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Jim Cramer's Action Alerts PLUS

Action Alerts PLUS

Weekly Roundup

BY Jim Cramer and Stephanie Link | 01/30/15 - 06:11 PM EST

The markets fell for a second consecutive week on mixed earnings, conservative 2015 guidance and uneven language from the Federal Reserve on interest rates, making January a forgettable month for stocks. It's still early in the earnings cycle: Only 40% of the S&P 500 companies have reported, but so far it's been a season of "haves" and "have-nots." Several good ones like Apple (AAPL:Nasdaq), Google (GOOGL:Nasdaq), 3M (MMM:NYSE), Honeywell (HON:NYSE), MasterCard (MA:NYSE), Lear (LEA:NYSE) and Amgen (AMGN:Nasdaq) posted strong results while others acted as offsets, with very disappointing results from Caterpillar (CAT:NYSE), Freeport-McMoRan (FCX:NYSE), Peabody Energy (BTU:NYSE), Chevron (CVX:NYSE) and others. The U.S. dollar played havoc on guidance as well, with some companies better able to deal with the headwinds better than others, making this truly a stock-picker's market. Those who have exposure to consumer, aerospace, auto/parts, truck, cloud, security and non-residential construction have been able to handle the currency. Pure U.S. companies have also had little trouble meeting expectations, as have many in healthcare, which continues to hit its stride, while those with exposure to any commodity, well, not so much.

The bigger turn downward for the markets came mid-week following confusing minutes from the Fed -- it's pretty much unclear what they want to do and what they can do in terms of raising interest rates. The U.S. economy has showed steady improvement (minus the disappointing 4Q GDP) but the key metrics they look at in determining monetary policy -- wages and PCE-core inflation -- remain muted, plus the global softness and monetary decisions (14 central bankers globally eased this month) are making it harder for action. The market doesn't like unknowns, and this remains a heavy weight.

For the month, the S&P 500 fell 3%, the DJIA declined 3.6%, the Nasdaq was off by 2.1% and the Russell 2000 dropped by 3%. Volatility was on the rise throughout the month with 70% of the trading days showing triple-digit moves in either direction. Bonds had their best month in three years and stocks their worst since last January. Oil fell another 10%, the dollar rose 5% and defensive sectors led, with utilities and healthcare outperforming. The theme this week and for the month for the markets has really been the same: concerns about the rapid decline in oil and interest rates, the fast move upward in the dollar, and central bankers and their monetary policy moves. We don't expect this to change any time soon, but a new spate of earnings next week should bring clarity.

Because of these policy moves globally, the international markets have outperformed the U.S. We still like the "U.S. only" stocks with no dollar conversion exposure getting the benefit from the improving economy, but we also have a few positions for Europe to play that trend. The multinationals are challenged given the dollar strength, making end-market exposure all that more important.

We have been big supporters of the consumer-related stocks, key beneficiaries of lower oil. In fact, we added another one this week with Lowe's (LOW:NYSE). The personal consumption data in Friday's GDP report supports that people are in fact spending, with a 4.6% growth rate in 4Q, the best of the year. This, along with lower unemployment and improving Nonfarm Payrolls, should bring strong tailwinds for this group. If we ever get higher wages, which have been stubbornly low, all the better. We also like cyclicals, those that will benefit from the stronger U.S. growth and the eventual recovery in the global markets with a focus on end-markets in autos/parts, trucks, aerospace and nonresidential construction.

We've warmed up somewhat (although remain underweight) to financials, especially the credit card companies (consumer) as we expect rates to remain low and should lead to stronger mortgage refinance activity; we added Wells Fargo (WFC:NYSE) this week. We continue to look for opportunities in healthcare and like technology, even after this week's drudging. Capex is on the rise and IT managers have more money to spend this year as cloud and security are themes we like in tech, but we are happy to have the exposure in technology with Apple (AAPL:Nasdaq) and Google (GOOG:Nasdaq), which both had strong earnings this week. Oil stocks remain challenged, but the valuations and dividend yields are hard to ignore and we're inclined to nibble, though we're in no rush.

Warnings came fast and furious this week, with 134 S&P 500 companies posting results. So far the numbers have been pretty good: 73.7% have seen positive surprises, 15.8% negative surprises and 10.5% in line, supported by strong results from Apple (AAPL:Nasdaq), Google (GOOGL:Nasdaq), 3M (MMM:NYSE), Amazon (AMZN:Nasdaq), Google (GOOGL:Nasdaq), Lear (LEA:NYSE), MasterCard (MA:NYSE), Visa (V:NYSE) and others. But the real attention was on the losers: Caterpillar (CAT:NYSE), Freeport-McMoRan (FCX:NYSE), Peabody Coal (BTU:NYSE), Procter & Gamble (PG:NYSE), Zions (ZION:Nasdq), Qualcomm (QCOM:Nasdaq) and Chevron (CVX:NYSE), where the guidance from this group was even worse. So it's a clear situation with winners and losers, making stock-picking all that more important.

