Has Wall Street’s Post-Election Party Gotten Out of Hand?
Since Donald Trump’s surprise victory on November 8, the mood of investors has been buoyed by the prospect of a fiercely free-market president in the White House. But the post-election euphoria shows signs of going too far. As comedian Larry David might say: curb your enthusiasm.
The rallies this week of the broader indices to new highs mask the litany of dangers that lurk around the corner.
The mercurial nature of America’s president-elect, a fractious European Union, a heavily indebted international banking system, an expansionist Russia, excessively high equity valuations — these are only a few of the potential “triggers” that threaten to kill off this aging bull market.
The cyclically adjusted P/E (CAPE), a valuation metric created by the Nobel Laureate economist Robert Shiller, now stands at over 27, a level exceeded only during the 1929 market peak, the 2000 dot-com frenzy, and the 2007 equities and housing bubble.
Don’t get me wrong: As a rule, our editorial team disdains the perma-bears who continually concoct doomsday scenarios to prey on your worst fears. But sometimes concern is warranted. In the words of legendary investment guru Sir John Templeton:
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
But you needn’t panic. You can still pursue growth and income, while protecting your portfolio.
In perilous times like these, one of the best defensive strategies is to choose companies with strong and rising dividends.
Dividend-paying stocks are proven tools for long-term wealth building, but they’re also safe harbors in rough seas because companies with robust and rising dividends by definition sport the strongest fundamentals.
If a company has healthy cash flow (and sufficiently low debt) to generate high and growing dividends, it also means that the balance sheet is inherently solid enough to sustain the company through the kinds of risks and challenges we’re witnessing today.
Jim Pearce says: Follow the new money…
Jim Pearce, chief investment strategist of our flagship publication Personal Finance, points out that nervous investors are flocking to healthy, dividend-paying companies.
The list of possible candidates, he says, boils down to large-cap U.S. stocks, namely those in S&P 500. As Jim puts it:
“Most small and midsize companies pay little or no dividend, and those that do tend to have revenue that’s more susceptible to changes in the economy. For that reason, I believe a core group of big U.S. companies will attract the lion’s share of new money coming into the market, making them good prospects for growth and generous dividend payouts.”
Jim already has added a slew of these robust dividend payers to the PF Growth and Income portfolios. Below I spotlight one stock that I like in particular: biotech firm AbbVie (NYSE: ABBV). Since Jim added AbbVie to the Income Portfolio on March 12, 2015, the stock has racked up a total return of 50.37%. With a fat dividend yield of 4.21%, this stock is undervalued right now for reasons that have nothing to do with its underlying fundamentals.
In an interview this week with Time magazine for the 2016 “Person of the Year” cover story, Donald Trump declared: “I’m going to bring down drug prices. I don’t like what has happened with drug prices.” With those two vague and intemperate sentences, Trump crushed the biotechnology sector.
Trump’s remarks spooked traders who sent biotech shares tumbling, under the assumption that price controls under a Trump administration would hurt corporate profits.
This fear is wildly overblown. First, the U.S. president is not an emperor (at least not yet). The White House can’t unilaterally dictate prices. What’s more, we’ve witnessed political pandering on drug prices many times in the past and nothing came of it. Trump’s proposed cabinet is shaping up to be anti-regulation and laissez-faire, which means drug makers have little to worry about.
On the bargain shelf…
As undervalued biotech plays, AbbVie is a standout.
The world’s largest-selling immunology drug is AbbVie’s Humira, which is used in the treatment of rheumatoid arthritis, chronic plaque psoriasis, Crohn’s disease, and arthritis. Some analysts are concerned that AbbVie is overly reliant on Humira, since the immunology drug has long accounted for a majority of the company’s total sales.
To be sure, Humira is officially slated to lose patent expiration in December 2016 in the U.S. and October 2018 in Europe. However, the company has been filing new patents and lawsuits to defend Humira’s proprietary formulation and to delay the market launch of biosimilar knock-offs. So far, those pro-active efforts have paid off.
AbbVie’s management predicts that annual global sales of Humira will rise to $18 billion in 2020, through the use of new patents to ward off competitors.
In addition to Humira, AbbVie also offers Imbruvica, an oral therapy for the treatment of chronic lymphocytic leukemia, and Viekira Pak, for the treatment chronic hepatitis.
ABBV sports a trailing 12-month price-to-earnings (P/E) ratio of 16, lower than most of its large-cap peers. Shares now trade at about $60; the analyst consensus is for a one-year price target of about $70, for a gain of nearly 17%. With good reason, AbbVie is one of the high-income stalwarts of the PF Income Portfolio.
Got a question about dividend stocks… or about stocks in general? Send me a message: email@example.com. — John Persinos
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