This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Jim Cramer's Action Alerts PLUS

Weekly Roundup

By Jim Cramer and Jack Mohr | 05/22/15 - 06:00 PM EDT

The market ended the week slightly higher as solid earnings and more dovish Federal Reserve minutes helped propel the S&P 500 toward new highs. The 10-year note moved 6 basis points higher, gold edged slightly lower, both Brent (-2.2%) and West Texas Intermediate (WTI) (-1.5%) oil prices retreated and the dollar strengthened against the euro.

First-quarter earnings this week were strong, with 63.2% of companies surprising to the upside. Within our portfolio, we had one name report results this week: Target (TGT:NYSE).

Target reported solid first-quarter results Wednesday -- a bright spot in a somewhat dismal retail earnings season thus far (Kohl's (KSS:NYSE), Macy's (M:NYSE), J.C. Penney (JCP:NYSE), Wal-Mart (WMT:NYSE), Dillard's (DDS:NYSE), Nordstrom (JWN:NYSE) and Urban Outfitters (URBN:Nasdaq) all missed expectations in some capacity). Target's results were a top- and bottom-line beat, with both earnings per share ($1.10 vs. $1.03) and revenue ($17.12 billion vs. $17.08 billion) topping consensus and comparable sales growth of 2.3% coming in directly in line with expectations. Management issued second-quarter EPS guidance of $1.04-$1.14 vs. $1.12 consensus and raised fiscal year 2015 guidance to $4.50-$4.65 from $4.45-$4.65, vs. $4.56 consensus.

In addition, Target's comparable sales growth in signature categories where the company has heightened focus (style, baby, kids and wellness), grew more than twice the company average, with beauty comps increasing by more than 5% and apparel and home comps up in the mid- 4% range. We were also particularly impressed with the company's e-commerce prowess, with digital sales growing nearly 40% and contributing 0.8 percentage points to comparable sales growth.

On the economic front, The U.S. Department of Commerce reported on Tuesday that housing starts and permits both rose to 1.14 million units, rising 20.2% and 10.1%, respectively. Housing starts were expected to reach 1.02 million units whereas permits were projected to be 1.07 million. The surge in housing starts marks the highest level since November 2007 and the largest percentage increase since February 1991.

Groundbreaking for single-family homes also rose to its largest level since January 2008 -- a positive move for the economy as single-family homes account for the largest share of the market. Starts for the more volatile multifamily segment also made substantial gains. Permits for future home construction, which reached its highest level since June 2008, have been above the one million unit pace for almost a year (since last July).

The bullish housing data, which comes not long after weak reports in consumer consumption and business spending, is a good sign for a housing and overall economic rebound. There is some guarded optimism that the acceleration in home sales and prices can bolster the economy out of the soft patch hit (re: weak GDP, retail sales, etc.) at the start of the year -- we will know just how much the economy rebounded after a harsh winter when the government publishes its revised GDP data next week.

On Wednesday, the Fed released the minutes from its April meeting. Policymakers mainly ignored the rocky economic figures to start off 2015, noting that the decelerated growth was mostly due to "transitory" factors that would soon subside. However, as many expected, the minutes showed that the majority of Fed members do not see a compelling reason to raise the rates this coming June, turning the attention to September. Some believe that the rate hike will not come until early 2016. After the release of the minutes, stocks traded roughly flat as many investors had already been pricing in a hike no earlier than September, and some shifted their focus to 2016.

The Labor Department reported on Thursday that initial jobless claims for the week ending May 16 were 274,000, a slight increase from the prior week and above expectations of 270,000. Despite the increase, the four- week moving average hit yet another low. The average fell another 5,500 claims since the prior week, decreasing to 266,250, which is the lowest level since April 15, 2000. Claims have now remained under the 300,000 threshold for 11 straight weeks. Continued claims were also reported to fall (for the week ended May 9, since there is a one-week lag), down to 2.211 million from 2.229 million the week before and below expectations of 2.231 million. Continued claims are also at a 15-year low -- registering levels last seen in November 2000.

Also on Thursday, Markit Economics released its preliminary reading on manufacturing activity, reporting that the PMI declined to 53.8, below expectations of 54.5 and April’s reading of 54.1. This figure indicates the slowest macro business conditions since the beginning of last year -- just in time to keep up the trend of recent, sluggish economic figures to start 2015. Moreover, Markit showed that overall new business growth was the weakest since January 2014. Many believe the decline is due to the strong U.S. dollar that has been breaking down the U.S. economy as of late and slashing corporate earnings. The release is just the latest hint to look to September or beyond for the highly anticipated Fed rate hike.

On Friday morning, the Labor Department reported that the Consumer Price Index (CPI) increased 0.1% in April, roughly in line with expectations and slightly below the 0.2% increase in March. Year over year, the index indicated prices fell 0.2%, which was also in line with expectations. The upside surprise came with the "core" CPI (which excludes costs of food and gas due to their volatility), which increased 0.3% in April and 1.8% over the year, both above expectations. The increase in the core CPI was the largest since January 2013. In response, the dollar strengthened in the morning and stocks moved lower as investors believe the Fed will move closer to a rate hike when core prices increase. That being said, we still look to September or early 2016 for the first Fed rate hike.