This week we made a few changes to the portfolio. We added Wells Fargo (WFC:NYSE) and Lowe's (LOW:NYSE) as new positions and sold out of Johnson & Johnson (JNJ:NYSE), taking our gains. We also sold out of Vale (VALE:NYSE). We added to our financials in SunTrust (STI:NYSE), Morgan Stanley (MS:NYSE) and American Express (AXP:NYSE). We sold higher, and the pullbacks make them more attractive ahead of the Comprehensive Capital Analysis and Review (CCAR). We also added to AbbVie (ABBV:Nasdaq) and will continue to buy with the price pullback on Friday. We increased our consumer bets on Dollar General (DG:NYSE), Unilever (UN:NYSE) and UPS (UPS:NYSE).

Next week the earnings parade continues with 20% of S&P 500 companies ready to go. We will be focused on Eaton (ETN:NYSE), UPS (UPS:NYSE), General Motors (GM:NYSE), Merck (MRK:NYSE), Cigna (CI:NYSE), Cummins (CMI:NYSE), Under Armour (UA:NYSE), Prudential (PRU:NYSE), Yum! Brands (YUM:NYSE), Exxon Mobil (XOM:NYSE), Symantec (SYMC:Nasdaq) and Twitter (TWTR:Nasdaq).

Below is the economic calendar for the U.S. and the rest of the world for next week:


Monday (2/2)

Personal Income (08:30): +0.2% expected

Personal Spending (08:30): -0.2% expected

Market US Manufacturing PMI (09:45): 54.0 expected

Construction Spending MoM (10:00): +0.8% expected

ISM manufacturing (10:00): 54.8 expected

Tuesday (2/3)

ISM New York (09:45)

Factory Orders (10:00): -2.0% expected

IBD/TIPP Economic Optimism (10:00): 51.4 expected

Wards Domestic Vehicle Sales: 13.6M expected

Wards Total Vehicle Sales: 16.8M expected

Wednesday (2/4)

MBA Mortgage Applications (07:00)

ADP Employment Change (08:15): 220K expected

Markit US Services PMI (09:45)

Markit US Composite PMI (09:45)

ISM Non-Manufacturing Composite (10:00): 56.5 expected

Thursday (2/5)

Challenger Job Cuts YoY (07:30)

Nonfarm Productivity (08:30): +0.9% expected

Unit Labor Costs (08:30): +1.0% expected

Initial Jobless Claims (08:30)

Continuing Jobless Claims (08:30)

Trade Balance (08:30): -$38.0B expected

Friday (2/6)

Change in Nonfarm Payrolls (08:30): 231K expected

Unemployment Rate (08:30): 5.6% expected

Average Hourly Earnings MoM (08:30): +0.3% expected

Average Hourly Earnings YoY (08:30): +1.8% expected

Average Weekly Hours All Employees (08:30): 34.6 expected


Saturday (1/31)

China Manufacturing PMI (20:00): 50.2 expected

China Non-Manufacturing PMI (20:00)

Sunday (2/1)

Japan Markit/JMMA Manufacturing PMI (20:35)

China HSBC Manufacturing PMI (20:45): 49.8 expected

Monday (2/2)

Japan Vehicle Sales YoY (00:00)

Germany Markit/BME Manufacturing PMI (03:55): 51.0 expected

Eurozone Markit Manufacturing PMI (04:00): 51.0 expected

Tuesday (2/3)

Eurozone PPI MoM (05:00): -0.7% expected

Eurozone PPI YoY (05:00): -2.3% expected

Japan Markit Services PMI (20:35)

China HSBC Services PMI (20:45)

China HSBC Composite PMI (20:45)

Wednesday (2/4)

Germany Markit Services PMI (03:55): 52.7 expected

Germany Markit/BME Composite PMI (03:55): 52.6 expected

Eurozone Markit Services PMI (04:00): 52.3 expected

Eurozone Markit Composite PMI (04:00): 52.2 expected

Eurozone Retail Sales MoM (05:00): -0.2% expected

Eurozone Retail Sales YoY (05:00)

Thursday (2/5)

Germany Factory Orders MoM (02:00): +0.8% expected

Germany Factory Orders WDA YoY (02:00): +0.1% expected

Germany Markit/BME Construction PMI (03:30)

Friday (2/6)

Japan Leading Index CI (00:00)

Japan Coincident Index (00:00)

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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 my trading restrictions allow.


AbbVie (ABBV:NYSE; $60.35; 1000 shares; 2.49%; Sector: Healthcare): Despite the company reporting 4Q earnings results that beat expectations on both the top and bottom lines, shares traded lower for the week due to concerns over softness in the revenue result for the flagship Humira drug and lower-than-anticipated guidance for the company's HCV treatment. AbbVie earned $0.89 per share, above the $0.86 consensus, on revenue of $5.37 billion, up 5% y/y (up 8.9% on a constant currency basis) and in line with analyst estimates. Gross margins beat consensus expectations (81.2% vs. 78%), as did operating margins (35.8% vs. 34%). The first concern for investors was Humira sales, which came in slightly below expectations, but when adjusted for FX changes, the numbers were slightly ahead of expectations and the company continues to guide mid-teens growth for the drug in 2015. More importantly, ABBV management noted that while sales of Viekira (the company's hepatitis C treatment) would end the year at a run rate basis of more than $3 billion, 2015 sales would likely be short of the $3 billion for which many had hoped. To some degree, we believe that management is being conservative due to the many moving pieces in the Hep C market, but we still believe that the company can achieve a 20% market share over time. We also continue to like the company's other 40 pipeline drugs, five of which will gain prominence in 2015, including its therapies for Parkinson's disease and endometriosis. Importantly, management reiterated its 2015 guidance at $4.25 to $4.45 per share due to impressive margin expansion. We're inclined to buy the dip, once the dust settles. Our target is $73.

