900 million from $925 million-$955 million and for net interest margin (NIM) to 1.75%-1.79% from 1.85%-1.95%. The outlook for declines in average deposits was increased to the low-double-digit percentage range from mid single digits.
“While VC deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted,” Chief Executive Greg Becker wrote in a letter to shareholders. “The related shift in our funding mix to more, higher-cost deposits and short-term borrowings, coupled with higher interest rates, continues to pressure NII and NIM.”
The stock dove 41% in morning trading, outpacing the S&P 500’s SPX, +0.02%
losers by a wide margin. It was suffering the biggest one-day selloff since its record 42.3% decline on Sept. 10, 1998.
SVB said late Wednesday it sold about $21 billion worth of its available-for-sale securities. As of Dec. 31, the company had $26.1 billion in AFS securities.
The sale will result in a loss of about $1.8 billion in the first quarter of 2023, while the FactSet consensus for first-quarter net income was $274.8 million.
“The sale of substantially all of our AFS securities will enable us to increase our asset sensitivity, partially lock in funding costs, better insulate net interest income (NII) and net interest margin (NIM) from the impact of higher interest rates, and enhance profitability,” Becker wrote.
Separately, the company said it plans to offer for sale $2.25 billion worth of equity securities to bolster its financial position.
The offering includes $1.25 billion worth of common stock, which represents 13.4% of the company’s current market capitalization of $9.33 billion, and $500 million worth of mandatory convertible preferred stock. SVB has also entered into an agreement with private-equity investor General Atlantic to buy $500 million worth of common stock in a separate private transaction.
“Our financial position enables us to take these strategic actions, which are intended to further bolster that position now and over the long term,” the bank said in a statement.
JPMorgan analyst Steven Alexopoulos cut his stock-price target to $270 from $300 but reiterated the overweight rating he’s had on SVB for at least the past three years. The stock target is above Tuesday’s closing price of $267.83.
“While this is yet another setback that will result in another negative [earnings-per-share] revision, we continue to believe that it remains a question of when rather than if the war chest of dry powder on the sidelines starts to get deployed at a much more rapid pace,” Alexopoulos wrote in a note to clients.
The stock, which was headed for its lowest close since April 2020, has tumbled 28.3% over the past three months and plunged 70.7% over the past 12 months. In comparison, the Financial Select Sector SPDR exchange-traded fund XLF, -2.06%
has lost 7.1% over the past year and the S&P 500 has shed 6.6%.
David Rosenberg, the former chief North American economist at Merrill Lynch, has been saying for almost a year that the Fed means business and investors should take the U.S. central bank’s effort to fight inflation both seriously and literally.
Rosenberg, now president of Toronto-based Rosenberg Research & Associates Inc., expects investors will face more pain in financial markets in the months to come.
“The recession’s just starting,” Rosenberg said in an interview with MarketWatch. “The market bottoms typically in the sixth or seventh inning of the recession, deep into the Fed easing cycle.” Investors can expect to endure more uncertainty leading up to the time — and it will come — when the Fed first pauses its current run of interest rate hikes and then begins to cut.
Fortunately for investors, the Fed’s pause and perhaps even cuts will come in 2023, Rosenberg predicts. Unfortunately, he added, the S&P 500 SPX, -0.61%
could drop 30% from its current level before that happens. Said Rosenberg: “You’re left with the S&P 500 bottoming out somewhere close to 2,900.”
At that point, Rosenberg added, stocks will look attractive again. But that’s a story for 2024.
In this recent interview, which has been edited for length and clarity, Rosenberg offered a playbook for investors to follow this year and to prepare for a more bullish 2024. Meanwhile, he said, as they wait for the much-anticipated Fed pivot, investors should make their own pivot to defensive sectors of the financial markets — including bonds, gold and dividend-paying stocks.
MarketWatch: So many people out there are expecting a recession. But stocks have performed well to start the year. Are investors and Wall Street out of touch?
Rosenberg: Investor sentiment is out of line; the household sector is still enormously overweight equities. There is a disconnect between how investors feel about the outlook and how they’re actually positioned. They feel bearish but they’re still positioned bullishly, and that is a classic case of cognitive dissonance. We also have a situation where there is a lot of talk about recession and about how this is the most widely expected recession of all time, and yet the analyst community is still expecting corporate earnings growth to be positive in 2023.
In a plain-vanilla recession, earnings go down 20%. We’ve never had a recession where earnings were up at all. The consensus is that we are going to see corporate earnings expand in 2023. So there’s another glaring anomaly. We are being told this is a widely expected recession, and yet it’s not reflected in earnings estimates – at least not yet.
There’s nothing right now in my collection of metrics telling me that we’re anywhere close to a bottom. 2022 was the year where the Fed tightened policy aggressively and that showed up in the marketplace in a compression in the price-earnings multiple from roughly 22 to around 17. The story in 2022 was about what the rate hikes did to the market multiple; 2023 will be about what those rate hikes do to corporate earnings.
“ You’re left with the S&P 500 bottoming out somewhere close to 2,900. ”
When you’re attempting to be reasonable and come up with a sensible multiple for this market, given where the risk-free interest rate is now, and we can generously assume a roughly 15 price-earnings multiple. Then you slap that on a recession earning environment, and you’re left with the S&P 500 bottoming out somewhere close to 2900.
This is just pure mathematics. All the stock market is at any point is earnings multiplied by the multiple you want to apply to that earnings stream. That multiple is sensitive to interest rates. All we’ve seen is Act I — multiple compression. We haven’t yet seen the market multiple dip below the long-run mean, which is closer to 16. You’ve never had a bear market bottom with the multiple above the long-run average. That just doesn’t happen.
David Rosenberg: ‘You want to be in defensive areas with strong balance sheets, earnings visibility, solid dividend yields and dividend payout ratios.’
Rosenberg Research
MarketWatch: The market wants a “Powell put” to rescue stocks, but may have to settle for a “Powell pause.” When the Fed finally pauses its rate hikes, is that a signal to turn bullish?
