This commentary was originally sent to Trifecta Stocks subscribers on Feb. 12. Click here to learn more about this dynamic service.
Despite ending on a high note, this past week was another rough one for the stock market as the S&P 500 fell about 1%. The increasingly familiar cast of characters -- oil price swings, economic growth concerns, renewed European banking issues and the notion the Fed may not really know what it is doing -- were all factors in the decline.
Friday's rebound was led primarily by comments from the energy minister of OPEC member United Arab Emirates, which likely sparked some short covering ahead of the holiday weekend, but all told oil still dipped for the week. A flurry of buyback announcements and insider buying, including from Amazon (AMZN) and JPMorgan Chase (JPM) also helped move the market higher on Friday.
From a Trifecta portfolio perspective, we had a rather good week, with more positive moves in positions than negative. Once again, one of the big winners for the week was American Water Works (AWK), which climbed more than 2%, setting yet another 52-week high in the process. Shares of Costco Wholesale (COST) and CVS Health (CVS) also rebounded nicely, climbing about 3% over the last five days.
This week also saw earnings from CVS Health and Disney (DIS) and if you missed our comments on those events you can find them here and here. Shares of United Parcel Service (UPS) rebounded nicely, too, and the company also boosted its quarterly dividend to $0.78 per share, up from the prior $0.73.
While Friday left investors feeling a little better, the reality is there are still a number of concerns that will continue to pressure the market, particularly if the comments from the UAE turn out to be something other than what the market is reading. We saw this just a few weeks ago, and prefer to be cautious ahead of what could be yet another "buy the rumor, sell the news" moment. Other shoes yet to drop include what's going on with the European banks, another slug of corporate earnings, and economic data in the next two weeks that will give us a clearer picture of how the current quarter is doing. Earlier this week, Deutsche Bank and others cut GDP expectations for the first half of 2016 and subsequently their full-year expectations. We expect others to follow.
Inside the current market environment, the Trifecta portfolio remains rather well insulated given our cash levels and the favorable characteristics associated with several of our holdings (CVS, Costco and American Water Works), which should continue to perform in an economy with a slower economic glide path. We also have positions in companies such as MasterCard (MA), Foot Locker (FL) and United Parcel Service (UPS) that have demonstrative tailwinds at their backs, including the continued push to non-cash and non-check forms of payment, athleisure and overall health and fitness, and the accelerating shift to online and mobile shopping. While some may wince at the news from Gallup that obesity rates have hit an all-time high in the U.S. at 28% and diabetes is at record levels, we see this benefiting Foot Locker and other companies we are keeping tabs on, which are now at far more attractive prices given the 8.5% drop in the market year to date, as measured by the S&P 500.
During this roller coaster ride, which likely has goosed sales of Zantac among investors, we have carefully navigated through the storm thanks to our threefold investing criteria that looks for overlaps on a quantitative, technical and fundamental basis. That interlocking discipline paid off in spades as we exited Boeing (BA) before the big slide in the shares this week. Over the last few weeks, we've seen far fewer upgrades than downgrades by TheStreet Quant Ratings, our initial screening process, and that has us being far more selective when it comes to potential positions. While this has tied our hands somewhat, but cash levels in the portfolio and some smart holdings, like those mentioned above, have led the Trifecta portfolio to outperform our benchmark --- Vanguard Total Stock Market ETF (VTI), which was down 10% year to date exiting the week -- by several hundred basis points during these turbulent times.
This market is frustrating for sure, but we would much rather "measure twice and cut once," to steal an old carpenter saying, when it comes to putting capital to work now. Roughly 25% of the S&P 500 companies have yet to report their quarterly results; in the coming shortened trading week 56 S&P 500 company will report. Earnings expectations for the index this year continued to move lower this week, hitting $122.42 per share (3.7% year over year) and we suspect that will drift lower as those remaining S&P 500 companies announce results. Let's remember, too, that 3.7% forecast benefits from the significant buyback activity going on, and, given the number of upsized share repurchase authorizations that continue to be announced this is likely to continue, especially with the pullback in stock prices. From a fundamental perspective, we'll continue to focus on operating profit growth and operating margin expansion.
Turning our gaze to next week, we have no portfolio companies reporting quarterly results -- our next one is American Water Works on Feb. 25. However, the economic calendar is full, with several regional Fed manufacturing surveys and housing reports being published as well as the latest Industrial Production reading. We also have both inflation indicators -- the PPI and CPI -- for January coming, but given the move in oil and other commodities, we are not expecting any pronounced changes in those indices.
Following Fed Chair Janet Yellen's testimony this week, the FOMC minutes from the Jan. 27 meeting will be released this coming Wednesday (Feb. 17). Our view remains that any next increase in rates by the Fed will come later rather than sooner as we doubt the central bank wants to pour a combination of sand and water on the flailing fire that is the domestic economy (at least according to the latest data). Buckle up, it's going to be another fun ride next week.
Enjoy the long weekend and we'll see you back here next week.