American Express (AXP:NYSE; $80.69; 1,200 shares; 3.63%; Sector: Financials): The stock continued to decline this week and with the 7% drop from its recent highs (and down 15% from December highs) we added to the position. We thought the quarter was solid with billed business growing 8% y/y despite a 2.4% foreign exchange headwind and lower gasoline prices. Expenses fell 2% y/y, and marketing and promotion and member services increased by a reasonable 3% y/y, all while credit quality continues to improve. Expenses should continue to improve with the 4,000 job cuts this year, and the pull forward on investment spending following the gains from the sale of Concur Technologies (CNQR). The company's balance sheet remains strong, capital levels have improved, and the $1 billion in share repurchases to be completed in 1Q will be support. We like the CCAR set up as well for later in 1Q. Our target is $95.

Cisco Systems (CSCO:Nasdaq; $26.37; 2,500 shares; 2.47%; Sector: Technology): Shares trended lower this week in sympathy with fellow large-cap tech name Microsoft (MSFT), which delivered an in-line earnings report but cut its guidance significantly due to foreign exchange headwinds. CSCO will not be immune to currency with 40% of its sales outside the U.S. and 25% from Europe. But we like the transition story as the company changes its product mix away from its mature routers and switches business and into higher-growth, higher-margin products such as data center, collaboration, telepresence and security and services, which now account for about half of revenue. Specifically, security products now account for 23% of total sales, with $11.1 billion in revenue; we believe this will be a bright spot in the upcoming quarter. Shares are cheap at 12.7x forward estimates, which is a 15% discount to peers. Our target is $33.

Dollar General (DG:NYSE; $67.06; 1,300 shares; 3.26%; Sector: Consumer Discretionary): The stock stabilized this week after last week's official announcement that Dollar Tree (DLTR) would win Family Dollar (FDO). As we've said since we first opened this position, we like the stock whether or not the acquisition is completed; the benefits from lower oil prices, its shifting product mix into higher-margin items and aggressive store growth agenda allows it to execute without the scrutiny of the FTC. Plus we view the recent news that CEO and Chairman Richard Dreiling will be staying in his current role for at least another year as positive. Dreiling is very well regarded by analyst and investors and has demonstrated strong execution ability in much more challenging environments for the consumer. Finally, there is a valuation argument to be made for DG, which trades at 17.3x forward estimates below that of FDO at 27x and DLTR at 20x. Our target is $74.

Kinder Morgan (KMI:NYSE; $41.05; 2,400 shares; 3.69%; Sector: Energy): The company held its annual analyst day this week and provided color on its long-term internal estimates as a new C-corp. Overall, the presentation was positive, with management reiterating its goal of a $2 dividend this year, 10% dividend growth until 2020 and $2 billion in excess dividend coverage each year, despite the lower commodity price environment. On last week's earnings call, management disclosed a backlog of growth projects of $17.6 billion, a figure that had increased $2.8 billion y/y despite the company placing into service about $2.7 billion of projects in 2014. That $17.6 billion figure was reiterated at this week's meeting; however, the company also disclosed a "shadow backlog" of about $18 billion, mostly related to natural gas projects, which we will keep an eye on. Finally, it was clear that they are looking for additional M&A opportunities in the wake of the Hiland Partners acquisition; we are not surprised, and we believe the current valuations offer a lot of opportunity. Shares have held up well relative to others in the group and we're buyers in the mid- to upper $30s. Our target is $50.

Lowe's (LOW:NYSE; $67.76; 1,100 shares; 2.79%; Sector: Consumer Discretionary): We added this new position to the portfolio this week as a holding that will stand to benefit from continued low interest rates, low oil prices and stronger consumer confidence. The addition makes the portfolio even more overweight the consumer discretionary sector, which we have been focused on since September of last year when oil prices cracked and the U.S. economy showed strength. Lowe's is the second-largest home improvement retailer in the world, with annual revenue of more than $53 billion, a 13% market share and 1,840 locations in North America. It operates in an effective duopoly with Home Depot (HD) and has immense purchasing power due to its size and scale, as well as an improved supply chain and logistics platforms. There are also several self-help initiatives at play, as the company has undergone extensive internal fixes, such as improving its value proposition, product differentiation and in-stocking position, while tailoring local merchandising and improving its professional offerings and e-commerce platform, LowesForPros. Management has targeted 150 basis points of operating margin improvement (to 11% from 9.5%) by 2017, as well as earnings per share of $4.70, same-store sales growth of 4% and a return on invested capital (ROIC) of 19%. Total shareholder return is expected to be at least $14 billion (or $9.20 per share) over the next three years, including at least $10 billion in stock buybacks and $4 billion in dividends, which would represent a 35% payout. We believe that if the company can deliver on its goals, it should see multiple expansion toward a long-term level in the mid-$20s. Our target is $80.