Rosenberg: The stock market bottoms 70% of the way into a recession and 70% of the way into the easing cycle. What’s more important is that the Fed will pause, and then will pivot. That is going to be a 2023 story.
The Fed will shift its views as circumstances change. The S&P 500 low will be south of 3000 and then it’s a matter of time. The Fed will pause, the markets will have a knee-jerk positive reaction you can trade. Then the Fed will start to cut interest rates, and that usually takes place six months after the pause. Then there will be a lot of giddiness in the market for a short time. When the market bottoms, it’s the mirror image of when it peaks. The market peaks when it starts to see the recession coming. The next bull market will start once investors begin to see the recovery.
But the recession’s just starting. The market bottoms typically in the sixth or seventh inning of the recession, deep into the Fed easing cycle when the central bank has cut interest rates enough to push the yield curve back to a positive slope. That is many months away. We have to wait for the pause, the pivot, and for rate cuts to steepen the yield curve. That will be a late 2023, early 2024 story.
MarketWatch: How concerned are you about corporate and household debt? Are there echoes of the 2008-09 Great Recession?
Rosenberg: There’s not going to be a replay of 2008-09. It doesn’t mean there won’t be a major financial spasm. That always happens after a Fed tightening cycle. The excesses are exposed, and expunged. I look at it more as it could be a replay of what happened with nonbank financials in the 1980s, early 1990s, that engulfed the savings and loan industry. I am concerned about the banks in the sense that they have a tremendous amount of commercial real estate exposure on their balance sheets. I do think the banks will be compelled to bolster their loan-loss reserves, and that will come out of their earnings performance. That’s not the same as incurring capitalization problems, so I don’t see any major banks defaulting or being at risk of default.
But I’m concerned about other pockets of the financial sector. The banks are actually less important to the overall credit market than they’ve been in the past. This is not a repeat of 2008-09 but we do have to focus on where the extreme leverage is centered.
It’s not necessarily in the banks this time; it is in other sources such as private equity, private debt, and they have yet to fully mark-to-market their assets. That’s an area of concern. The parts of the market that cater directly to the consumer, like credit cards, we’re already starting to see signs of stress in terms of the rise in 30-day late-payment rates. Early stage arrears are surfacing in credit cards, auto loans and even some elements of the mortgage market. The big risk to me is not so much the banks, but the nonbank financials that cater to credit cards, auto loans, and private equity and private debt.
MarketWatch: Why should individuals care about trouble in private equity and private debt? That’s for the wealthy and the big institutions.
Rosenberg: Unless private investment firms gate their assets, you’re going to end up getting a flood of redemptions and asset sales, and that affects all markets. Markets are intertwined. Redemptions and forced asset sales will affect market valuations in general. We’re seeing deflation in the equity market and now in a much more important market for individuals, which is residential real estate. One of the reasons why so many people have delayed their return to the labor market is they looked at their wealth, principally equities and real estate, and thought they could retire early based on this massive wealth creation that took place through 2020 and 2021.
Now people are having to recalculate their ability to retire early and fund a comfortable retirement lifestyle. They will be forced back into the labor market. And the problem with a recession of course is that there are going to be fewer job openings, which means the unemployment rate is going to rise. The Fed is already telling us we’re going to 4.6%, which itself is a recession call; we’re going to blow through that number. All this plays out in the labor market not necessarily through job loss, but it’s going to force people to go back and look for a job. The unemployment rate goes up — that has a lag impact on nominal wages and that is going to be another factor that will curtail consumer spending, which is 70% of the economy.
“ My strongest conviction is the 30-year Treasury bond. ”
At some point, we’re going to have to have some sort of positive shock that will arrest the decline. The cycle is the cycle and what dominates the cycle are interest rates. At some point we get the recessionary pressures, inflation melts, the Fed will have successfully reset asset values to more normal levels, and we will be in a different monetary policy cycle by the second half of 2024 that will breathe life into the economy and we’ll be off to a recovery phase, which the market will start to discount later in 2023. Nothing here is permanent. It’s about interest rates, liquidity and the yield curve that has played out before.
MarketWatch: Where do you advise investors to put their money now, and why?
Rosenberg: My strongest conviction is the 30-year Treasury bond TMUBMUSD30Y, 3.674%.
The Fed will cut rates and you’ll get the biggest decline in yields at the short end. But in terms of bond prices and the total return potential, it’s at the long end of the curve. Bond yields always go down in a recession. Inflation is going to fall more quickly than is generally anticipated. Recession and disinflation are powerful forces for the long end of the Treasury curve.
As the Fed pauses and then pivots — and this Volcker-like tightening is not permanent — other central banks around the world are going to play catch up, and that is going to undercut the U.S. dollar DXY, +0.70%.
There are few better hedges against a U.S. dollar reversal than gold. On top of that, cryptocurrency has been exposed as being far too volatile to be part of any asset mix. It’s fun to trade, but crypto is not an investment. The crypto craze — fund flows directed to bitcoin BTCUSD, +0.35%
and the like — drained the gold price by more than $200 an ounce.
“ Buy companies that provide the goods and services that people need – not what they want. ”
I’m bullish on gold GC00, +0.22%
– physical gold — bullish on bonds, and within the stock market, under the proviso that we have a recession, you want to ensure you are invested in sectors with the lowest possible correlation to GDP growth.
Invest in 2023 the same way you’re going to be living life — in a period of frugality. Buy companies that provide the goods and services that people need – not what they want. Consumer staples, not consumer cyclicals. Utilities. Health care. I look at Apple as a cyclical consumer products company, but Microsoft is a defensive growth technology company.
You want to be buying essentials, staples, things you need. When I look at Microsoft MSFT, -0.61%,
Alphabet GOOGL, -1.79%,
Amazon AMZN, -1.17%,
they are what I would consider to be defensive growth stocks and at some point this year, they will deserve to be garnering a very strong look for the next cycle.