On the commodity front, the Energy Information Administration signaled this week that commercial crude oil inventories fell by 2.7 million barrels last week, well above the predicted drop of 1.5 million barrels and compared with the prior report where inventories fell 2.19 million barrels. The fall in crude inventories marks three straight weeks of declines. The overall number stands at 482 million barrels (as of last week), down from 485 million barrels from the prior report. That being said, oil inventories are still at 80-year highs.

In response to the bullish inventory data mentioned above, oil prices (WTI) charged higher on Wednesday and Thursday, closing up 2.95% on Thursday at $60.72 -- the highest close since May 13. In addition, the persistent fighting in Iraq, which has raised worries about the stability of crude shipments from the Middle East, also contributed to the surge upward. However, on Friday morning, prices retreated back below $60 as investors likely took profits from the rally earlier in the week and the strengthening dollar added pressure.

With respect to our portfolio, this week we initiated positions in Starwood Hotels & Resorts Worldwide (HOT:NYSE) and Express Scripts (ESRX:Nasdaq). We also added to our holdings in EOG Resources (EOG:NYSE), Energy Transfer Partners (ETP:NYSE), 3M Co. (MMM:NYSE) and Starwood Hotels & Resorts (after the initiation); trimmed back on Twenty-First Century Fox (FOXA:Nasdaq), Merck (MRK:NYSE), Kinder Morgan (KMI:NYSE) and Schlumberger (SLB:NYSE); and closed our position in lululemon athletica (LULU:Nasdaq).

On Starwood Hotels & Resorts, we believe the company is benefiting from a favorable supply/demand dynamic in the U.S. and the organic global growth in travel, which supports its large international exposure long-term. In addition, the pending spinoff of its timeshares business and current examination of strategic and financial alternatives reflect a focused effort to improve the company's operational performance and stock price. We are bullish on the name and see a path to $100 in the medium- term.

As for our other new position, we view Express Scripts as a well-run pharmacy benefit manager (PBM) with a track record of high returns. Among all supply-chain participants, we believe the company is best positioned to execute on the large and increasing specialty pharmaceutical opportunity. More thematically, we love the PBM industry long-term, with growth driven by an aging population that uses more prescription drugs. Express Scripts also generates strong free cash flow, which we believe provides flexibility for accretive capital deployment.

At the beginning of the week, we added to our position in EOG below our cost basis as we believed the shares finally stabilized and did not want to wait for the stock to run away. The stock has been hit recently after Greenlight Capital's David Einhorn dubbed the company as the “Father Fracker," but we couldn't disagree more. EOG continues to expand its competitive advantage relative to peers from a dominant position in domestic oil assets. The company is delivering superior wells, while capturing more value from the wellhead via sustainably lower well costs and a leading position in crude logistics.

We also added to Energy Transfer Partners and 3M Co on weakness, sold shares of Merck above our cost basis, and took significant gains on shares of Schlumberger and Kinder Morgan, as we wanted to direct those profits toward our more attractive stocks.

We also pared our Twenty-First Century Fox position on strength after key investors (ValueAct and Omega Advisors) took large stakes in the company. We believe management's more cautious tone this past quarter reflects the potential for a 2016 guidance cut when it releases its next quarterly results. As such, we wanted to limit our overall exposure.

Lastly, we exited our LULU position not as a result of reduced conviction, but because we believed its upside was relatively capped in the near-term. We were able to direct these funds toward our purchase of Starwood shares, which we believe has more upside and lower downside risk.

We also made several ratings changes, downgrading Dow Chemical, Kinder Morgan, Merck and Schlumberger to Two from One -- Dow since many of the near-term catalysts are already out on the table, Kinder Morgan given our preference for ETP, Merck given our preference for Actavis and Express Scripts, and Schlumberger as the shares are now 11% above our cost basis.

First-quarter earnings season continued this week and 96.2% of the S&P 500 has now reported. Total first- quarter earnings growth is 0.7%; excluding financials, that growth is -1.0% vs. expectations at the beginning of the season for a 0.4% increase. Revenues are declining -3.30% vs. expectations at the beginning of the season for a -3.27% decline. The results have been solid across the board with 63.2% having beaten expectations, 33.3% missing the mark and 3.5% in line with consensus. Health care, consumer staples, energy, and utilities have led the strong performance. Materials, financials, industrials, and telecom services have posted the worst results so far in the S&P 500.

Next week, 1.4% of the S&P 500 is set to report earnings. Key reports are: AutoZone (AZO:NYSE), Nordic American Offshore (NAO:NYSE), Nimble Storage (NMBL:NYSE), TiVo (TIVO:Nasdaq), Workday (WDAY:NYSE), DSW (DSW:NYSE), Frontline (FRO:NYSE), Michael Kors (KORS:NYSE), Movado Group (MOV:NYSE), Tiffany & Co (TIF:NYSE), Valspar (VAL:NYSE), Costco (COST:Nasdaq), Palo Alto Networks (PANW:Nasdaq), Popeyes Louisiana Kitchen (PLKI:Nasdaq), Rentrak (RENT:Nasdaq), Abercrombie & Fitch (ANF:NYSE), Express (EXPR:NYSE), Pall (PLL:NYSE), Royal Bank of Canada (RY:NYSE), Avago Technologies (AVGO:NYSE), GameStop (GME:NYSE), Guess? (GES:NYSE), OmniVision (OVTI:Nasdaq), Veeva Systems (VEEV:NYSE), Big Lots (BIG:NYSE), China Mobile Games (CMGE:Nasdaq), Genesco (GCO:NYSE), and Scotiabank (BNS:NYSE)

Economic Data (*all times EST)U.S.

