Market Preview: Trade Deals Driving Market Even Higher, GDP Announcement, Salesforce Earnings

Good news on trade between the U.S. and Mexico kept a fire under the market that won’t quit on Monday. The two countries announced they had reached a deal on NAFTA, and it is expected that Canada will join the renegotiated deal, perhaps as early as the end of this week. The new deal would require that 75% of automobile content be made in the NAFTA region, compared to the current requirement for 62.5%. Automakers Ford (F) and General Motors (GM) both jumped on the news. Markets set new record highs, and the Dow reclaimed the 26,000 level.

As earnings season is in its final weeks, Tuesday morning the market will see earnings from Best Buy (BBY) and close the day with Hewlett Packard (HPE) . Best Buy is expected to increase quarterly earnings by approximately 20%. Analysts want to know if the electronics retailer is keeping pace with apparel retailers, and that consumers are not just opening their wallets for new clothes. Hewlett Packard fell after earnings last quarter and has yet to regain levels set earlier in the year. Analysts have a price target of $19.47 on the company, but they’ll likely need to have a large beat to propel the stock back toward those levels.   

Tuesday’s economic calendar will have investors hopping. The full calendar includes international trade in goods, retail inventories, advanced wholesale inventories, Redbook numbers, S&P Corelogic Case-Shiller Home Price Index, consumer confidence, the Richmond Fed manufacturing index and investor confidence numbers. The Case-Shiller number will be a major focus, as housing is currently seen as one of the few possible wrenches that could be thrown into the U.S. economy. Wednesday, analysts will get to see new mortgage applications, corporate profits after taxes, which are expected to be up 2.7% year-over-year, the pending home sales index, and the EIA Petroleum Status Report. But the real conversation will be around the GDP number released at 8:30AM. GDP is expected to come in at 4.0%, a slight decrease from last quarter’s 4.1%.

On Wednesday morning American Eagle Outfitters (AEO) will take center stage. This trendy teen outpost has been on fire this year, and analysts expect nothing less than a stellar quarter. CEO Jay Schottenstein would like to announce a repeat of last quarter when the retailer beat on both earnings and sales. After the close the customer relationship management monster Salesforce (CRM) will report earnings. The $113 billion company has been on an acquisition spree, gobbling up smaller CRM companies to add to its offerings. With its stock at an all time highs, investors are expecting a very friendly report out of the company.

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Profit From This One Stock As Fresh Water Becomes Scarce

Back in April, I shared with you about the growing problem facing humanity in many places around the world – the growing scarcity of water, which is the foundation upon which our very civilization is built.

Conditions are still very bad, making water even more of a no-brainer sector for some of your investment money. Let me fill you in on what has happened since my last article on water.

First, there was new satellite data on freshwater reserves from NASA that revealed dozens of regions across the globe are in danger of becoming the next Cape Town. If you’ll recall, I told you about the South African city of nearly four million residents that was in danger this year of becoming the first of the world’s big cities to run out of water. It had to impose severe water-saving measures to avert “Day Zero”… more on that situation in a moment.

Research from scientists at NASA and the Jet Propulsion Laboratory shows that worldwide fresh water reserves have changed drastically since 2002. The decline in water availability in regions such as northern India, north-east China, the Caspian Sea and across the Middle East has been blamed mainly on irrigation and groundwater pumping.

The study was the first to use gravitational satellite data to map global trends in fresh water availability across a 14-year period, drawing on data from NASA’s Grace satellites. The research identified areas where water resources rose or fell significantly during the period, and it found 14 regions where changes were primarily due to human activity, compared with eight regions where the changes were mainly caused by climate. As Jay Famiglietti, one of the study’s authors, noted “Fresh water availability is changing and water insecurity is much closer than we think.”

Day of Reckoning Postponed Briefly

That means there could a number of Cape Towns in our future.

Speaking of Cape Town, it managed to postpone it so-called ‘Day Zero’… barely. Theewaterskloof, the biggest reservoir for the city, is a vastly diminished trickle of its former self after three years of relentless drought have reduced it to barely a tenth of its 480 billion-liter capacity.