You also want to invest in areas with a secular growth tailwind. For example, military budgets are rising in every part of the world and that plays right into defense/aerospace stocks. Food security, whether it’s food producers, anything related to agriculture, is an area you ought to be invested in.
You want to be in defensive areas with strong balance sheets, earnings visibility, solid dividend yields and dividend payout ratios. If you follow that you’ll do just fine. I just think you’ll do far better if you have a healthy allocation to long-term bonds and gold. Gold finished 2022 unchanged, in a year when flat was the new up.
In terms of the relative weighting, that’s a personal choice but I would say to focus on defensive sectors with zero or low correlation to GDP, a laddered bond portfolio if you want to play it safe, or just the long bond, and physical gold. Also, the Dogs of the Dow fits the screening for strong balance sheets, strong dividend payout ratios and a nice starting yield. The Dogs outperformed in 2022, and 2023 will be much the same. That’s the strategy for 2023.
These are tricky times in the stock market, so it pays to look to the best stock-fund managers for guidance on how to behave now. Veteran value investor Bill Nygren belongs in this camp, because the Oakmark Fund OAKMX he co-manages consistently and substantially outperforms its peers.
That isn’t easy, considering how many fund managers fail to do so. Nygren’s fund beats its Morningstar large-cap value index and category by more than four percentage points annualized over the past three years. It also outperforms at five and…
Most investors want to keep things simple, but digging a bit into details can be lucrative — it can help you match your choices to your objectives.
The JPMorgan Equity Premium Income ETF JEPI, +0.20%
has been able to take advantage of rising volatility in the stock market to beat the total return of its benchmark, the S&P 500 SPX, +1.19%,
while providing a rising stream of monthly income.
The objective of the fund is “to deliver a significant portion of the returns associated with the S&P 500 Index with less volatility,” while paying monthly dividends, according to JPMorgan Asset Management. It does this by maintaining a portfolio of about 100 stocks selected for high quality, value and low price volatility, while also employing a covered-call strategy (described below) to increase income.
This strategy might underperform the index during a bull market, but it is designed to be less volatile while providing high monthly dividends. This might make it easier for you to remain invested through the type of downturn we saw last year.
JEPI was launched on May 20, 2020, and has grown quickly to $18.7 billion in assets under management. Hamilton Reiner, who co-manages the fund with Raffaele Zingone, described the fund’s strategy, and its success during the 2022 bear market and shared thoughts on what may lie ahead.
Outperformance with a smoother ride
First, here’s a chart showing how the fund has performed from when it was established through Jan. 20, against the SPDR S&P 500 ETF Trust SPY, +1.20%,
both with dividends reinvested:
JEPI has been less volatile than SPY, which tracks the S&P 500.
FactSet
Total returns for the two funds since May 2020 pretty much match, however, JEPI has been far less volatile than SPY and the S&P 500. Now take a look at a performance comparison for the period of rising interest rates since the end of 2021:
Rising stock-price volatility during 2022 helped JEPI earn more income through its covered call option strategy.
FactSet
Those total returns are after annualized expenses of 0.35% of assets under management for JEPI and 0.09% for SPY. Both funds have had negative returns since the end of 2021, but JEPI has been a much better performer.
““Income is the outcome.””
— Hamilton Reiner
The income component
Which investors JEPI is designed for? “Income is the outcome,” Reiner responded. “We are seeing a lot of people using this as an anchor tenant for income-oriented portfolios.”
The fund quotes a 30-day SEC yield of 11.77%. There are various ways to look at dividend yields for mutual funds or exchange-traded funds and the 30-day yield is meant to be used for comparison. It is based on a fund’s current income distribution profile relative to its price, but the income distributions that investors actually receive will vary.
It turns out that over the past 12 months, JEPI’s monthly distributions have ranged between 38 cents a share and 62 cents a share, with a rising trend over the past six months. The sum of the past 12 distributions has been $5.79 a share, for a distribution yield of 10.53%, based on the ETF’s closing price of $55.01 on Jan. 20.
JEPI invests at least 80% of assets in stocks, mainly selected from those in the S&P 500, while also investing in equity-linked notes to employ a covered call option strategy which enhances income and lowers volatility. Covered calls are described below.
Reiner said that during a typical year, investors in JEPI should expect monthly distributions to come to an annualized yield in the “high single digits.”
He expects that level of income even if we return to the low-interest rate environment that preceded the Federal Reserve’s cycle of rate increases that it started early last year to push down inflation.
JEPI’s approach may be attractive to investors who don’t need the income now. “We also see people using it as a conservative equity approach,” Reiner expects the fund to have 35% less price volatility than the S&P 500.
Getting back to income, Reiner said JEPI was a good alternative even for investors who were willing to take credit risk with high-yield bond funds. Those have higher price volatility than investment-grade bond funds and face a higher risk of losses when bonds default. “But with JEPI you don’t have credit risk or duration risk,” he said.
An example of a high-yield bond fund is the iShares 0-5 Year High Yield Corporate Bond ETF SHYG, -0.10%.
It has a 30-day yield of 7.95%.
When discussing JEPI’s stock selection, Reiner said “there is a significant active component to the 90 to 120 names we invest in.” Stock selections are based on recommendations of JPM’s analyst team for those that are “most attractively priced today for the medium to long term,” he said.
Individual stock selections don’t factor in dividend yields.
Covered call strategies and an example of a covered-call trade
JEPI’s high income is an important part of its low-volatility total-return strategy.
A call option is a contract that allows an investor to buy a security at a particular price (called the strike price) until the option expires. A put option is the opposite, allowing the purchaser to sell a security at a specified price until the option expires.
A covered call option is one an investor can write when they already own a security. The strike price is “out of the money,” which means it is higher than the stock’s current price.
Here’s an example of a covered call option provided by Ken Roberts, an investment adviser with Four Star Wealth Management in Reno, Nev.
You bought shares of 3M Co. MMM, +1.63%
on Jan. 20 for $118.75.