Tuesday (5/26)

Durable Goods Orders (8:30): -0.3% expected

Durable Ex Transportation (8:30): 0.4% expected

Cap Goods Orders Nondef Ex Air (8:30): 0.5% expected

FHA House Price Index MoM (9:00): 0.7% expected

Markit US Composite PMI (9:45):

Markit US Services PMI (9:45): 57.0 expected

New Home Sales (10:00): 500k expected

Consumer Confidence Index (10:00): 95.0 expected

Richmond Fed Manufatucirng Index (10:00): 0 expected

Dallas Fed Manufacturing Activity (10:00): -12.5 expected

Wednesday (5/27)

MBA Mortgage Applications (07:00):

Thursday (5/28)

Initial Jobless Claims (8:30):

Continuing Claims (8:30):

Bloomberg Consumer Comfort (9:45):

Pending Home Sales MoM (10:00): 0.9% expected

Friday (5/29)

GDP Annualized QoQ (8:30): -0.9% expected

Personal Consumption (8:30):

GDP Price Index (8:30): -0.1% expected

Core PCE QoQ (8:30):

Chicago Purchasing Manager (9:45): 53.0 expected

U of Mich Sentiment (10:00): 90.0 expected

International

Wednesday (5/27)

Germany GFK Consumer Confidence (2:00): 10.0 expected

Japan Retail Trade YoY (19:50):

Japan Retail Trade MoM (19:50):

Thursday (5/28)

Eurozone Consumer Confidence (5:00):

UK GFK Consumer Confience (19:05): 4 expected

Japan Jobless Rate (19:30):

Japan Job-to-Applicant Ratio (19:30):

Japan National CPI YoY (19:30):

Japan National CPI Ex Fresh Food YoY (19:30):

Japan National CPI Ex Food, Energy YoY (19:30):

Japan Tokyo CPI YoY (19:30):

Japan Tokyo National CPI Ex Fresh Food YoY (19:30):

Japan Tokyo National CPI Ex Food, Energy YoY (19:30):

Japan Industrial Production YoY (19:50):

Japan Industrial Production MoM (19:50):

Friday (5/29)

Japan Housing Starts YoY (1:00):

Eurozone M3 Money Supply YoY (4:00): 4.9% expected

Eurozone M3 3-Month Average (4:00): 4.5% expected

UK GDP QoQ (4:30): 0.4% expected

UK GDP YoY (4:30): 2.5% expected

New folks, welcome aboard! You're reading the Weekly Roundup of the "charitable trust" that Jim talks about regularly on "Mad Money" and in his new bestseller Get Rich Carefully. Jim put $3 million of his own money into this charitable trust so that you, the subscriber, can learn how he and Jack Mohr make decisions about a diversified portfolio and make money. You'll see every position in every stock, and we'll send you alerts BEFORE every trade. And best of all, all profits go to charity - - we've donated $1.8 million to date.

To learn more about how we construct and trade the portfolio, click on the "Getting Started" link directly above the "Weekly Roundup" headline. You can also get your alerts faster by following us on Twitter @CramerAndMohr.

We also want to be sure you're not confused about the terminology that Jim uses on his "Mad Money" television show: When you hear Jim refer to the "charitable trust" on "Mad Money", he is talking about the trust that holds the Action Alerts PLUS portfolio. The winnings from Action Alerts PLUS go to charity after the close of each trading year.

Here's the quick guide to the rating system, too: Ones are stocks we would buy right now, Twos are stocks that we'd buy on a pullback, Threes are stocks we would sell on strength and Fours are stocks we want to unload as soon as our trading restrictions allow.

ONES

3M Company (MMM:NYSE; $160.98; 600 shares; 3.69%; Sector: Industrials): Last week, we initiated a position in 3M, and we followed up by adding to our holdings on Thursday. We believe 3M offers an attractive company transformation story that is still in its early innings. After three years of unimpressive, mid-single-digit earnings per share (EPS) growth and inefficient balance sheet management (2011-2013), 3M's new management team has been implementing new operating and capital structure strategies over the past two years that continue to yield significant benefits for shareholders. In the face of global economic uncertainty, 3M's fundamentals have continued to improve, making us confident this highly diversified global conglomerate is poised to drive sustained value creation over the coming years. All in, we think sentiment on the shares is unfairly low, as only 33% of analysts have a Buy rating on the stock. 3M is a great company with premium technology and products that generate leading margins and returns. We believe the shares should trade at 21x 2016 consensus EPS estimates, implying a $185 price target.

Actavis (ACT:NYSE; $301.35; 375 shares; 4.32%; Sector: Health Care): The shares nudged higher this week on little news. Post solid first-quarter 2015 results, Actavis remains one of our highest conviction ideas, driven by a combination of strong organic growth (high- single-digit top-line, double-digit EPS), a range of upside drivers to estimates (including business development) and an inexpensive valuation. We see a compelling case for multiple expansion for ACT given these dynamics, particularly with 1) the shares trading at about 14x estimated 2016 EPS, over a 20% discount to the major pharma group despite having better growth prospects; 2) recent large-cap generic M&A multiples suggesting valuation upside potential for ACT’s generic business; and 3) a branded business that consists mostly of legacy products from Allergan/Forest Labs (80%), which historically traded at high-teens multiples on forward EPS. Our target remains $350.

