On October 18, CNBC reported Bill Gross top picks. His top stock picks were Annaly Capital (NLY), Invesco (IVZ) and Allergan (AGN). PIMCO co-founder is well-known for his investment ideas in debt securities. On a year-to-date basis, these stocks have returned -10.6%, -5.1%, and 29.9%, respectively. Also, the S&P 500 Index gained 19.1% in this period.
High dividend yield stocks
Gross said Invesco offers a dividend yield of 7.5%. Besides, according to the bond king, the stock trades at a PE (price to earnings ratio) of 6x. Based on the Reuters survey, out of the 17 analysts tracking the stock, only two recommended either a “buy” or a “strong-buy” on the stock. Around 14 analysts have “hold” recommendations. Only one analyst has a “sell” call. Analysts’ mean target price for the stocks is around $17.76. This shows a possible upside of 11.8% in the next 12 months.
Further, Gross said that “the active management is under attack and has been for a number of years.” But, Invesco has closed-end funds. The fees for these funds has been fixed permanently, according to Gross.
Gross prefers high dividend yield stocks. Currently, $17 trillion worth of bonds have a negative yield around the globe. Moreover, the US 10-year Treasury yield is 1.75%. The S&P 500’s dividend yield is 5 basis points more than the 10-year Treasury. It could be one of the reasons that utilities and real estate are outperforming other market sectors. These two sectors give a high dividend yield.
Energy and real estate offer high dividend yields
Among sector-specific SPDR ETFs, the Energy Select Sector SPDR ETF (XLE) offers the highest dividend yield of 3.8%. However, XLE’s yield has risen because of the fall in prices. But, Utilities Select Sector SPDR ETF (XLU) and the Real Estate Select Sector SPDR (XLRE) offers a yield of 2.9% each and are next to XLE.
Historically, XLU and XLRE are high dividend yield sectors. These sectors have a more stable outlook than energy. But, Bill Gross might not have high hopes about utilities. He said that he sold Dominion Energy a week before. Read Mike Wilson: Growth Stocks Could Decline 20-30% to know more about the outlook for defensive stocks.
Bill Gross’s healthcare arbitrage
Gross said, “there been two arbitrage situations in the health care business.” He was referring to AbbVie’s acquisition of Allergan. The billionaire fund manager believed that the merger will benefit investors.
However, in general, the healthcare sector has been an underperformer. On a year-to-date basis, the Health Care Select Sector SPDR ETF (XLV) rose 6.1%. It was the lowest rise among sector-specific SPDR ETFs. The policy risk might be dragging this sector.
Bill Gross on the US economy
In the CNBC interview, Bill Gross said that the US economy will not fall into a recession next year. However, he believes the growth rate could slow to 1.5%. In 2018, the US economy grew at 2.9%. He also said, “They need another trillion to do the same type of magic.” Here, he was referring to President Donald Trump’s fiscal stimulus. Gross sees a need for further stimulus to continue the pace in the economic expansion rate.
He also said there is a high probability of a rate cut in October. Based on CME’s FedWatch Tool, the probability for a 25 basis points rate cut is 91.4%. Based on Bill Gross’s views, Trump might not win the reelection. The legendary investor is confident about Democratic candidate Elizabeth Warren’s win. However, Moody Analytics has predicted an easy win for Trump.