But for now, ‘Day Zero’ has been put off until 2019. The drought is still going, but the people have made unprecedented efforts in conserving water. In three years, Cape Town residents have more than halved their use from 1.2 billion liters a day in 2015, to just over 500 million liters (about 132 million gallons) at the start of this year. Part of the restriction included suburban residents living with just 50 liters (a little over 13 gallons) a day per person versus the global average of 185 liters.

If and when ‘Day Zero’ restrictions kick in, residents’ water rations would be cut to 25 liters a day. This will be triggered when overall dam levels fall to 13.5% – they were 19% recently.

Water and Geopolitics

Water is also becoming more important geopolitically. Take a country that has been in the news a lot lately – Turkey.

Turkey is the country where the very important Tigris and Euphrates rivers originate and it decides how much of the water to release to its neighbors to the south – Iraq and Iran. It recently decided to restrict the water flow on the Tigris River as it fills a reservoir behind a newly-built dam. Many of those dams, by the way, flooded the traditional lands of the Kurdish people that President Recep Tayyip Erdoğan is constantly fighting against.

That restriction of the Tigris is not good news for those downstream. In Iraq, for example, inflows this year are 40% below the long-term median.

Water shortages pose an immediate and very real threat to Iran, Turkey’s ancient rival. Kaveh Madani, a former Iranian deputy vice-president for the environment and a professor at Imperial College London, said to the Financial Times: “This is not a water crisis. It is a bankruptcy.”

He was not exaggerating the seriousness of the situation. Drought now afflicts 97% of Iran. The country’s most serious recent protests were not against “moderates” or “conservatives” in the government and the average person there could care less about the U.S. withdrawal from the nuclear deal… they were protesting about the lack of water.

The protests are aimed in the right direction – poor government policy. Iran’s policy to raise national food production has led to the cultivation of marginal farmland and, in turn, over-irrigation, salinification and increased desertification.

Water Investments

As you can see water is becoming more and more crucial and is a must-own investment. So how can you participate in the water investment thesis?

The broadest way is through exchange traded funds of which there are five water sector ETFs. The one I like the most is the former Guggenheim S&P Global Water Index ETF, which is now controlled by Invesco and is called the PowerShares S&P Global Water Index Portfolio (NYSE: CGW).

This is nicely balanced geographically with about 45% in the U.S. and the rest overseas. The top two sub-sectors within the fund are utilities (46%) and industrials (41%). Wall Street is apparently still in the ‘ignorance is bliss’ mode when it comes to the global water situation because this fund gained only 6.7% over the past year and is actually down 1% year-to-date.

Among its top ten positions are names that should be well-known to U.S. investors: American Water Works (NYSE: AWK)Xylem (NYSE: XYL)Idex (NYSE: IEX)Danaher (NYSE: DHR) and Aqua America (NYSE: WTR). Both AWK and WTR are water utilities, while the other three are industrial companies.

Interesting to note that these stocks have actually outperformed the ETF on an individual basis, which is why I almost always opt for individual stocks instead of an index or an ETF. Here are the gains for these stocks on a one-year basis and year-to-date respectively:

  • American Water Works – 8.39% and a minus 2.75%
  • Aqua America – 12.1% and a minus 3.5%
  • Danaher – gains of 24% and 8.4%
  • Idex – gains of 35.5% and 16.5%
  • Xylem – gains of 28.5% and 11.66%

One of these stocks is my top water recommendation in my Growth Stock Advisor newsletter – Xylem. It recently came in at number 7 on the Fortune 2018 “Change the World” list for its effect on the world.

Following the acquisition of Sensus in 2016, Xylem now operates in three segments: water infrastructure, applied water and Sensus.

The Water Infrastructure segment includes the company’s business surrounding the sourcing, collection, treatment, and transportation of water. The primary customers in this segment are public utilities and large industrial companies. These customers use Xylem products including industrial pumps, filtration and treatment equipment, and infrastructure control systems.