You sold a $130 call option with an expiration date of Jan. 19, 2024.
The premium for the Jan. 24, $130 call was $7.60 at the time that MMM was selling for $118.75.
The current dividend yield for MMM is 5.03%.
“So the maximum gain for this trade before the dividend is $18.85 or 15.87%. Add the divided income and you’ll get 20.90% maximum return,” Roberts wrote in an email exchange on Jan. 20.
If you had made this trade and 3M’s shares didn’t rise above $130 by Jan. 19, 2024, the option would expire and you would be free to write another option. The option alone would provide income equivalent to 6.40% of the Jan. 20 purchase price in the period of a year.
If the stock rose above $130 and the option were exercised, you would have ended up with the maximum gain as described by Roberts. Then you would need to find another stock to invest in. What did you risk? Further upside beyond $130. So you would have written the option only if you had decided you would be willing to part with your shares of MMM for $130.
The bottom line is that the call option strategy lowers volatility with no additional downside risk. The risk is to the upside. If 3M’s shares had doubled in price before the option expired, you would still wind up selling them for $130.
JEPI pursues the covered call options strategy by purchasing equity-linked notes (ELNs) which “combine equity exposure with call options,” Reiner said. The fund invests in ELNs rather than writing its own options, because “unfortunately option premium income is not considered bona fide income. It is considered a gain or a return of capital,” he said.
In other words, the fund’s distributions can be better reflected in its 30-day yield, because option income probably wouldn’t be included.
One obvious question for a fund manager whose portfolio has increased quickly to almost $19 billion is whether or not the fund’s size might make it difficult to manage. Some smaller funds pursuing narrow strategies have been forced to close themselves to new investors. Reiner said JEPI’s 2% weighting limitation for its portfolio of about 100 stocks mitigates size concerns. He also said that “S&P 500 index options are the most liquid equity products in the world,” with over $1 trillion in daily trades.
Summing up the 2022 action, Reiner said “investing is about balance.” The rising level of price volatility increased options premiums. But to further protect investors, he and JEPI co-manager Raffaele Zingone also “gave them more potential upside by selling calls that were a bit further out of the money.”
Many people are good at saving up money for retirement. They manage expenses and build up their nest eggs steadily. But when it comes time to begin drawing income from an investment portfolio, they might feel overwhelmed with so many choices.
Some income-seeking investors might want to dig deeply into individual bonds or dividend stocks. But others will want to keep things simple. One of the easiest ways to begin switching to an income focus is to use exchange-traded funds. Below are examples of income-oriented exchange-traded funds (ETFs) with related definitions further down.
First, the inverse relationship
Before looking at income-producing ETFs, there is one concept we will have to get out of the way — the relationship between interest rates and bond prices.
Stocks represent ownership units in companies. Bonds are debt instruments. A government, company or other entity borrows money from investors and issues bonds that mature on a certain date, when the issuer redeems them for the face amount. Most bonds issued in the U.S. have fixed interest rates and pay interest every six months.
Investors can sell their bonds to other investors at any time. But if interest rates in the market have changed, the market value of the bonds will move in the opposite direction. Last year, when interest rates rose, the value of bonds declined, so that their yields would match the interest rates of newly issued bonds of the same credit quality.
It was difficult to watch bond values decline last year, but investors who didn’t sell their bonds continued to receive their interest. The same could be said for stocks. The benchmark S&P 500 SPX, -0.20%
fell 19.4% during 2022, with 72% of its stocks declining. But few companies cut dividends, just as few companies defaulted on their bond payments.
One retired couple that I know saw their income-oriented brokerage account value decline by about 20% last year, but their investment income increased — not only did the dividend income continue to flow, they were able to invest a bit more because their income exceeded their expenses. They “bought more income.”
The longer the maturity of a bond, the greater its price volatility. Depending on the economic environment, you might find that a shorter-term bond portfolio offers a “sweet spot” factoring in price volatility and income.
And here’s a silver lining — if you are thinking of switching your portfolio to an income orientation now, the decline in bond prices means yields are much more attractive than they were a year ago. The same can be said for many stocks’ dividend yields.
Downside protection
What lies ahead for interest rates? With the Federal Reserve continuing its efforts to fight inflation, interest rates may continue to rise through 2023. This can put more pressure on bond and stock prices.
Ken Roberts, an investment adviser with Four Star Wealth Management in Reno, Nev., emphasizes the “downside protection” provided by dividend income in his discussions with clients.
“Diversification is the best risk-management tool there is,” he said during an interview. He also advised novice investors — even those seeking income rather than growth — to consider total returns, which combine the income and price appreciation over the long term.
An ETF that holds bonds is designed to provide income in a steady stream. Some pay dividends quarterly and some pay monthly. An ETF that holds dividend-paying stocks is also an income vehicle; it may pay dividends that are lower than bond-fund payouts and it will also take greater risk of stock-market price fluctuation. But investors taking this approach are hoping for higher total returns over the long term as the stock market rises.
“With an ETF, your funds are diversified. And when the market goes through periods of volatility, you continue to enjoy the income, even if your principal balance declines temporarily,” Roberts said.
If you sell your investments into a declining market, you know you will lose money — that is, you will sell for less than your investments were worth previously. If you are enjoying a stream of income from your portfolio, it might be easier for you to wait through a down market. If we look back over the past 20 calendar years — arbitrary periods — the S&P 500 increased during 15 of those years. But its average annual price increase was 9.1% and its average annual total return, with dividends reinvested, was 9.8%, according to FactSet.
In any given year, there can be tremendous price swings. For example, during 2020, the early phase of the Covid-19 pandemic pushed the S&P 500 down 31% through March 23, but the index ended the year with a 16% gain.
Two ETFs with broad approaches to dividend stocks
Invesco Head of Factor and Core Strategies Nick Kalivas believes investors should “explore higher-yielding stocks as a way to generate income and hedge against inflation.”