MasterCard (MA:NYSE, $82.03, 1,100 shares; 3.38%; Sector: Financials): The company reported solid earnings, but, more importantly, guidance was a little better than expected. The company grew earnings 25% y/y and net revenues of 17% on strong volumes, processing transactions, card growth and fewer rebate/incentives. While the earnings line was helped by a lower tax rate, the benefits should continue throughout 2015 as the company optimizes its international operations. Gross dollar volumes rose 13% vs. 12% last quarter with U.S. up 8% and international up 15%. U.S. credit rose 8% and debit increased 8.2%. Cross-border volumes rose 18.9% led by a 20% increase in Europe. Expenses were hit by a one-time restructuring and heavy investments in digital/technology investments, which is consistent with what others have done. Guidance was reiterated (more skewed towards the low end of the ranges) but manageable and realistic given the currency situation. We continue to like this position and believe the strong execution in a challenging environment is a bright spot. Our target is $93.

McDonald's Corp. (MCD:NYSE; $92.44; 700 shares; 2.42%; Sector: Consumer Staples): The company announced this week that CEO Don Thompson will retire March 1 and will be succeeded by Steve Easterbrook, a longtime company executive who most recently served as global chief brand officer. The stock rallied 5% on the news; a justified reaction in our view, given the extreme underperformance during Thompson's tenure (MCD shares gained just 0.28% since he took over in July 2012, compared with a 47% gain in the S&P 500 and a 66% increase in in the restaurants/leisure sector). Easterbrook's various titles at McDonald's have included CEO of U.K. and president of Europe; he has had a stellar record, including a turnaround of the U.K. operation that was facing food-quality issues and increased competition -- two of the issues facing the global operation today. He has also been involved in the company's digital initiatives, which were first implemented in the U.K. and France and will likely be key to the company's domestic turnaround. We hope that the new leadership will bring needed change to the company's operations and balance sheet as well, where we see several opportunities for improvement. The company's general and administrative (G&A) expense is 2x to 4x higher than its peers on a per-store basis and there is significant unrealized land value worldwide at the company's 12,000 corporate-owned locations. Plus, the balance sheet is under-levered, with room to take on more debt and increase shareholder distributions. All of these actions are low-hanging fruit and will lead to higher earnings even before the product fixes are in place. The low expectations provide and strong dividend yield of 3.7% allow us to remain patient as the company enacts its turnaround strategy. Our target is $100.

Morgan Stanley (MS:NYSE, $33.81, 2,400 shares; 3.04%; Sector: Financials): We added to the position this week improving our cost basis on the 5% pullback. The 4Q report was not the catalyst we had been hoping for, but the 2015 story remains intact and the company has emerged from this earnings season as one of the better-positioned banks in the group due to its decreased reliance on unpredictable trading revenue. Specifically, FICC (fixed income, currencies and commodities) trading revenue was the biggest disappoint for the quarter, but that was an industry-wide issue and Morgan Stanley has positioned itself to have more offsets to this business in global wealth management (GWM) and asset management businesses, which now account for 55% of revenue. Management reiterated its goal of 10% return on equity (ROE) by the end of 2015, and margin improvement should come once rates stabilize. Trading at just 1.1x Px/TBV, the stock is cheap on a valuation basis with the upcoming positive catalyst coming from March's CCAR results. Our target is $44.

Red Hat (RHT:NYSE, $63.79, 1,500 shares; 3.58%; Sector: Technology): Shares lost some ground this week but outperformed both the technology sector and the broader market without much company-specific news. We continue to like the stock because the company is well positioned into an expected increase in IT investment this year. Red Hat offers products that will enhance companies' mobile and cloud capabilities, as well as information security profiles. It has developed a cult-like customer base within the world of Linux operating system users and stands to benefit from the secular shift of corporations that transition to Linux. It has an attractive mix of products that includes a sticky subscription-based business selling services tied to free software, offering support, troubleshooting and other services that support complicated, mission-critical enterprise projects for clients. It is also in the process of changing both its sales and billing models, moving to a more consultant-like approach that should yield more cross-selling opportunities and shifting towards more short-term bookings, which should create more pricing power and fewer discounts. We expect that the company will continue to see strong topline growth into 2015, and believe that it can see a stabilization of margin trends, driving EPS growth. Currency is the only wildcard. Our target is $78.

Royal Dutch Shell (RDS.A: NYSE; $61.45; 1,650 shares; 3.8%; Sector: Energy): The fourth quarter was disappointing, driven by weaker than-expected upstream operations and lower price realizations, which is hardly a surprise given the underlying commodity price decline. Upstream-adjusted net income was $1.7 billion vs. the $2.8 billion consensus, with the miss primarily explained by higher exploration costs, higher tax expenses and lower price realizations. Production was in line at 3.2 million boe/d, but the integrated gas segment was weak and upstream Americas posted a $526 million loss. The positive offset was the company's downstream operations, which generated net income of $1.6 billion, ahead of the $1.4 billion estimate, due to better-than-expected results from oil products, including a 50% beat on better trading and marketing profitability. The balance sheet remains strong, and its financial flexibility continues to improve, with cash flow of $9.6 billion and working capital inflows of $6 billion vs. $8.7 billion in capex. We view the $15 billion reduction to capex as prudent with more to come should oil continue to slide. The important takeaway is that the restructuring efforts continue and margin improvement was notable, especially in the downstream segment. We expect the same with the upstream now taking focus. The stock is cheap compared to its group at just 6.6x EV/EBITDA, and its 5.8% dividend yield is well-protected. Our target is $80.