The Applied Water segment involves the Xylem’s products and services sold to residential, commercial, industrial, and agricultural end-users. Some of the products in this segment include pumps, valves, heat exchangers, hydro turbines, and dispensing equipment systems. Its Applied Water business focuses more on the distribution of water to households and businesses.

The third segment of Xylem’s business is Sensus. It represents the company’s largest foray into the smart technology market. Sensus is all about technology and includes a variety of smart meters, cloud-based analytics software, remote monitoring and data management systems, and smart lighting.

The company reported excellent results for the second quarter of 2018. It delivered $1.3 billion in second quarter 2018 revenue, up 13% year-over-year. Revenue for the quarter rose 8% on an organic basis, driven by double-digit growth in utilities and continued strength in the industrial and commercial end markets across nearly all major geographies. Orders increased 8% organically in the quarter. Xylem now forecasts full-year 2018 revenue of approximately $5.2 billion, up more than 10% versus the prior year. On an organic basis, Xylem now anticipates revenue growth in the range of 6% to 7%. Xylem also narrowed the range of its full-year 2018 earnings expectations, with adjusted earnings per share in the range of $2.85 to $2.95. This represents an increase of 19% to 23% from Xylem’s 2017 adjusted results.

Xylem’s stock is up more than 12% since the November 29 recommendation date despite the turbulent stock market we’ve had in 2018. And I expect much more upside in the years ahead due to the water situation globally.

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3 “Screaming Buy” Dividend Stocks from the San Francisco MoneyShow

Last week at the San Francisco MoneyShow I did a joint, dividend stock focused presentation with Kelley Wright of Investment Quality Trends. Here is an excerpt from the MoneyShow description of the event:

“Dividends and dividend growth have historically accounted for the lion’s share of stock total returns. Moreover, companies that are rapidly growing their payouts can be found in some of the fastest-growing sectors of the economy. This gives rise to a largely underutilized strategy: ‘Stealth growth’ investing, which centers around buying quality stocks with a penchant for dividend growth.”

IQ Trends method tracks stocks between historic yields. Buy when the yield is near the high of the range and sell when the yield touches the low of the historic range. Each stock will have its own yield history. This is a very value oriented stock market strategy and the stocks he follow can go for years without hitting a buy or sell signal. The strategy works because the service only recommends growing dividends stocks. This means as the dividend grows and if the share price stays in the historic yield range, the share price must be appreciating.

While he didn’t go deeply into individual stocks Wright did give some quick hits on shares his system shows as undervalued. Here are several:

The Walt Disney Company (NYSE: DIS) has a historic yield range of 0.8% to 1.6%. The current yield is 1.5%, which under the IQ Trends system is a strong indicator that DIS is undervalued and should move higher from here.

Wright labeled CVS Health Corporation (NYSE: CVS) and Philip Morris International Inc. (NYSE: PM) as “screaming buys”. He also discussed his belief in the large cap energy companies stating he owned a “boatload” of Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX).

I personally like the contrarian value approach of Wright and his IQ Trends approach. He and I both use dividend yields and dividend growth as tools to help us find stocks that provide long term positive returns for investors.

More: 3 High Growth Dividend Stocks Paying Over 6%

During my portion of the presentation, I shared a handful of stocks I thought income investors should take a strong look at. My difference is that I often recommend newer companies. Under the IQ Trends system, stocks must have a 25 year dividend history. I like to find and recommend newer stocks with high yields and potential for dividend growth in the early years, on top of those yields.

Here’s one of the more recent ones I’ve unearthed:

PermRock Royalty Trust (NYSE: PRT) is a new investment I revealed to the presentation attendees. This is not a company, but instead the trust has a right to 75% of the net income from crude oil production from dedicated acreage in the Permian Basin.

PRT pays a variable, monthly dividend based on the prices received for sold crude oil and natural gas. I describe PermRock as a pure play, high yield way to participate in crude oil prices.

I believe that oil will continue to go higher, resulting in a higher share price and larger dividend payments. However, the latest dividend was lower, causing a share price drop, making PRT very attractive.

I expect PRT to yield between 8% and the mid-teens.

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