He cautioned during an interview that selecting a stock based only on a high dividend yield could place an investor in “a dividend trap.” That is, a high yield might indicate that professional investors in the stock market believe a company might be forced to cut its dividend. The stock price has probably already declined, to send the dividend yield down further. And if the company cuts the dividend, the shares will probably fall even further.
Here are two ways Invesco filters broad groups of stocks to those with higher yields and some degree of safety:
The Invesco S&P 500 High Dividend Low Volatility ETF SPHD, -0.33%
holds shares of 50 companies with high dividend yields that have also shown low price volatility over the previous 12 months. The portfolio is weighted toward the highest-yielding stocks that meet the criteria, with limits on exposure to individual stocks or sectors. It is reconstituted twice a year in January and July. Its 30-day SEC yield is 4.92%.
The Invesco High Yield Equity Dividend Achievers ETF PEY, -0.70%
follows a different screening approach for quality. It begins with the components of the Nasdaq Composite Index COMP, +1.39%,
then narrows the list to 50 companies that have raised dividend payouts for at least 10 consecutive years, whose stocks have the highest dividend yields. It excludes real-estate investment trusts and is weighted toward higher-yielding stocks meeting the criteria. Its 30-day yield is 4.08%.
The 30-day yields give you an idea of how much income to expect. Both of these ETFs pay monthly. Now see how they performed in 2022, compared with the S&P 500 and the Nasdaq, all with dividends reinvested:
Both ETFs had positive returns during 2022, when rising interest rates pressured the broad indexes.
8 more ETFs for income (and some for growth too)
A mutual fund is a pooling of many investors’ money to pursue a particular goal or set of goals. You can buy or sell shares of most mutual funds once a day, at the market close. An ETF can be bought or sold at any time during stock-market trading hours. ETFs can have lower expenses than mutual funds, especially ETFs that are passively managed to track indexes.
You should learn about the expenses before making a purchase. If you are working with an investment adviser, ask about fees — depending on the relationship between the adviser and a fund manager, you might get a discount on combined fees. You should also discuss volatility risk with your adviser, to establish a comfort level and to try to match your income investment choices to your risk tolerance.
Here are eight more ETFs designed to provide income or a combination of income and growth:
Company
Ticker
30-day SEC yield
Concentration
2022 total return
iShares iBoxx $ Investment Grade Corporate Bond ETF
The following definitions can help you gain a better understanding of how the ETFs listed above work:
30-day SEC yield — A standardized calculation that factors in a fund’s income and expenses. For most funds, this yield gives a good indication of how much income a new investor can be expected to receive on an annualized basis. But the 30-day yields don’t always tell the whole story. For example, a covered-call ETF with a low 30-day yield may be making regular dividend distributions (quarterly or monthly) that are considerably higher, since the 30-day yield can exclude covered-call option income. See the issuer’s website for more information about any ETF that may be of interest.
Taxable-equivalent yield — A taxable yield that would compare with interest earned from municipal bonds that are exempt from federal income taxes. Leaving state or local income taxes aside, you can calculate the taxable-equivalent yield by dividing your tax exempt yield by 1 less your highest graduated federal income tax bracket.
Bond ratings — Grades for credit risk, as determined by ratings agencies. Bonds are generally considered Investment-grade if they are rated BBB- or higher by Standard & Poor’s and Fitch, and Baa3 or higher by Moody’s. Fidelity breaks down the credit agencies’ ratings hierarchy. Bonds with below-investment-grade ratings have higher risk of default and higher interest rates than investment-grade bonds. They are known as high-yield or “junk” bonds.
Call option — A contract that allows an investor to buy a security at a particular price (called the strike price) until the option expires. A put option is the opposite, allowing the purchaser to sell a security at a specified price until the option expires.
Covered call option — A call option an investor writes when they already own a security. The strategy is used by stock investors to increase income and provide some downside protection.
Preferred stock — A stock issued with a stated dividend yield. This type of stock has preference in the event a company is liquidated. Unlike common shareholders, preferred shareholders don’t have voting rights.
These articles dig deeper into the types of securities mentioned above and related definitions:
It may not have been a surprise to see the consumer discretionary sector of the S&P 500 get hammered last year amid talk of a looming recession while the Federal Reserve jacked up interest rates to push back against inflation.
But the stock market always looks ahead. Following a decline of 19.4% for the S&P 500 SPX, +0.42%
in 2022 and a 37.6% drop for the benchmark index’s consumer discretionary sector, this may be the time to begin looking for bargains.
And now, analysts at Jefferies have lifted the sector to a “bullish” rating.
In a note to clients on Jan. 10, Jefferies’ global equity strategist, Sean Darby, wrote: “A Goldilocks scenario might be unfolding for the U.S. consumer — falling inflation but steady employment conditions.”
He sees consumer confidence improving, in part because “households are still sitting on [about] $1.4 trillion of Covid savings.”
Darby pointed to a list of 18 consumer discretionary stocks favored by Jefferies analysts that was published on Jan. 6. Those are listed below, along with three stocks in the sector the analysts rate “underperform.”
The ratings of the Jefferies analysts for individual stocks is based on their 12-month outlooks for the companies, in keeping with Wall Street tradition.
So we have added another list further down, showing which companies in the S&P 500 consumer discretionary sector are expected by analysts polled by FactSet to increase sales the most through 2024.
The Jefferies 18
Here are the 18 consumer discretionary stocks recommended by Jefferies analysts with “buy” ratings on Jan. 6, sorted by how much upside the firm sees for the shares from closing prices on Jan. 9:
Click on the tickers for more information about the companies.
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
The two right-most columns on the table show estimated compound annual growth rates (CAGR) for the companies over the past three calendar years and expected sales CAGR for two years through calendar 2024, based on the companies’ financial reports and consensus estimates among analysts polled by FactSet.
(We used calendar-year numbers, some of which are estimated by FactSet for prior years, because some companies have fiscal years or even months that don’t match the calendar.)
The stock pick with the highest 12-month upside potential, based on Jefferies’ price target, is Topgolf Callaway Brands Corp. MODG, -0.22%.