SunTrust Banks (STI:NYSE; $38.42; 2,200 shares; 3.17%; Sector: Financials): Shares sold off early in the week and we began to add back to the position after recently taking profits at a higher price. The company did a good job in its quarter in the face of lower interest rates from 8% annualized loan growth, fee increases and strong expense management. We now believe that the current rate environment will further help the company's mortgage business as well. Capital levels were strong, setting up a better-than-expected CCAR result, which will be a positive catalyst at the end of 1Q. At just 1.3x Px/TBV, shares are attractively valued and a discount to peers. Our target is $43.

Twitter (TWTR:NYSE; $37.53; 1,500 shares; 2.11%; Sector: Technology): It was a busy week for the company, which debuted multiple new features as it continues to introduce ways to increase user growth and engagement. The first feature was group Direct Messaging which will allow private conversations for up to 20 Twitter users at a time, expanding upon the existing Direct Message feature for one-on-one private conversations. Users can start a conversation with any of their followers, and invitees do not need to follow one another in order to chat with one another. Additionally, the company improved its video capability by introducing a new mobile video feature that allows users to record, edit, preview and post videos, all without leaving the application. The group Direct Messaging is available to users immediately and the video feature will be rolled out in coming weeks. The moves are encouraging, and we hope it will lead to higher engagement levels and eventual monetization. Expectations are low for 4Q, with consensus estimates at $0.06 per share and revenue of $453 million, which would represent a more than 85% increase from a year ago. But the measure of success for the quarter will be the company's user growth and engagement statistics, as well as the monetization per active user metrics. Our target is $60.

Unilever (UN:NYSE; $43.37; 2,700 shares; 4.38%; Sector: Consumer Staples): This position was our top performer for the week and we added to it before our restrictions kicked in. Part of the higher move is the European exposure, which will benefit from the lower euro. The other is lower oil prices, which account for 25% of total input costs. These are positive tailwinds and with a strong product portfolio, superior distribution platform and 60% of its exposure in the faster-growing markets, we continue to like the stock and believe 2015 will gradually show improvement throughout the year. We also like that it trades at a 15% discount to its largest rival Procter & Gamble (PG), which we see playing catch up as the company delivers on its targets. Our target is $49.

United Parcel Service (UPS:NYSE; $98.84; 1,000 shares; 3.7%; Sector: Industrials): Shares continued to search for a floor this week after last week's negative pre-announcement of 4Q results, and with the stock having fallen 15% since last week's close we added to the position. The negative preannouncement last week was disappointing but the fact is the news is now known (currency, pension, and higher costs during peak season) and we believe the risk/reward into the official 4Q announcement will have a stabilizing effect on the shares. In the end, the company is part of a duopoly with FedEx (FDX) and has significant pricing power in what is a growing business due to the ever-increasing amount of e-commerce volume. The balance sheet is strong and the company has a $15 billion share repurchase program that should act as support at the current levels. Our target is $115.

Wells Fargo (WFC:NYSE; $51.92; 1,000 shares; 1.94%; Sector: Financials): We added this to the portfolio this week for its quality leadership and execution, strong balance sheet and capital ratios, and because the low interest rate environment should help reignite the mortgage refinancing, which will offset net interest margin (NIM) pressure. The company has realistic cost/efficiency goals that should lead to better operating leverage this year and especially as rates pick up (now more of a 2016 event). Trading at 13x forward estimates and 1.5x book value, we see value and like the CCAR catalyst for shares. Our target is $60.


Apple (AAPL:Nasdaq; $117.16; 820 shares; 3.6%; Sector: Technology): The stock rallied 7% following its better-than-expected earnings report. The company beat on the top and bottom lines on the back of impressive iPhone and Mac sales. Revenue for the quarter rose 30% y/y to $74.6 billion, well ahead of the $67 consensus and whispers of $70 billion, while earnings per share increased 48% y/y to $3.06, much stronger than the $2.60 expectation. The results are even more impressive when the 4% revenue headwind is considered, as the company saw huge growth in emerging markets (up 58% y/y) and China (up 70% y/y). Gross margins were ahead of expectations as well, coming in at 39.9%, and operating margins were the highest they've been in 10 quarters at 32.5%. The new iPhone was the clear leader for the quarter, as Apple sold 74.5 million units -- on average selling 34,000 iPhones every hour, 24 hours a day, each day -- with an average selling price (ASP) of $687, a $50 increase y/y. Mac sales beat expectations as well, with 5.5 million units sold (vs. the 5.3 million estimate) and the product set an all-time revenue record of nearly $7 billion. There was a predictable decline in iPad sales, as the larger iPhone likely cannibalized sales of the tablet, but the product still managed to gain share in the tablet space, with usage 6x larger than the competitors' average. Management's guidance for the next quarter was typically conservative, with in-line revenue projections of $52 billion to $55 billion and gross margins at 38.5% to 39.5%. But forex did have a negative impact on guidance, as revenue would have been 4% higher and gross margins 100 bps higher in the period, which will see some hedges roll off. We continue to view this position as one that we will hold, not trade, and shares remain cheap compared to their own historical median at just 13.7x forward estimates. Our target is $125.

Facebook (FB:Nasdaq; $75.91; 1,300 shares; 3.7%; Sector: Technology): The company beat 4Q earnings expectations on both the top and bottom lines and posted extraordinary strength and monetization metrics once again. Total revenue for the quarter was $3.85 billion, up 49% y/y, even with a 4% forex headwind and solidly above the $3.77 billion estimate, while earnings per share came in at $0.54, a 50% increase from the prior year and above the $0.48 consensus. The company also beat expectations across the board for many of its user growth, engagement and monetization metrics. Facebook now has 1.39 billion monthly active users (MAUs) and 890 million daily active users (DAUs), and advertising revenue grew 53% y/y to $3.59 billion, with mobile ad revenue now accounting for 69% of total ad revenue (up from 53% a year ago). Free cash flow was strong and in line with expectations at $1.07 billion, and the company ended the quarter with $11.2 billion in total cash/equivalents. The offset to the extraordinary top line and user growth was higher-than-anticipated costs and expenses for the company, coming $1.63 billion for the quarter, a 50% y/y increase and well above the $950 million estimate, as FB significantly increased its headcount, invested in its video capability and paid to integrate acquisitions such as WhatsApp and As a result, operating margin was flat y/y at 58%, below the low-to-mid 60% expectations. Guidance was strong, excluding forex, and we believe the valuation proposition remains very strong given the strong growth and optionality for operating leverage down the road. Our target is $90.

General Motors (GM:NYSE; $32.62; 3,100 shares; 3.79%; Sector: Consumer Discretionary): This week the company rejected a request from two U.S. senators to extend the Jan. 31 deadline to accept applications for compensation from people injured due to defective ignition switches (a deadline which had already been extended once in the past), as the company tries to get this unfortunate situation behind it. Focus will be next week, with January sales figures for the automakers, and GM should see sales momentum continue, especially with given lower gas prices, lower interest rates (reducing financing costs for consumers) and continued strong product momentum. Also, the company will deliver its 4Q earnings report, for which we are optimistic because of the aforementioned strong sales figures to end the year, as well as the reduction in metal prices and higher North American margins. As usual, management commentary will be key, especially its discussion of the extent of forex headwinds and the possibility of a dividend raise in the near future. Shares are cheap and we like the easy comparisons, favorable consumer dynamics and potential for global recovery upside. Our target is $45.

Google (GOOGL:Nasdaq; $537.55; 150 shares, 3.02%; Sector; Technology): The company delivered a 4Q earnings report this week that was noisy due to forex headwinds and one-time expenses, but the underlying business appears strong and the impressive revenue growth remains. Revenue was $18.1 billion for the quarter, below the consensus expectation of $18.4 billion, but the figure included a $468 million negative impact from foreign exchange ($600 million on gross basis, offset by hedges). Earnings per share was below consensus, as well, at $6.88 per share, vs. an expected $7.13 per share, as the results were dragged down by the aforementioned foreign exchange headwinds, one-time expenses related to compensation and real estate purchases and elevated capex spending. Aggregate paid clicks (APC) rose 14% y/y and 11% sequentially, led by Google Sites paid clicks, which were up 25% y/y and 18% sequentially. Aggregate costs per click (CPC) were up 3% y/y and sequentially, a bit lower than the flat expectations, mainly due to Googles Sites CPCs, which fell 8% y/y due to forex and geographic mix. Perhaps the most encouraging thing from the quarter was management's commentary on the conference call, in which they discussed their philosophy regarding expenses and investments and noted that if they could not find compelling opportunities, they would review their capital-return program. Just the fact that management acknowledged the recent weakness of the stock price was a positive development and, after initially trading lower in after-hours trading, the stock ended Friday's trading session solidly in positive territory. Our target is $600.

lululemon athletica (LULU:Nasdaq; $66.24; 1,000 shares; 2.48%; Sector: Consumer Discretionary): Shares continue to re-rate, given the improving fundamentals and favorable consumer sentiment. We continue to like the position as a play on the strength of the domestic consumer, with an additional boost from the company's aggressive growth agenda and new management and product lines, which are just beginning to turn. Advent International's involvement is also interesting to us, as this group will help the company's international effort -- when the time is right. We like the new management, the balance sheet flexibility, the U.S. and international opportunities and lagging stock, all as reasons to stay involved. Our target is $80.

Lear (LEA: NYSE; $100.35; 900 shares; 3.38%; Sector: Industrials): The company reported a 4Q earnings result that was slightly ahead of the preliminary results, which were released at the Detroit Auto Show earlier this month. The result sent shares more than 1% higher for the week, above the $100 level once again and near the all-time highs reached in September of last year. Revenues were $4.56 billion (vs. the expected $4.51 billion), operating margins were 6.2% (vs. the 5.8% consensus) and adjusted earnings were $2.27 per share (vs. the $2.08 estimates). Both of the company's segments outperformed, with seating revenues up 9.8% y/y to $3.45 billion as margins improved to 5.9% (from 5.0% a year ago and 5.5% in 3Q) and electrical sales of $1.1 billion, with margins at 13.3% (vs. 11.2% a year ago and flat sequentially). In addition to the strong 2014 results, the company edged its 2015 guidance higher, to $1.01 billion to $1.14 billion, a projection that management stated it was "very comfortable" with. The new guidance factors in a lowered estimate for the euro, though management stated on the conference call that lower commodity prices (especially copper) acted as a natural offset to the weakened currency. The guidance includes expanding margins in both divisions and vehicle production growth in every region except for Europe & Africa, which is modeled to be flat. All things considered, it was an especially strong quarter for the company. But with shares once again approaching their all-time high (and our price target), we could look to take some profits here. Our target is $105.

Merck (MRK:NYSE; $60.28; 1,200 shares; 2.71%; Sector: Healthcare): We added to the position this week, wanting to make it a bigger bet on the upcoming Keytruda data that will likely spur shares higher. In addition, we like this pharmaceutical name for this cheap valuation (18.1x forward estimates) and strong dividend yield (2.9%) -- and there are still skeptics in the investment community. MRK has a strong pipeline. Again, Keytruda's cancer franchise in particular is presenting near-term upside potential after the company recently announced that it would attempt to accelerate the drug's FDA approval timeline, in the wake of last year's breakthrough therapy designation. The company will deliver its 4Q earnings report nest week and analysts expect the company to earn $0.86 per share from revenue of $10.498 billion, estimates that both represent mid-single digit declines from a year ago. The group discount and above-average yield keeps us even more interested in adding. Our target is $65.

Microsoft (MSFT:Nasdaq; $40.40; 1,800 shares; 2.72%; Sector: Technology): Shares got hammered this week following its mixed quarter results and lower-than-expected guidance. We downgrade this to Two and into strength we'll likely move to Three, given few near-term catalysts. The quarter was a slight beat on the top line, with revenue of $26.5 billion, vs. the $26.3 billion consensus and earnings matching expectations at $0.71 per share. The strength came from better growth in devices and consumer (up 8% y/y to $12.9 billion, ahead of the $12.8 billion consensus) and the company's cloud products strength, with Office 365 Home and Personal up 30% and the commercial cloud offerings (including Office 365, Azure and Dynamic CRM Online) up 114% y/y. The other positive was the company bought back $4.5 billion in stock and will now complete its existing $40 billion share repurchase program by the end of 2016. The negatives were the lower growth in Commercial/PCs, including Windows OEM Pro down 13% and Office Commercial products revenue, down 1%, with the scale out of Windows XP support, as well as lower-than-expected revenue growth in the commercial segment. Guidance for the full year was much lower than expected, part from currency (explainable), but the other being from expected weakness in the commercial segment and disappointing results in China and Japan. The transition is not over, but the catalysts are few near term and we see other positions with more upside. Plus, this is now a show-me stock and likely dead money in the near term. Our target is $46.

Panera Bread (PNRA:Nasdaq; $171.86; 400 shares; 2.57%; Sector: Consumer Discretionary): The stock drifted higher this week as consumer stocks led the markets higher, helped by Brinker International's (EAT) positive earnings surprise and McDonald's (MCD) news to replace its CEO. The IPO of Shake Shack (SHAK) also gained interest for the group and the continued decline in oil prices was notable. The company earnings report, due in mid-February, will almost certainly be a significant binary catalyst for the stock, with new 2015 guidance and progress on Panera 2.0. We are optimistic that the company will be able to deliver against easy comparisons from a year ago, though should it get close to our target we'll most certainly trim to lock in our gains. Our target is $185.

Starbucks (SBUX:NYSE; $87.53; 800 shares; 2.62%; Sector: Consumer Discretionary): Shares were essentially flat this week, outperforming once again, even after last week's 9.4% gains following a strong fiscal 1Q15 earnings report. The headline earnings were exactly in line with estimates on both the top and bottom lines, but underlying sales, margins and guidance were all very strong. The outperformance occurred in all regions, with same-store sales increasing by 5% in both the Americas and EMEA and by 8% in China/Asia Pacific. Even the company's channel development segment outperformed, with a 10% revenue increase and a 33% rise in operating income. We intend to hold our current position as a core holding, as we believe in the company's aggressive international growth agenda and plan to grow ticket size domestically via new product offerings and differentiated storefronts. We think the company will be a leader of technological innovation in the space and is deserving of its premium multiple, given the superior growth it continues to demonstrate quarter after quarter. Our target is $94.

United Technologies (UTX:NYSE; $114.78; 1,000; 4.3%; Sector: Industrials): The company delivered a solid earnings report this week, in line with expectations, but lowered 2015 guidance due to forex headwinds. EPS for the quarter was $1.62, which included 9 cents of restructuring costs and 17 cents of one-time items and was in line with expectations. Revenue was a touch light at $17 billion (vs. the expected $17.1 billion consensus), but organic sales were up 4% on a constant-currency basis. Operating profit was up 10%, while operating margins grew by 120 bps, with all segments of the company contributing increased profit and expanded margins. The most impressive performance came the UTC Aerospace division, which saw a 5% organic sales increase and a 17% increase in profits. The negative takeaway from the earnings release was the guide down for 2015 from $7.00-$7.20 a shares and $66.9 billion in sales to $6.95-$7.05 a share and $65 billion to $66 billion. But the cut was due entirely to FX and is understandable, given the euro's decline to $1.10 from $1.25, since the company held its analyst and investor day in early December. In fact, arguably the most important conclusion from the report was new CEO Greg Hayes' tone on the conference call, which indicated a sense of urgency in right-sizing the company (he's already made some restructuring moves in his first few months) and skewing the company more towards its building and industrial businesses. We also like that the company raised the buyback amount to the high end of previous guidance -- $3 billion and expect more behind it. Our target is $125.


Dow Chemical (DOW:NYSE; $45.16; 2,550 shares; 4.31%; Sector: Materials): The company delivered an impressive fourth-quarter earnings result in a tough macro environment, including an impressive bottom-line beat. Revenue was $14.4 billion for the quarter, slightly below the $14.5 billion consensus, but earnings per share were 85 cents, well ahead of the 69-cent consensus. Strength came from performance materials and chemicals, consumer, infrastructure and agriculture. Performance plastics were the only offset. All regions experienced growth, but the most positive callout was EMEA, which saw a 9% volume increase, though the benefit was offset by an 11% drop in prices (9% ex-foreign exchange). Dow's utilization rate was impressive at 86% and management commented on the conference call that lower oil prices are, in fact, a net positive for the company, as we have been saying for quite some time. The company ended 2014 with $5.65 billion in cash, flat y/y even after it completed its $4.5 billion buyback program. Shares reacted positively to the earnings report and we will likely use the gains to trim some of it when our restrictions are clear to right-size.

Eaton (ETN:NYSE; $63.09; 900 shares; 2.13%; Sector: Industrials): The company lost a good amount of ground this week, declining in sympathy with several other peers in the industrial/multi-industry space that reported weaker-than-anticipated 4Q earnings reports, weighed down by foreign exchange. Eaton reports its own earnings early next week and consensus estimates call for earnings of $1.20 per share, on revenue of $5.590 billion. We expect that the results will face similar FX headwinds and could face softness in its China end-market businesses, but hope that strength from its domestic non-residential construction and aerospace end-markets businesses will be enough to offset those challenges. This is a big quarter for the company, which is attempting to demonstrate earnings consistency, following its first quarter of outperformance after three straight misses. Our expectations are low.

Walgreens Boots Alliance (WBA:Nasdaq; $73.75; 1,000 shares; 2.76%; Sector: Healthcare): We took some gains this week to add to our new position in Lowe's (LOW:NYSE), where we see more upside. Plus, it's prudent to take gains when we can. The company announced the appointment of George Fairweather as executive VP and global CFO. Fairweather is the former finance director for Alliance Boots. We view the move positively, as it brings a permanent figure to the role and introduces more former Alliance Boots executives into the fold. Alliance Boots was a significantly superior operator than the formerly independent Walgreen's, as evidenced by the 300-600 basis-point margins disparity, so having more of its former executives with the combined company is certainly a positive. We still like the position, especially given its newly expanded European exposure (from the Boots Alliance merger) that will certainly benefit from the introduction of monetary stimulus in the region. But without a near-term catalyst, we trimmed.

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DISCLOSURE: At the time of publication, Action Alerts PLUS was long AAPL, ABBV, AXP, CSCO, DG, DOW, ETN, FB, GM, GOOGL, KMI, LEA, LOW, LULU, MA, MCD, MRK, MS, MSFT, PNRA, RDS.A, RHT, SBUX, STI, TWTR, UN, UPS, UTX, WBA and WFC.

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MasterCard Guidance Was Actually Pretty Good
Stocks in Focus: MA

The company also beat estimates on the top and bottom lines.

01/30/15 - 02:18 PM EST
Lear's Beat-and-Raise Streak Continues
Stocks in Focus: LEA

We were also pleased with the tone and commentary from management.

01/30/15 - 12:58 PM EST
Weekly Roundup

We made few trades in the portfolio this week amid myriad market events, earnings and economic data.

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Action Alerts PLUS Holdings

Stocks we would buy right now

Symbol % Portfolio
Industry Trade Now
ABBV 2.46% Drugs
AXP 3.59% Financial Services
CSCO 2.44% Computer Hardware
DG 3.23% Retail
KMI 3.65% Energy
LOW 2.76% Retail
MA 3.34% Financial Services
MCD 2.40% Leisure
MS 3.01% Financial Services
MSFT 2.69% Computer Software & Services
RDS.A 3.76% Energy
RHT 3.54% Computer Software & Services
STI 3.13% Banking
TWTR 2.09% Internet
UN 4.34% Consumer Non- Durables
UPS 3.66% Transport
WFC 1.92% Banking

Stocks we would buy on a pullback

Symbol % Portfolio
Industry Trade Now
AAPL 3.56% Consumer Durables
DOW 4.27% Chemicals
FB 3.65% Internet
GM 3.75% Automotive
GOOGL 2.99% Internet
LEA 3.35% Automotive
LULU 2.45% Consumer Non- Durables
MRK 2.68% Drugs
PNRA 2.55% Leisure
SBUX 2.59% Leisure
UTX 4.25% Aerospace/ Defense

Stocks we would sell on strength

Symbol % Portfolio
Industry Trade Now
ETN 2.10% Industrial
WBA 2.73% Retail

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