Cisco Systems (CSCO:Nasdaq; $29.26; 2,750 shares; 3.08%; Sector: Technology): The shares fell modestly this week on little news. Last week, the company delivered solid results, with its fiscal third quarter coming in ahead of expectations and fourth-quarter guidance in line with consensus. Things are looking up at Cisco, and the telling sign is North American enterprise orders, which grew 21% year over year (y/y). With a course set for more software, recurring revenues and more cash flows, we see solid absolute returns and steady dividend growth (2.9% yield). We think the stock can get to $33, and see upside from there given improving fundamentals and a wave of buybacks.

Energy Transfer Partners (ETP:NYSE; $58.02; 1,700 shares; 3.77%; Sector: Energy): The shares crept higher this week on little news. We have visibility on an $11 billion organic backlog to 2017, which we think will drive high-single-digit distribution per unit (DPU) growth going forward. The majority of this backlog will likely be in the high-growth Marcellus and Utica shale basins, where ETP is expected to construct a major natural gas and NGLs super-system. Nearer-term, we expect an uplift from synergies following the recent closing of its merger with Regency, in the realm of $160 million-225 million per year. Lastly, ETP holds general partnership and large limited partnership stakes in Sunoco Logistics Partners (SXL) and Sunoco LP (SUN) (Sunoco units), respectively, offering exposure to their high growth. We maintain our $72 target, which is based on a 6.5% target yield.

EOG Resources (EOG:NYSE; $90.26; 1,250 shares; 4.32%; Sector: Energy): Shares of EOG inched higher this week on little news, marking a rebound from last week’s sharp underperformance following negative comments made by Greenlight Capital founder David Einhorn. We couldn’t disagree more with Einhorn, especially after better-than- expected first-quarter results in which the company delivered a $0.03 EPS beat and a $0.11 cash flow per share (CFPS) beat, as incremental improvements to both asset performance and cost structure continue to add to what has been peer-leading performance. EOG has reiterated that it is holding out for $65 WTI oil to accelerate the development of its completions backlog and to resume drilling. As a result, the company is anticipating that second-quarter 2015 U.S. oil production will be sequentially lower by 7% to 11%. EOG also expects 2015 capital expenditures to be in line with its budget despite a slightly high 1Q 2015 spend. We are impressed by the company’s ability to continuously reduce costs, with its transportation expenses, G&A and gathering and processing lower by 7%, 5%, and 11%, respectively, vs. its prior guidance. On the drilling and completions side, EOG noted on its latest call that current costs were at or below expectations across all regions. The company is delivering superior wells, while capturing more value from the wellhead via sustainably lower well costs and a leading position in crude logistics. We reiterate our $110 target.

Express Scripts (ESRX:Nasdaq; $90.44; 300 shares; 1.04%; Sector: Health Care): We initiated a small position in Express Scripts this week. Express Scripts is an extremely well-run pharmacy benefit manager (PBM) that has demonstrated an impressive track record of high returns. We view the company's 2012 $29 billion merger with Medco (another one of the nation's largest PBMs) favorably, as the combination brought together two strong stand-alone models and created a clear market-share leader based on prescription volume. Beyond this, we point to a diversified set of opportunities for Express over the next few years, including specialty pharmacy, restrictive plan design (improvements to formulary management, mail order, retail networks) and adjacent businesses that should drive solid underlying operating profit growth. More thematically, we love the PBM industry long term, with growth driven by an aging population that uses more prescription drugs. Among all supply-chain participants, we view the company as best positioned to execute on the large and increasing specialty pharmaceutical opportunity. Our target is $105.

Google (GOOGL:Nasdaq; $554.52; 150 shares; 3.18%; Sector; Technology): This past weekend, The Wall Street Journal reported that Google will soon launch "Buy" buttons on mobile search results pages. This seems like a significant move by Google to get closer to the commerce transaction on mobile and an attempt to create an on- platform marketplace. Specifically, we would expect Buy buttons to 1) help counter competition from Amazon (AMZN), Facebook (FB), Alibaba (BABA), etc.; 2) improve mobile ad pricing through better attribution (closing the loop); and 3) provide Google with valuable transactional data. We believe that adding Buy buttons on product ads is one way for Google to "close the loop" more effectively with merchants and advertisers, stretching from the top of the purchase funnel (i.e., driving traffic to websites and product listings) all the way through processing transactions. From a consumer standpoint, the Buy button skips the sometimes unnecessary step of clicking all the way through to a retail app or website to complete transactions. Our target is $650.

Honeywell (HON:NYSE; $105.92; 1,100 shares; 4.46%; Sector: Industrials): Earlier this week, CEO Dave Cote spoke at the EPG Conference, and the presentation was consistent with past earnings and investor day presentations, with no change to guidance and limited near-term comments on the macro environment. Comments around the performance materials and technologies (PMT) group were a bit more encouraging after expectations were somewhat tempered on the first quarter call, as trends appear to be stabilizing. The company continues to see a solid growth year for the PMT business next year, quelling investor concerns of an oil-related deterioration. Cote reaffirmed the positive growth inflection beginning next year as key Aero platforms ramp and PMT capacity comes online. Management’s tone on capital allocation remains consistent, and the company plans to be disciplined and opportunistic around M&A, not ruling out adding a new leg to the portfolio, but also not signaling anything specific or imminent on the horizon. Expectations arer for FCF conversion to move to above 100% over time as capex rolls down and the Honeywell Operating System (HOS) helps drive working capital improvements. Our target remains $115.

Starwood Hotels & Resorts Worldwide (HOT:NYSE; $84.78; 900 shares; 2.92%; Sector: Consumer Discretionary): We initiated a position in Starwood Hotels & Resorts this week as we see the company benefiting from a favorable supply/demand dynamic in the U.S. and the organic global growth in travel, which supports its large international exposure long-term. In addition, the pending spinoff of its timeshares business and current examination of strategic and financial alternatives reflect a focused effort to improve the company's operational performance and stock price. We are bullish on the name and see a path to $100 in the medium- term.

Target (TGT:NYSE; $79.29; 1,700 shares; 5.16%; Sector: Consumer Discretionary): Target reported a strong top-and-bottom-line beat on its quarterly earnings this week, confirming the strength of the company’s turnaround, which is supported by potential incremental upsides from a number of key areas this year: continued outperformance of higher-margin signature categories, incremental sales from relatively new omnichannel features such as "ship from store" and store pickup, and greater-than-expected sales of licensed merchandise from key movie releases such as The Avengers this month and Star Wars in December. Moreover, the company impressed with its dramatic increase in e-commerce and 2.3% comparable sales growth, with sales in key categories (style, kids, baby, wellness) growing more than twice the company average. Target’s consistency and stable sales throughout the country were a good sign as well. Although the bears may point to secon-quarter guidance that was below expectations, we believe the company is being conservative and we would not be surprised to see a beat in 2Q similar to the lowball EPS guidance given for 1Q. Overall, we see the valuation as compelling, especially when compared with competitor Wal-Mart (WMT) (which could see a decline in EPS this year), and we reiterate our $90 target.

Thermo Fisher Scientific (TMO:NYSE; $132.15; 950 shares; 4.80%; Sector: Health Care): Thermo Fisher hosted its annual analyst meeting on Wednesday this week in New York where it delivered an upbeat growth message, showcased its management depth, and expanded upon its business diversification. We were happily unsurprised, as the company's track record of execution and performance has led us to expect a reliable business model, with high visibility into organic growth. Augmenting that growth, TMO announced the opportunity to re-deploy $15 billion toward bolt-on M&A and share repurchases through 2018. While we did not come away with any thesis-changing observations, the day confirmed our conviction in Thermo Fisher’s business and management. As a result, we were assured in the company's ability to meet its financial targets, particularly as it relates to organic growth. We continue to view Thermo Fisher as uniquely positioned among its peers to benefit from the convergence of life science tools and diagnostics. In addition, the smoothness to which TMO management was handled the acquisition of Life Technologies has resulted in significant advantages for the company. At the meeting, the company pointed out its desire to integrate Life Technologies in the best way possible for the overall business as opposed to forcing a Thermo Fisher "way" onto Life's management. As such, we were given another reason to be behind this management and we are confident that they will continue to succeed and drive further value for shareholders. Lastly, we were impressed by management's focus on margin expansion, which has accelerated earnings growth, improved acquisition accretion, and driven better returns for investors. We reiterate our $160 target.

Walgreens Boots Alliance (WBA:NYSE; $86.45; 750 shares; 2.48%; Sector: Health Care): We recently reinitiated a position in Walgreens, and continue to recommend the shares against the backdrop of CVS Health's (CVS) $10+ billion bid for Omnicare (OCR). Beyond this, from an overall strategic standpoint, we view the company’s efforts to transform the global pharmaceutical supply chain through the Alliance Boots and AmerisourceBergen (ABC) relationships very favorably, and cite potential benefits from procurement synergies, cross-selling products and sharing best practices. While the near-term environment remains challenging, due to reimbursement pressure, Medicare Part D step-downs and generic price inflation, we remain positive on the longer-term outlook for Walgreens, based on opportunities around the Alliance Boots transaction, the accretive relationship with ABC, and increased prescription volume related to health care reform. We reiterate our $105 price target.

Wells Fargo (WFC:NYSE; $56.00; 3,000 shares; 6.43%; Sector: Financials): A few data points this week made us more bullish on Wells Fargo. First, mortgage refinancing applications have continued to charge higher over the past several months, even in the midst of a rising interest rate. WFC has high exposure to refi activity, so we expect the growth to contribute positively to the bank’s bottom line. Next, multifamily housing starts were up 31%, which also bodes well for volume levels in WFC’s mortgage business. Our target is $63.

WhiteWave Foods (WWAV:NYSE; $47.80; 2,600 shares; 4.75%; Sector: Consumer Staples): Despite the 10% rally in the shares since our initiation, we remain quite bullish on WhiteWave long-term. Though we think the stock may be due for a breather, we view this company as a core holding longer-term for growth-oriented investors. Beyond the top-line opportunities, WWAV also has margin growth potential thanks to infrastructure investments and scale benefits. And it will likely continue to add to sales and EBITDA via M&A, per management’s explicit guidance. Our target is $50.

TWOS

Apple (AAPL:Nasdaq; $132.54; 820 shares; 4.16%; Sector: Technology): Earlier this week, activist investor Carl Icahn issued an open letter to CEO Tim Cook, asking the company to pursue a more aggressive buyback program. Icahn argues that the shares are worth nearly double what they are currently trading at ($240 vs. current price of about $130). In the letter, Icahn highlights Apple's valuation discrepancy vs. the broader market, with the shares trading at a substantial discount to the S&P 500 (11.9x estimated 2016 earnings vs. the index's 17.4x average). He argues that market participants -- including institutional investors, sell-side analysts and financial media -- are failing to value Apple's net cash separately from its business, adjust earnings to reflect the company's real tax rate, validate the growth prospects of newly entered categories, or appreciate the company's ability to maintain premium pricing and elevated margins. From a category perspective, Icahn believes Apple is well positioned to disrupt the TV and automobile markets, which he expects Apple to enter in 2016 and 2020, respectively. He also expressed confidence in Apple's core iPhone business, which he anticipates will continue taking market share from competitors, particularly in emerging markets. Icahn ultimately has a tremendous level of confidence in management's ability to deliver excellent execution and drive value. We share his sentiment, and believe the stock is grossly undervalued on a price-to-earnings basis. That said, we recognize it will take time for the company to grow into its valuation; therefore, we reiterate that the stock must be owned, not traded. Our target is $150.

Dow Chemical (DOW:NYSE; $51.29; 1,750 shares; 3.43%; Sector: Materials): Dow has successfully figured out how to curtail spending. Last month, the company broke new ground and began to articulate its longer-term free cash flow generation potential in its latest conference call. The company indicated that its annual capital expenditures would decrease to its level of depreciation (from $2.7 billion to $2.1 billion) following the completion of its large capital projects on the Gulf Coast in 2017. Dow cited no new major capital projects to follow the current Gulf Coast expansions in response to questions on the conference call. Management indicated that it was satisfied with the magnitude of increase in its commodity portfolio from its current Greenfield projects. We believe Dow’s free cash flow generation can expand significantly, to nearly a 10% free cash flow yield by 2018. Our target remains $60, but we downgrade shares to Two from One based on lack of near- term catalysts and relative volatility related to its sensitivity to energy prices.

Facebook (FB:Nasdaq; $80.54; 1,300 shares; 4.00%; Sector: Technology): Facebook Vice President of Global Marketing Solutions, Carolyn Everson, and CFO Dave Wehner participated in a fireside chat at J.P. Morgan’s Global TMT conference. The company’s overall tone was positive as it remains in the early days of the mobile shift, with a number of key growth drivers ahead. Management highlighted the significant evolution in its advertiser relationships over the last few years, where conversations are increasingly focused on driving defined business results, including sales and conversion lift. Facebook is able to drive these deeper conversations as it has materially improved its targeting and measurement capabilities, including products such as Custom & Lookalike Audiences. While ad spend has improved, the company highlighted that its wallet share with large advertisers still lags consumer media time share (FB represents 20%+ of U.S. mobile time spent), representing a significant opportunity ahead. Facebook also remains bullish on mobile video, highlighting advertisers’ successful history with creative that combines sight, sound and motion. On Instagram, management indicated that the platform is resonating well with advertisers, particularly the mobile-first nature and the focus on discovery, while noting that it is still very early in the platform’s monetization. Our target is $90.

Halyard Health (HYH:NYSE; $41.76; 2,800 shares; 4.47%; Sector: Health Care): We're frustrated with our position in Halyard Health. As we're sure you're aware, the shares have fallen from the high $40s to the low $40s in a matter of weeks. The company has been on the road during this time meeting with investors, and simply has not taken control of the story. Management is far from Wall Street-savvy, and the consequence of that handicap is likely the loss of one or two major holders. We believe the selloff has been driven by uncertainty related to two key concerns: the company's first-quarter 2015 EPS miss; and lower-than-expected growth in medical devices. Starting with the former, the miss was driven exclusively by one-off items including planned dis- synergies following the spinoff from Kimberly-Clark (KMB) as well as increased distribution costs form a West Coast dock worker labor agreement. On the latter, though, investors expected Halyard to take immediate advantage of a halt in sales at its main competitor in non-narcotic pain medication (Pacira’s (PCRX) Exparel), yet our conversations with management indicate that the conversion process takes two to three quarters. As such, we recognize near-term catalysts are limited yet would note that the long-term value creation opportunity is intact. We lowered our price target to $50 from $55 to reflect a more reasonable (and achievable) medium-term outcome.

Kinder Morgan (KMI:NYSE; $42.69; 1,900 shares; 3.10%; Sector: Energy): The shares moved slightly higher this week on little news. With a presence across every midstream vertical and in every major basin, investors should not buy KMI to gain exposure to a certain asset type or shale play. Instead, KMI should be used to buy into the build-out of U.S. energy infrastructure, as we believe it has the footprint, financial scale, and management team to capitalize on the nation’s continuing need for midstream operations. We see three key benefits to KMI’s position as a large, integrated C-Corp. First, a diversified midstream footprint means that while no one stand-alone asset/basin will drive stock upside, it has the ability to offset near-term weakness in the commodity-sensitivity segments (like CO2). Second, a larger footprint allows KMI to consider a broader opportunity set to have potential synergies/strategic advantages from a larger set of assets. And third, we believe that KMI as a stand-alone 1099 entity will attract a wider investor base. We see KMI’s decision to transform its org structure -- from four public listings into one – as key to our thesis. First, it lowers KMI’s cost of capital, which translates into a lower hurdle rate on new projects (4% from 9%). Second, a lower hurdle rate allows KMI to pursue more projects and underbid peers ($18 billion announced backlog with $6 billion potential incremental near-term). Lastly, it creates a more attractive M&A currency. While we are still quite bullish on the name, we do see more upside from the likes of Energy Transfer Partners (ETP), and therefore downgrade KMI to Two from One. KMI is more of a "Steady Eddie" type of asset, so investors looking for a safe way to play the energy revolution should still keep their money in KMI, while those looking for more direct upside should look to EOG and ETP, with a particular emphasis on the latter given its 7%+ yield. Our target remains $50.

MasterCard (MA:NYSE, $92.69; 950 shares; 3.37%; Sector: Financials): The shares edged higher this week as MasterCard received a key vote of confidence from analysts at Pacific Crest, who upgraded the stock to an "Overweight" rating with a $110 price target. The analyst believes the company is well positioned to benefit from its fast-growing European business. In fact, the analyst thinks MasterCard is set to benefit from European Union regulations and capped pricing that would value the company's strong services capabilities and massive scale. We believe MasterCard remains well positioned in the domestic market and stands to benefit from increasing European and potential Chinese market opportunities. We reiterate our bullishness on the name and $100 target.

Merck (MRK:NYSE; $59.38; 1,000 shares; 2.27%; Sector: Health Care): Merck is presenting plenty of new data on cancer drugs trials at the upcoming American Society of Clinical Oncology (ASCO) conference. From what we gather, it is focusing exclusively on immuno-oncology and more specifically, its anti-PDL1 drug Keytruda (pembrolizumab). The medicine has already been approved for advanced melanoma and the next step could be lung cancer. But that’s not all. The company is going to present new data for 10 different cancer types, which suggests a promising future for Keytruda. We have previously stated that the drug holds potential for lifting Merck’s value by at least 10%, provided it gets few FDA approvals. We downgrade the shares to Two from One to reflect our preference for other health care names like Express Scripts and Actavis, as we see more upside from those names in the near-, medium- and longer-term. Our target remains $70.

Morgan Stanley (MS:NYSE; $38.17; 1,850 shares; 2.70%; Sector: Financials): Morgan Stanley continues to make progress on its return on equity (ROE) targets as it optimizes its business mix to the current environment. In a rapid client re-risking and re-engagement, which generates very robust dealer revenues, we believe EPS could grow to $3.85, which provides upside to our $42 target.

Schlumberger (SLB:NYSE; $92.02; 900 shares; 3.17%; Sector: Energy): The shares moved higher this week on little news. SLB has "teased" us with the possibilities of new business models and further integration/ownership of drilling rigs. "Blue sky" thinking suggests these initiatives could add up to $0.75 in annualized EPS and raise fair value by as much as $9 (10% of our price target), net of incremental capex. Interestingly, SLB continues to explore ways to earn more for performance. Footage-based contracting models and rig ownership/control, which allows for integration/coordination with the drill string to optimize performance, are anchored in the view that SLB should get rewarded if it can drill wells faster. From a stock perspective, in addition to an apparently favorable margin impact, we expect SLB can continue to leverage its earnings multiple to lower the cost of capital of rig ownership (vs. rig contractors). That being said, while we still love the company’s business model and think the stock can continue to work long-term, we move its rating to Two from One given the 11% rise in the stock since our initial purchase. Our target remains $105.

Starbucks (SBUX:Nasdaq; $51.48; 1,000 shares; 1.97%; Sector: Consumer Discretionary): On Monday, Starbucks announced that it has entered into a partnership with streaming-music service Spotify that would link 7,000 company-operated Starbucks stores in the U.S. and 10 million "My Starbucks Rewards" (MSR) loyalty members with Spotify's 60-million-plus global users. The new interconnectivity will enable MSR members to access (both in and out of the store) and influence (in-store) Starbucks playlists and earn "Stars as Currency," which can eventually be traded for free food or coffee items. As part of this deal, Spotify will also purchase "Stars" from Starbucks in order to attract potential premium subscribers. This partnership is another step toward Starbucks' long-term vision of extending its company currency beyond its own stores. We see this as an innovative move by Starbucks CEO Howard Schultz. By allowing customers to influence the music played in stores, the company is catering to each individual's personal "third-place" experience, which has always been a goal of the company. In an ever-evolving restaurant environment where the customer is king, the partnership with Spotify is compelling, as both companies boast a large millennial customer base. In addition, since customers will need to have the Starbucks app in order to utilize the new features, the company should be able to build upon its 16 million mobile-user base. We expect that as more partnerships roll out, Starbucks will further deepen its relationship with its already engaged customer base. Our target is $56.

Twenty-First Century Fox (FOXA:Nasdaq; $34.25; 2,200 shares; 2.88%; Sector: Consumer Discretionary): This week we sold some shares into strength as several key investors (ValueAct and Omega Advisors) have recently taken large stakes in the company. Moving forward, while we have been right on the growth drivers (India, sports), we believe management's more cautious tone this past quarter reflects the potential for a 2016 guidance cut when it releases its four-quarter fiscal 2015 results. As such, we look to limit our overall exposure. Our target is $42.

Twitter (TWTR:NYSE; $36.60; 1,400 shares; 1.96%; Sector: Technology): CFO Anthony Noto participated in a fireside chat this week at J.P. Morgan’s Global TMT Conference. Management’s tone was positive on product and distribution initiatives, but TWTR did repeat cautious language from the first-quarter 2015 earnings call around monthly active users (MAU) growth in 2Q and indicated that it will increase marketing spending. Our target is $52.

THREES

Eaton (ETN:NYSE; $73.09; 600 shares; 1.68%; Sector: Industrials): Eaton presented at the EPG Conference this week. Overall, in terms of near-term trends, the pause in industrial demand evident in the first quarter appears to have persisted into Q2, although the commercial/institutional construction markets are showing good resilience. There is no big change in trend under way in pricing; code differences help limit the FX advantage for overseas electrical competitors. Oil & gas- related sales are still expected to be down 20%+ this year, which makes us exercise caution.

General Motors (GM:NYSE; $35.70; 1,600 shares; 2.18%; Sector: Consumer Discretionary): As we discussed last week, we are torn between appreciating GM's strength in North America and fearing its weakness in Europe and Latin America. We do like GM for its best-in-class leverage to global growth markets, ongoing operational turnaround, and improving product cadence. We are attracted to the shares based on both valuation and what we see as several upcoming positive catalysts. GM shares trade at a lower multiple of NTM EBITDA than any other auto company; in a sector that has clearly re-rated above historical average multiples, GM shares paradoxically trade at a discount to their historical trading range, despite the company being structurally more profitable and less levered than it has been in decades. We do see capital allocation as the primary catalyst leading to a re-rating, but this is relatively well understood and the fundamental areas of weakness (LatAm sales) keep us more cautious in the near-term.

Regards,

Jim Cramer, Portfolio Manager & Jack Mohr, Director of Research - Action Alerts PLUS

DISCLOSURE: At the time of publication, Action Alerts PLUS was long ACT, AAPL, CSCO, DOW, EOG, ETN, ETP, ESRX, FB, FOXA, GM, GOOGL, HON, HOT, HYH, KMI, MA, MMM, MRK, MS, SBUX, SLB, TGT, TMO, TWTR, WBA, WFC and WWAV.

Jim Cramer Talks Portfolio Moves
Stocks in Focus: HOT, LULU, FOXA, EOG

Jim Cramer explains recent moves in the charitable-trust portfolio.

05/21/15 - 04:43 PM EDT
Adding to 3M and Energy Transfer
Stocks in Focus: MMM, ETP, KMI, SLB

We'll take some gains in Kinder and Schlumberger and direct them to these more attractively valued holdings.

05/21/15 - 02:56 PM EDT
What's Ailing Halyard Health?
Stocks in Focus: HYH

We're sticking with it, though we're a little queasy.

05/21/15 - 12:36 PM EDT
Weekly Roundup

We added two new positions to the portfolio this week as the S&P 500 moved slightly higher.

05/22/15 - 06:00 PM EDT

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community

Special Subscription Bundles

Want more than one service?
Sign up to one of our packaged services and take advantage of amazing savings!

Portfolio Plus Real Money Pro
Portfolio
Chairman's Club
Action Alerts PLUS checkmark | Portfolio Plus checkmark | Real Money Pro Portfolio checkmark | Chairman's Club
Stocks Under $10 checkmark | Portfolio Plus checkmark | Real Money Pro Portfolio checkmark | Chairman's Club
Growth Seeker checkmark | Portfolio Plus checkmark | Real Money Pro Portfolio checkmark | Chairman's Club
Dividend Stock
Advisor
checkmark | Portfolio Plus checkmark | Real Money Pro Portfolio checkmark | Chairman's Club
TheStreet
Quant Ratings
checkmark | Portfolio Plus checkmark | Real Money Pro Portfolio checkmark | Chairman's Club
Real Money checkmark | Real Money Pro Portfolio checkmark | Chairman's Club
Real Money Pro checkmark | Real Money Pro Portfolio checkmark | Chairman's Club
Trifecta Stocks checkmark | Chairman's Club
Action Alerts
OPTIONS
checkmark | Chairman's Club
Options Profits checkmark | Chairman's Club
Daily Swing Trade checkmark | Chairman's Club
Top Stocks checkmark | Chairman's Club
Quarterly Call
with Jim Cramer
checkmark | Chairman's Club
Started Now Started Now Started Now

Markets

DOW 18,232.02 -53.72 -0.29%
S&P 500 2,126.06 -4.76 -0.22%
NASDAQ 5,089.3620 -1.4320 -0.03%

Action Alerts PLUS Holdings

Stocks we would buy right now

Symbol % Portfolio
Weighting
Industry Trade Now
ACT 4.31% Drugs
CSCO 3.07% Computer Hardware
EOG 4.31% Energy
ESRX 1.04% Health Services
ETP 3.77% Energy
GOOGL 3.18% Internet
HON 4.45% Industrial
HOT 2.91% Leisure
MMM 3.69% Industrial
TGT 5.15% Retail
TMO 4.79% Health Services
WBA 2.48% Retail
WFC 6.41% Banking
WWAV 4.74% Food & Beverage

Stocks we would buy on a pullback

Symbol % Portfolio
Weighting
Industry Trade Now
AAPL 4.15% Consumer Durables
DOW 3.43% Chemicals
FB 4.00% Internet
FOXA 2.88% Media
HYH 4.46% Health Services
KMI 3.10% Energy
MA 3.36% Financial Services
MRK 2.27% Drugs
MS 2.70% Financial Services
SBUX 1.97% Leisure
SLB 3.16% Energy
TWTR 1.96% Internet

Stocks we would sell on strength

Symbol % Portfolio
Weighting
Industry Trade Now
ETN 1.67% Industrial
GM 2.18% Automotive