This company has the highest estimated three-year sales CAGR on the list, and has the third-highest projected sales CAGR through 2024, after Planet Fitness Inc. PLNT, +0.69%
and Chewy Inc. CHWY, +1.63%.
On Jan. 6, the Jefferies analysts also listed three stocks in the sector they rated “underperform.” Here they are, sorted by how much the analysts expect the stocks to decline over the next 12 months:
A look head at which companies are expected to increase sales the most over the next two years might serve as a good starting point for your own research.
Bear in mind that some of the companies in travel-related industries suffered declining sales for three years through 2022 because of the coronavirus pandemic. Some of those are on this new list of 20 stocks in the S&P 500 consumer discretionary sector expected to show the highest two-year sales CAGR through calendar 2024:
Among the companies on this list that didn’t suffer sales declines from 2019 levels, Tesla Inc. TSLA, -1.83%
is expected to achieve the highest two-year sales CAGR through 2022.
Dollar General Corp. DG, -0.26%
is the only company to appear on this list based on consensus sales growth estimates and the Jefferies recommended list.
The first trading days of January loom large on Wall Street as being able to foretell the U.S. stock market’s direction for the full year. What does that mean for 2023?
Not much. January’s reputation is largely undeserved. Even when the market declines over the first sessions of January, it still is more likely than not to rise over the remainder of the year.
That should provide some solace to followers of these “first-days-of-January” indicators, who are biting their nails over the stock market’s weakness out of the starting gate on the first trading day of the year.
The accompanying table reviews the track records of the various iterations of these indicators. The percentages are based on the Dow Jones Industrial Average DJIA, -0.03%
back to its creation in the 1890s.
Length of initial period
% of time DJIA rises over remainder of year when it rises during initial period
% of time DJIA rises over remainder of year when it declines during initial period
First trading day of January
73%
53%
First 2 trading days of January
70%
56%
First 5 trading days of January
70%
58%
All of January
74%
56%
On the one hand, notice that there are greater odds of the market rising if it also rises in the first sessions of January. On the other hand, notice also that even when the market falls in those first sessions the odds of the market rising for the remainder of the year are still above 50%.
To put the table’s data in context, bear in mind that the odds of the stock market rising in any given calendar year are 64% (based on the Dow’s track complete history). So, depending on the “first-day-of-January” indicator on which you focus, the odds of an “up” year increase or decrease by a modest amount — between 6 and 11 percentage points. These differences are only marginally significant at the 95% confidence level that statisticians often use when assessing if a pattern is genuine.
There are several additional reasons not to put too much weight on these first-days-of-January indicators:
There is nothing particularly unique about January. Many other days of the year have the same apparent ability to foretell the market’s direction over the remainder of the next year. A trader intent on following the lead of all such “indicators” would be whipsawed into and out of stocks on a near-daily basis.
The marginally significant success of the early-days-of-January indicators traces in large part to the earlier part of the 20th century. Since 1960, in contrast, their track records are not statistically significant.
The bottom line? Regardless of how the market performs over the first days of this month, the intelligent bet is that the stock market will rise this year.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
Harris Kupperman, the president of Praetorian Capital, made a couple of interesting calls heading into 2022. He predicted that stocks of the giant tech-oriented companies that led the bull market would be sold off, and that oil prices would continue to rise through the end of 2022.
The first prediction came true, while the second one for oil prices fizzled. After rising to $130 in March, oil prices have fallen back to where they started the year. Then again, that second prediction still could have made you a lot of money because the share prices of oil companies kept rising anyway.
That leads to a new prediction for 2023 and a related stock screen below.
Here’s a chart showing the movement of front-month contract prices for West Texas Intermediate (WTI) crude oil CL.1, -0.62%
since the end of 2021:
FactSet
Even though Kupperman didn’t get his oil price call right, the energy sector of the S&P 500 SPX, -1.20%
was up 60% for 2022 through Dec. 27, excluding dividends. That is the only one of the 11 S&P 500 sectors to show a gain in 2022. And the energy sector is also cheapest relative to earnings expectations, with a forward price-to-earnings ratio of 9.8, compared with 16.7 for the full S&P 500.
WTI pulled back from its momentary peak at $130.50 in early March, but that didn’t reverse the long-term trend of low capital spending by oil and natural gas producers, which has given investors confidence that supplies will remain tight.
Vicki Hollub, the CEO of Occidental Petroleum Corp. OXY, -3.50%
— the best-performing S&P 500 stock of 2022 — said during a recent interview that there was “no pressure to increase production right now,” citing a $40 per barrel break-even point for oil prices.
At the end of November, these 20 oil companies stood out as reasonable plays for 2023 based on expectations for free-cash-flow generation and dividend payments.
For this next screen, we are only looking at ratings and consensus price targets among analysts polled by FactSet.
There are 23 energy stocks in the S&P 500, and you can invest in that group easily by purchasing shares of the Energy Select SPDR ETF XLE, -2.24%.
We can expand the list of large-cap names by looking at the components of the iShares Global Energy ETF IXC, -1.91%,
which holds all the energy stocks in the S&P 500 plus large players based outside the U.S.
Prices on the tables in this article are in local currencies.
IXC holds 51 stocks. To expand the list for a stock screen, we added the energy stocks in the S&P 400 Mid Cap Index MID, -1.24%
and the S&P Small Cap 600 Index SML, -1.89%
to bring the list up to 91 companies, which we then pared to 83 covered by at least five analysts polled by FactSet.
Here are the 20 companies in the list with at least 75% “buy” or equivalent ratings that have the most upside potential over the next 12 months, based on consensus price targets:
Elon Musk has been trying this week to defend Tesla’s abysmal stock performance in 2022. The electric vehicle giant has seen its stock plummet by 61% this year, making it the 11th-worst performing stock in the S&P 500 in 2022.
“As bank savings account interest rates, which are guaranteed, start to approach stock market returns, which are *not* guaranteed, people will increasingly move their money out of stocks into cash, thus causing stocks to drop,” Musk tweeted.
You might expect that Tesla’s stock drop has wiped out more investor wealth than any other stock in the world this year. But you would be wrong.
If we look at declines in market capitalization — the value of companies’ common-shares outstanding — Tesla TSLA, -1.76%
has been the fourth worst-performing stock in the benchmark S&P 500 this year, as of 1 p.m. ET on Dec. 21:
On a percentage basis, all these stocks have performed worse than the full S&P 500, which has fallen 19%, excluding dividends.
Amazon.com Inc. AMZN, +1.74%
has erased more shareholder wealth than any other publicly traded company in 2022. In total, investors in Amazon have lost $804.6 billion this year. The stock is down 48% in 2022.
Apple Inc. AAPL, -0.28%
and Microsoft Corp. MSFT, +0.23%
have also suffered larger market-cap declines than Tesla, by virtue of their sheer size.
The companies have different fiscal and annual period ends, but if we look at data for the past three reported quarters and compare to the same period a year earlier, here’s how the four stack up:
Company
Ticker
Change in sales for three quarters from year-earlier period
Change in EPS for three quarters from year-earlier period
Amazon showed a net loss of $3 billion for the first three quarters of 2022 as the company neared the end of its extraordinary multiyear effort to build out its warehouse and fulfillment infrastructure. For the first three quarters of 2021, the company booked $19 billion in profits. When announcing Amazon’s third-quarter results CEO Andy Jassy said the company was working methodically toward “a stronger cost structure for the business moving forward.”
The incredible growth of Amazon’s cloud business has stalled and disappointed the expectations the company had nurtured on Wall Street. The Amazon Web Services business is facing increasing competition from the likes of Microsoft and its customers are pulling back. Meanwhile, retail sales have also come in weak going into the Christmas and holiday season.
Amazon’s stock has declined 22% since it closed at $110.96 on Oct. 27, right before it disappointed investors not only with its third-quarter results, but with its outlook: It expects to break even during the holiday quarter. Analysts polled by FactSet had previously expected a profit of more than $5 billion.
Tesla stands in contrast to Amazon, as you can see on the table above. Its sales grew by 58% during the first three quarters of 2022 from the year-earlier period and its earnings per share rose nearly threefold.
This has been a year of significant declines for shares of giant tech-oriented companies, especially those that had traded at lofty price-to-earnings valuations — that group includes Amazon and Tesla. In fact, these companies have given up all their pandemic era gains int he stock market.
But with Tesla’s results so outstanding through the first three quarters of 2022, it raises the question: How much of the drop in the electric car makers share price was tied to Musk’s actions as CEO of Twitter, which he acquired on Oct. 27 after a monthslong saga? And how much of a relief rally, if any, might there be for Tesla if Musk, as expected, steps down as Twitter CEO?
How about some bottom-feeding?
Here’s the same list of 10 stocks in the S&P 500 that have seen the largest declines in market cap this year, with a summary of analysts’ ratings, consensus price targets and declines in their forward price-to-earnings ratios:
The benchmark S&P 500 Index has finally fallen below the 3900- to 4100-point trading range.
The move prompted an immediate reaction down to 3800, the next support level. (To see my suggestion for a so-called Santa Claus rally, please see the next item, below.)
Frankly, I would have expected more selling after the S&P 500 SPX, -2.32%
broke a support level of that magnitude (perhaps a move to 3700).
So, 3700 is the next support level, and then there is support at the yearly lows near 3500. On the upside, there is now resistance in the 3900-3940 area.
The larger picture is that SPX is still in a downtrend, and that the last rally failed in early December right at the downtrend line that defines this bear market. The declining 200-day moving average (MA) was also in that same area, near 4100.
We are closing our positions in the McMillan Volatility Band (MVB) buy signal that occurred in early October, and we will now wait for a new signal to set up. If SPX were to close below the lower -4σ Band (currently at 3760 and declining), that would be the first step toward a new buy signal. That does not appear to be imminent.
Equity-only put-call ratios continue to rise and, thus, remain on sell signals. There has been some relatively heavy put buying in stock options over the past few weeks, and that has been a major contributing factor in the rise in the put-call ratios. These ratios are rather high on their charts, so they are considered to be in oversold territory. However, “oversold” does not mean “buy.”
After the market broke below 3900, breadth was poor for the next two days. That pushed the breadth oscillators — which were already on sell signals dating back to December 5th — into oversold territory. We are now watching to see if they can generate buy signals. In fact, the NYSE breadth oscillator did generate a buy signal as of December 21st, but the “stocks only” oscillator has not. We generally require that any signal from this indicator (which is subject to whipsaws) persist for at least two consecutive days before considering it to be an actionable signal.
New 52-week highs on the New York Stock Exchange have lagged for some time again, and thus the “new highs vs. new lows” indicator remains on a sell signal.
So, the above indicators are relatively negative, but that is contrasted by the CBOE Volatility Index VIX, +15.50%
indicators, which are more bullish. The VIX “spike peak” buy signal of December 13th remains in place. Moreover, the trend of VIX buy signal, which is a more intermediate-term signal, remains in place. VIX would have to rise above 26 to cancel out these buy signals.
The construct of volatility derivatives remains bullish. That is, the term structures of the VIX futures and of the CBOE Volatility Indices slope upward. Moreover, the VIX futures are all trading at a premium to VIX. January VIX futures are now the front month, so we are watching for a warning sign, which would come if Jan VIX futures rose above the price of Feb VIX futures. That is not in danger of happening at this time.
The seasonal patterns that supposedly “rule” between Thanskgiving and the beginning of the new trading year have not worked out this year. The last of those patterns is yet to come, though — the Santa Claus rally — and it may still be able to salvage something for the bulls.
In summary, we continue to maintain a “core” bearish position and will continue to do so as long as SPX is in a downtrend. We will trade confirmed signals from our other indicators around that “core” position.
New recommendation: Santa Claus rally
The Santa Claus rally is a term and market seasonal pattern defined by Yale Hirsch over 60 years ago. It has a strong track record. The system is simple: The market rises over the last five trading days of one year and the first two trading days of the next year — a seven-day period.
This year the system begins at the close of trading on Thursday, December 22nd (today). However, if that period does not produce a gain by SPX, that would be a further negative for stocks going forward.
At the close of trading on Thursday, December 22nd,
Buy 2 SPY Jan (13th) at-the-money calls
And Sell 2 SPY Jan (13th) calls that are 15 points out of the money.
There is no stop for this trade, except for time. If the SPDR S&P 500 ETF Trust SPY, -2.29%
trades at the higher strike while the position is in place, then roll the entire spread up 15 points on each side. In any case, exit your spreads at the close of trading on Wednesday, January 4th (the second trading day of the new year).
Follow-up action
All stops are mental closing stops unless otherwise noted.
We are using a “standard” rolling procedure for our SPY spreads: in any vertical bull or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be roll up in the case of a call bull spread, or roll down in the case of a bear put spread. Stay in the same expiration, and keep the distance between the strikes the same unless otherwise recommended.
Long 2 SPY Jan (20th) 375 puts and Short 2 Jan (20th) 355 puts: this is our “core” bearish position. As long as SPX remains in a downtrend, we want to maintain a position here.
Long 1 SPY Jan (6th) 408 call and short 1 SPY Jan (6th) 423 call: this trade is based on the MVB buy signal, which was established on October 4th. We have already rolled up a couple of times and taken some profit out of the position. Close the remaining spread now.
Long 2 KMB Jan (20th) 135 calls: we rolled this position up last week. The closing stop remains at 135.
Long 2 IWM Jan (20th) 185 at-the-money calls and Short 2 IWM Jan (20th) 205 calls: this is our position based on the bullish seasonality between Thanksgiving and the second trading day of the new year. We will adjust this position if IWM rallies during the holding period, but initially there is no stop for the position, so the entire debit is at risk.
Long 2 PSX Jan (20th) 105 puts: we intended to hold these puts as long as the weighted put-call ratio remains on a sell signal. However, the put-call ratio has rolled over to a buy signal, so exit these puts now.
Long 2 AJRD Jan (20th) 52.5 calls: AJRD received an all-cash takeover offer of $56, so exit these calls now. Do not sell them below parity.
Long 1 SPY Jan (20th) 402 call and Short 1 SPY Jan (20th) 417 calls: this spread was bought at the close on December 13th, when the latest VIX “spike peak” buy signal was generated. Stop yourself out if VIX subsequently closes above 25.84. Otherwise, we will hold for 22 trading days.
Long 1 SPY Jan (20th) 389 put and Short 1 SPY Jan (20th) 364 put: this was an addition to our “core” bearish position, established when SPX closed below 3900 on December 15th. Stop yourself out of this spread if SPX closes above 3940.
Long 2 PCAR Feb (17th) 97.20 puts: these puts were bought on December 20th, when they finally traded at our buy limit. We will continue to hold these puts as long as the weighted put-call ratio is on a sell signal.
Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of the best-selling book, Options as a Strategic Investment. www.optionstrategist.com
Investors love dividend stocks but there are different ways to look at them, including various “quality” approaches. Today we are focusing on high yields.
A high dividend yield can be a warning that investors have lost confidence in a company’s ability to maintain its dividend payout. But there are always exceptions, some of which can be brought about by market events — some investors remain skeptical of energy stocks, for example, after so much pain before this year’s outstanding performance for the sector.
Below is a screen of stocks that have high dividend yields and are favored by analysts. The screen has no financial quality filters.
For investors who are interested in dividend stocks but wish to focus on quality and total returns, this recent look at the S&P Dividend Aristocrats (companies that have raised dividends consistently for many years) might be of interest. For those looking for income but also worried about dividend cuts, here is a list of stocks with dividend yields of at least 5% whose payouts are expected to be well-covered by free cash flow in 2023.
Removing the filters for a high-yield dividend-stock screen
For a broad screen of stocks with high dividend yields that are favored by analysts, we began with the S&P Composite 1500 Index SP1500, +1.42%,
which is made up of the S&P 500 SPX, +1.42%,
the S&P 400 Mid Cap Index MID, +1.48%,
and the S&P 600 Small Cap Index SML, +1.49%.
The S&P indexes exclude energy partnerships, so we added the 15 stocks held by the Alerian MLP ETF AMLP, +1.81%
to the list. Energy partnerships tend to have high distribution yields, in part because they pass most earnings through to investors. But they also can make tax preparation more complicated. They can also be volatile as oil CL00, +2.96%
CL00 and natural-gas NG00, +1.58%
prices swing.
The S&P indexes also exclude business development companies, or BDCs, so we expanded our initial screen to include the 24 stocks held by the VanEck BDC income ETF BIZD, +0.76%.
BDCs are specialized leveraged lenders that make loans with high interest rates, mainly to middle-market companies. They often take equity stakes in the companies they lend to, for a venture-capital-type of investment style. The BDC space features several stocks with very high dividend yields, but is also known for volatility.
You have been warned — this particular stock screen focuses only on high yields and favorable ratings among analysts working for brokerage firms. There is no look back at dividend cuts and no cash-flow analysis as featured in other dividend-stock articles. If you see anything of interest resulting from the screen, you need to do your own research to consider whether or not a long-term commitment to one or more of these companies is worth the risk as you seek high income.
The screen
Starting with the S&P Composite 1500 and the components of AMLP and BIZD, there are 68 stocks with dividend yields of at least 8%, according to data provided by FactSet.
Among the 68 companies, 55 made the first screen, because they are covered by at least five analysts polled by FactSet.
Among the 55 companies, 11 have “buy” or equivalent ratings among at least 70% of analysts.
Here they are, ranked by upside potential implied by analysts’ consensus price targets:
