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Jim Cramer's Action Alerts PLUS

Action Alerts PLUS

Weekly Roundup

By Jim Cramer and Jack Mohr | 03/27/15 - 05:40 PM EDT

The market wasn’t able to hold onto last week’s momentum, as weak economic data and growing uncertainty heading into the new earnings season weighed on all sectors, hitting high-beta names (in tech and biotech) particularly hard. U.S. Treasury yields inched higher, gold rallied and the dollar continued to give back its gains against the euro. Both West Texas Intermediate (WTI) and Brent crude oil ended the week sharply higher, with the WTI clocking in its biggest one-week move in three years.

Quarterly earnings trends remain solid, with 68% of companies surprising to the upside in the fourth quarter, the highest percentage of beats since the first quarter of 2010. The two Actions Alerts PLUS-names that reported this week -- lululemon (LULU: Nasdaq) and Red Hat (RHT:NYSE) -- had stellar quarters, sending shares of both soaring.

On Tuesday, Red Hat reported a convincing top- and bottom-line beat and announced a new, powerful $500 million share repurchase program. The company reported Q4 FY 15 earnings per share of $0.43, above consensus of $0.41, and revenue of $464 million, above consensus of $456.5 million. The FY Q4 revenue number indicates 16% y/y growth, while subscription revenue of $405 million represents 15% y/y growth. The company’s year-end deferred revenue balance of $1.48 billion is up 15% y/y and lays the groundwork for a strong start to FY 16. We are even more impressed with the company’s $217 million operating cash flow, which was up a compelling 18% y/y. While we expected strong performance in the quarter (at the same time tempering potential guidance expectations), we did not expect to see the launch of such a massive buyback program, certainly not in the realm of $500 million. This represents a healthy 4% of the company’s market cap -- an added, unanticipated, boost to earnings.

On Thursday, lululemon delivered a convincing Q4 FY 14 beat while also issuing softer-than-expected Q1 FY 15 and full-year FY 15 guidance. For the quarter, the company reported Q4 EPS of $0.78, handily above consensus of $0.73, and, more importantly, total comparable sales (which includes comparable store sales and direct to consumer) growth of 8% vs. 6.9% consensus. Within the comp number, comparable store sales increased by 5% on a constant currency basis while direct to consumer net revenue increased 20%. Gross margin of 51.5% was practically in line with consensus of 51.8%. While the Q1 and FY 15 guidance was a bit light, we expected that given the port- and weather-related disruptions. The headwinds are transitory in nature and it is clear that demand for lululemon products has never been stronger.

On the economic side, this morning we learned U.S. GDP expanded at a 2.2% annual rate (unrevised from the government’s previous forecast) and corporate profits posted their largest drop in four years (3% q/q), a reflection of an economy weighed down by a strong dollar and weak global demand. On a year-over-year basis, the report pegged corporate profit growth at 2.9%, slowing from 5.1% annual growth in the third quarter. As a share of the total economy, corporate profits were just a hair below the record high of 10.5% set in 2013. Despite the fourth-quarter dip, there is no doubt U.S. companies continued to drive a healthy bottom line, and we believe a lot of the pressure is a result of a stronger dollar.

The overall picture last quarter was reflective of a divergence between consumers and businesses. Consumers spent at the fastest pace since 2006, but business investment has been decelerating for the past several months and government outlays have fallen. Despite the uneven growth, the U.S. economy has been advancing at a fast enough pace to add jobs at a strong clip and bring some sidelined workers back into the job market.

On Wednesday, weak durable goods data drove the market sharply lower. Orders for long-lasting or durable goods, such as appliances, cars and computers, fell 1.4% in February to mark the third decline in four months. To add insult to injury, the increase in orders for January was lowered, making the decline last month look even uglier. The trend is worse if the volatile transportation sector is stripped out, with such orders down five straight months. A key proxy for business investment known as core orders, which excludes aircraft and military goods, also fell 1.4% in February to mark the sixth drop in a row. The last time that happened was in 2012.

The reason for weak durable goods is multi-faceted. Companies are facing a global environment that is quite prohibitive for large-scale projects and heavy investment budgets. A soft global economy and soaring dollar have made it harder to sell U.S. exports, leading domestic businesses to pull back on their growth projects. The steep plunge in oil price has also curtailed investment in what was a booming domestic energy sector. Finally, a lengthy labor dispute at critical West Coast ports created bottlenecks over the winter before a compromise was reached earlier this year.

Beyond the weak GDP and durable-goods order data, the market just seemed jittery this week (the Volatility Index (VIX) soared to five-week highs), likely stemming from uncertainty around Fed policy and expectations that the coming earnings season will disappoint. We are currently in a pre-announcement period, when companies will begin issuing warnings ahead of the earnings season, and since many investors expect first-quarter earnings to come in light (given weather and macro-related headwinds), the high-multiple, high-beta stocks such as biotechs and technology are the first ones to be shed from an investor’s portfolio.

Outside of the U.S., Japan saw its consumer-price index hit 0% on Friday, the lowest level in two years and far from the 2% target that the central bank had pledged to by this spring. The price data underscores the ongoing difficulties Prime Minister Shinzo Abe faces in pulling the world’s third-largest economy out of its long slump and eradicating the deflation that had long ailed the nation. Bank of Japan Governor Haruhiko Kuroda insists he is still on track, albeit on a delayed timetable, to reach his price goal. Surveys show most BOJ watchers expect Kuroda to expand his stimulus program this year to push ahead with his fight against deflation. Still, Kuroda faces growing challenges in continuing his quest, as business executives, economists, politicians -- even some of his own policy board members -- have turned increasingly wary of the side effects from his record- shattering asset purchases.

To be sure, the Japanese economy has some bright spots. As a shrinking working-age population and growth in construction work -- in part fed by fiscal stimulus -- tighten the labor market, the jobless rate fell to 3.5% in February from 3.6% in January, while the jobs-to- applicants ratio rose to 1.15, its highest level since March 1992. That means there were 115 jobs available for every 100 job seekers. That, however, hasn’t translated into more spending by consumers. Household spending fell 2.9% from a year earlier in February, marking the thirteenth consecutive decline. Retail sales fell 1.9% from a year earlier, as well.

On the commodity side, WTI had its best week in over four years, as falling U.S. production gains and a weaker dollar outweighed concerns over rising inventory. Brent crude also had a stellar week, up nearly 5%, in many ways driven by tension in Yemen. The gains for WTI came in spite of the continued growth in U.S. crude inventories, which remain at a record high for an eleventh consecutive week. One reason for this could be that strong supply build expectations have already been priced into the WTI. The benchmark was down some 15% in the two week period prior to the current rally that began last Friday. Instead, the market seems to have taken heart in the steady cutback in the number of rigs drilling for oil in the U.S. and a slowing in the pace of increase in U.S. crude production. WTI’s current rally has also coincided with a pullback in the dollar bull run, with the DXY dollar index down 0.6% this week.

With respect to our portfolio, this week we initiated new positions in Schlumberger (SLB:NYSE) and WhiteWave Foods (WWAV:NYSE), exited Lear (LEA:NYSE) and Dollar General (DG:NYSE), and trimmed United Technologies (UTX:NYSE). We explain our reasons for the SLB and WWAV initiations below, but both are true leaders and innovators in their space with transformational capabilities. We upgraded lululemon (LULU:Nasdaq), Dow Chemical (DOW:NYSE) and Twitter (TWTR:NYSE) to Ones following strong earnings (LULU), transformative strategic actions (DOW), and improving trends (TWTR). We downgraded Royal Dutch Shell (RDS.A:NYSE) to Two from One given lack of yield support, and our preference for Schlumberger as the best-in-class energy play.

Earnings continued in earnest this week and 99% of the S&P 500 has now reported. Total fourth-quarter earnings growth is 4.5%; excluding financials, that growth is 7.4% vs. the expectations at the beginning of the season for 2.5% growth. Revenues are modestly rising at 1.5%, a touch below the 1.7% expectation, although much of that has been negative currency translation. The results have been solid across the board, with 68% of the S&P 500 having beaten expectations, 21% missing the mark and just under 11% in line with consensus. Technology, materials, industrials and energy have led the strong performance. Telecom and utilities have posted the worst results so far in the S&P 500.

Next week, less than 1% of the S&P 500 is set to report earnings. Key reports are: Monsanto (MON:NYSE), Freshpet (FRPT:Nasdaq), CarMax (KMX:NYSE) and Micron (MU:Nasdaq). Wal-Mart (WMT:NYSE) is holding its annual shareholder meeting.

The economic calendar for next week is below:

Economic Data (*all times ET)

Monday (3/30)

Personal Income (08:30): 0.3% expected

Personal Spending (08:30): 0.2% expected

PCE Core MoM (08:30): 0.1% expected

Pending Home Sales MoM (10:00): 0.4% expected

Dallas Fed Manufacturing Activity (10:30): -9.0% expected

Tuesday (3/31)

Chicago Purchasing Manager (09:45): 52.0 expected

Consumer Confidence Index (10:00): 96.5 expected

Wednesday (4/1)

MBA Mortgage Applications (07:00)

ADP Employment Change (08:30): 225k expected

US Manufacturing PMI: (09:45): 55.2 expected

Construction Spending (10:00): -0.2% expected

ISM Manufacturing (10:00): 52.5 expected

Thursday (4/2)

Initial Jobless Claims (08:30): 285K expected

Continuing Claims (08:30)

Trade Balance (08:30): -$41.0B expected

Factory Orders (10:00): -0.3% expected

Friday (4/3)

Change in Nonfarm Payrolls (08:30): 250k expected

Unemployment Rate (08:30): 5.5% expected

Personal Consumption (08:30)

Core PCE QoQ (08:30)

Univ. of Michigan Consumer Sentiment Index (10:00): 91.8 expected

International

Monday (3/30)

Eurozone Consumer Confidence (05:00): -0.7% expected

Tuesday (3/31)

Eurozone Unemployment Rate (05:00): 11.2% expected

Eurozone CPI (05:00): -0.1% y/y expected

Germany Unemployment Rate (03:55): 6.5% expected

Germany Manufacturing PMI (03:55): 52.4 expected

UK GDP (04:30): 2.7% y/y expected

Japan Manufacturing Index (19:50): 4 expected

China Manufacturing PMI (21:00): 49.7 expected

Wednesday (4/1)

UK Manufacturing PMI (04:30): 54.4 expected

ADP Employment Change (08:30): 225k expected

US Manufacturing PMI: (09:45): 55.2 expected

Construction Spending (10:00): -0.2% expected

ISM Manufacturing (10:00): 52.5 expected

Japan Monetary Base (19:50)

Thursday (4/2)

Initial Jobless Claims (08:30): 285K expected

Continuing Claims (08:30)

Trade Balance (08:30): -$41.0B expected

Factory Orders (10:00): -0.3% expected

Friday (4/3)

Change in Nonfarm Payrolls (08:30): 250k expected

Unemployment Rate (08:30): 5.5% expected

Personal Consumption (08:30)

Core PCE QoQ (08:30)

Univ. of Michigan Consumer Sentiment Index (10:00): 91.8 expected

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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

Cisco Systems (CSCO:Nasdaq; $27.13; 2,750 shares; 2.90%; Sector: Technology): The shares took a breather this week after the company had a strong showing at Enterprise Connect 2015 last week. Cisco’s primary product introduction at the event -- Cisco Spark -- highlighted the more flexible approach to enterprise collaboration tools. The company’s head of Cisco Collaboration, Rowan Trollope, noted Spark’s essential replacement of traditional email for most of his communication and collaboration needs. To this end, Cisco had endorsed the "consumerized" approach to collaboration, positioning video as a communication platform on par with voice and messaging, to be utilized and accessed similarly (i.e., device ubiquity). While Cisco is not the only, nor the first, vendor with this "consumerized" approach, Cisco’s incumbent position and broad portfolio of integrated collaboration tools, including Spark, Jabber (similar to Lync), and the new WebEx, should provide a competitive advantage to most vendors and a nice upgrade tailwind for a mostly dormant collaboration business. Overall, we expect a multiple re- rating and upward earnings revisions to drive the shares through our $33 price target over the coming quarters.

Dow Chemical (DOW:NYSE; $47.76; 2,550 shares; 4.74%; Sector: Materials): The shares traded higher this week as the company announced on Friday it would spin off a significant portion of its chlorine business and merge it with Olin Corp. (OLN) in a deal valued at $5 billion. Dow’s move away from chlorine, which has been a staple of the company since its founding more than a century ago, is part of a broader strategic shift by the company from the increasingly commoditized business of turning oil and gas into basic chemicals to a focus on higher-margin, more proprietary products. The deal puts the company over its target of $7 billion to $8.5 billion in nonstrategic businesses, even as it keeps a steady supply of low-cost chlorine flowing to Dow’s other businesses. The two companies will also have ongoing supply agreements as part of the deal. In our view, this transaction maximizes the potential of a value chain that, while attractive, was no longer part of Dow’s strategic agenda and couldn't compete for capital in Dow’s portfolio. By moving the chlorine business from Dow’s portfolio to a more natural and synergistic owner, it allows Dow to deploy its capital to its targeted, higher growth businesses. Overall, we believe the announcement signifies a further powerful shift in Dow’s portfolio towards integrated high-performing markets and serves as another example of how Dow continues to behave as its own best activist and take action in its business portfolio. The company is not only delivering on its promises but exceeding them. As such, we upgraded the shares to One from Three. Our new target is $60.

Halyard Health (HYH:NYSE; $47.97; 2,300 shares; 4.29%; Sector: Health Care): The stock underperformed slightly this week after rising 5% last week. Our thesis has been emboldened by the company’s strong earnings results earlier this month, in which it delivered a convincing earnings beat on both the bottom and top lines. Management also guided 2015 revenue growth above consensus, though its earnings per share (EPS) forecast fell a bit short of Wall Street expectations. We believe management is being especially conservative with its 2015 EPS guidance and look for the expected 2% revenue growth to translate into meaningfully higher earnings (based on the company’s history of being able to convert flat revenue into mid- to- high- single-digit earnings growth). Halyard is focusing its efforts on three priorities for 2015: completing the separation from Kimberly-Clark (KMB); positioning itself for future growth; and delivering shareholder value. On the separation front, management is establishing functional teams to cover the areas where it has transition service agreements (TSAs) in place with KMB. Over time, the need for these TSAs will phase out; some were closed at the end of January. In terms of positioning the company for future growth, management is ramping up R&D, executing on plans for share gains, and expanding its markets and geographic footprint. Specifically, management plans to double R&D spending within the next four years, and this will begin with a 20% increase in 2015. In this arena, management also reiterated its plans to utilize its balance sheet and cash generation capabilities to pursue M&A opportunities, but this is more of a 2016 priority. Management also believes there are significant cost reduction opportunities, and called out IT spending as being above its pure-play peers post the spinoff. We believe the period between now and next quarter may be the last opportunity for investors to get into the name at a discount. Our target is $60.

Kinder Morgan (KMI:NYSE; $41.27; 2,400 shares; 3.85%; Sector: Energy): The shares traded slightly lower this week after charging 5% higher last week. Following the successful close of a massive consolidation transaction, which rolled up general and limited partner interests in Kinder Morgan Energy Partners, Kinder Morgan Management and El Paso Pipeline Partners into a single entity, Kinder Morgan Inc. is now the largest midstream energy firm on the continent. Its chairman, Rich Kinder, built this pipeline juggernaut out of the unwanted "hard assets" spurned by Enron almost 20 years ago. Now Kinder Morgan spans the continent, transporting a significant amount of the nation’s crude oil, refined products and natural gas, and is involved in virtually every link of the midstream energy value chain. Its unmatched asset footprint provides numerous opportunities for expansion, and Kinder has a seat at the table for every new project or deal that comes along, as well as the financial heft to execute, no matter the size of the project. Consolidating into a single entity provides Kinder Morgan with two key advantages. First, it breaks the link to the MLP (master limited partnership) model, where quarterly distribution increases are the norm, providing eventual headroom to walk down dividend growth as the business matures and growth opportunities slow next decade. Second, it positions Kinder Morgan as a natural consolidator, and we expect that acquisitions will play a significant role in its long-term growth story. Our target is $50.

Lowe’s (LOW:NYSE; $73.67; 1,200 shares; 3.44%; Sector: Consumer Discretionary): Late last Friday the company announced a new $5 billion buyback program, adding another layer to an already exciting story. The new repurchase program has no expiration date and adds to the previous program’s balance, which was $2.4 billion as of Jan. 30. The buyback authorization, combined with the company’s existing 1.25% dividend yield, puts its total return profile above 10%. We believe multi-year high valuations for LOW (a bear pushback) are justified; recent data suggest solid, if not improving, consumer spending trends in the U.S. and significant slack remains at LOW and in the U.S. housing recovery. At the same time, prospects for a continued strong U.S. dollar should keep market participants interested in well-positioned domestic stock plays such as this one. We are encouraged by the accelerating trends and consistency of execution we see from the company, both from a product (all products delivered positive comps in the last reported quarter) and geographic (all 14 regions posted 5%+ comps) standpoint. We are excited for what lies ahead and reiterate our $80 target.

lululemon athletica (LULU:Nasdaq; $64.32; 1,800 shares; 4.50%; Sector: Consumer Discretionary): Shares charged higher this week after reporting a very strong quarter. As we anticipated, the company's near-term weakness is transitory in nature, driven almost exclusively by weather- and port-related issues that converged in Q1 2015. Management's initial FY15 EPS bar appears prudent ($1.85-$1.90, including $0.09 FX impact and no buybacks) implying about 200 basis points of EBIT contraction (largely due to supply chain/international/omni-channel investments) on mid- single-digit same-store sales. We expect management to raise its FY15 forecast in subsequent calls as the business normalizes and headwinds abate. Temporary headwinds aside, the company reiterated that demand for its products remains stronger than ever, and consistent with what it saw over the holiday period. LULU's multi- year roadmap -- which we have been emphasizing time and time again -- is clearly on track. Positive traffic momentum continued into 1Q, with store comps up mid- single digits in 4Q, a key inflection point. We were also impressed with the company's international expansion strategy and note that management is now on the record stating its international business could match, and ultimately exceed, its overall North American revenue over the long term. Investors were undoubtedly excited to hear the company reiterate its long-term financial goals on the call, including a mid-single-digit increase in comps, gross margins returning to the low-to-mid $50s and operating margins to the low-to-mid $20s. Merchandise margins have already stabilized under the new product platform, and while 2015 will be another year of investment in growth initiatives, the strengthening product and increased marketing efforts position the company well for beating and raising its forecasts in the coming quarters. Overall, we believe this was a statement quarter for LULU. With primary fears near-term in nature, the stock under-owned in the mutual fund community, and 14% of the float still short, we like the setup from here, with brick-and-mortar traffic and underlying merchandise margin opportunity the key to the second-half 2016/full-year 2016 "show-me" story. We upgraded the shares to One from Two and reiterate our $80 target.

MasterCard (MA:NYSE, $87.25; 1,100 shares; 3.73%; Sector: Financials): The shares traded lower this week in sympathy with the market. Stifel issued an interesting note earlier in the week, recommending investors buy Visa (V) and/or MasterCard on any currency-related weakness. Stifel believes that recent industry trends support its upbeat views on the card company. The firm says that evidence of MasterCard's powerful and growing competitive advantages is increasing. We agree, and continue to be excited about the company’s prospects. Its 4Q was strong and the company sits neatly within powerful long-term payment themes (notably the conversion from cash to plastic). In our view, the world is MasterCard’s oyster. We reiterate our $95 target.

Morgan Stanley (MS:NYSE, $35.83; 3,200 shares; 4.46%; Sector: Financials): The shares retreated slightly this week after the company announced its CFO, Ruth Porat, will leave in April to become CFO at Google (GOOGL). Porat has been CFO of Morgan Stanley for the past five years, culminating a career that began in 1987 and included leading the Financial Institutions banking team during the 2008-09 financial crisis. Jonathan Pruzan, a 21-year Morgan Stanley veteran and currently head of the bank's Global Financial Institutions Group, will succeed Porat upon her departure. While Pruzan is well known within Morgan Stanley (and very familiar with the challenges facing the banking patch), we do not believe he is well known to investors. This could suggest some initial uncertainty, but we would remind investors that Porat was equally unknown to the investor community when she ascended into the CFO role in January 2010. To that end, the operating environment and Morgan Stanley's financial position are in a visibly better position than when Porat was named CFO. In our view, while Porat's departure is a temporary loss for the company, Pruzan is a well-known and seasoned executive within the company with meaningful knowledge of financial institutions and the regulatory framework in which they operate. Our target is $44.

Red Hat (RHT:NYSE, $76.52, 1,500 shares; 4.46%; Sector: Technology): The shares traded nearly 10% higher this week after a phenomenal quarter. The company posted solid 4Q FY 15 numbers, highlighted by 22% constant- currency revenue growth (up from 18% last quarter), a $5 million revenue beat above the high end of guidance despite the FX hit being $7 million greater than expected, 22% billings growth (up from 17%-19% in the prior three quarters and up 26% if adjusted for FX), and an operating margin, operating cash flow and EPS beat. This was about as clean a quarter as they come and makes RHT one of the best-performing infrastructure software vendors in the market. The list of what we liked in the quarter is long. RHT’s total revenue growth of 22% was the highest in almost three years, the billings growth of 22% was against a very tough comparison, the unbilled backlog was up a full 41% y/y (from 14% last quarter), the emerging tech bucket grew a solid 45%, operating margins were 80 basis points above guidance and cash flow growth was a strong 17%. For FY 16, RHT guided to 19% constant-currency revenue growth (above all expectations), flat operating margin and EPS of $1.79 to $1.82 (above consensus $1.79). RHT appears to be benefiting from strong demand for new Linux-based next- gen apps, a good free-to-paid conversion tailwind and strong overall adoption of open source software. Our target is raised to $85 from $78.

Schlumberger (SLB:NYSE, $83.31; 900 shares; 2.92%; Sector: Energy): We initiated a position in Schlumberger this week, buying 900 shares at $83.32. Schlumberger is the largest oil service company in the world, yet continues to gain market share and generate top-tier full-cycle returns. We expect the company to maintain its market supremacy and see increased opportunity for market share gains over the next three years, assuming a successful completion of the Halliburton (HAL)/Baker Hughes (BHI) deal. While Schlumberger doesn’t have as much direct exposure to North America, its global diversification makes it a much safer bet and we believe it is one of the best ways to gain exposure to our positive view of the sector long term given its lower risk profile and superior execution. On valuation, we’re willing to pay 14x estimated 2015 EBITDA, which is justified given our expectations for 25%-30% earnings growth in 2015/2016. Overall, we view the risk/reward trade-off as positively skewed, as the market is discounting significant reductions in activity, while in reality it should experience a modest deceleration at most. Overall, Schlumberger's immense scale and best-in- class execution make us confident in its ability to drive significant value over the long term. Our target is $105.

SunTrust Banks (STI:NYSE; $40.55; 1,500 shares; 2.37%; Sector: Financials): The shares fell nearly 6% this week on little news. Last week, we trimmed our position as we believed the shares had hit a near-term ceiling at $43. We were right. We had always pegged $43 as a compelling level to trim our position and since a major catalyst, the Comprehensive Capital Analysis and Review (CCAR), has already taken place and worked in our favor, we believe it was prudent to take some profits off the table now. This week, the company met with Deutsche Bank analysts. The key takeaways included: 1) STI continues to make good progress in the integration of the commercial/corporate/banking segments to improve cross sell; 2) The consumer (and wealth) segment continues to evolve, with increasing focus on wealth management (with more hirings to come) and improving the consumer lending experience (most notably in mortgage and unsecured); 3) Increased accountability to achieving targets, with further cost cuts if revenue disappoints; 4) Continued focus on improving balance sheet efficiency by reducing exposure to lower risk adjusted assets; and 5) Smart and steady capital deployment via supporting balance sheet growth, dividends and share buybacks. Overall, we are still bullish on the name and maintain our recently raised $47 price target.

Target (TGT:NYSE; $81.56; 1,700 shares; 5.39%; Sector: Consumer Discretionary): The shares were flat this week on little news. Last week, the company announced that it is raising its minimum wage to $9 per hour starting next month in a move that is a clear response to recent increases at peers Wal-Mart (WMT) and T.J. Maxx (TJX). Target's move comes less than a month after Wal-Mart announced that it was giving half a million U.S. workers a raise, bringing its minimum hourly pay to $9 in 2015 and $10 next year, and several weeks after T.J. Maxx said it would do the exact same. Everyone in large-box retail is compelled to follow Wal-Mart’s lead, and Target is no exception. We believe the company is making the right move, and forecast the EPS impact to be minimal. Of course, we would need more information on the current number of employees (out of its 366,000 full- time, part-time and seasonal “team members”) currently being paid minimum wage in order to make a more specific cost impact determination, but assuming it is a small portion (less than 1% of Wal-Mart’s employees were being paid minimum wage), the cost effect should be under $10 million annually. If the number of minimum wage employees is high (10% or above) the cost impact would well exceed $50 million annually, but we believe the likelihood of this scenario is low. We will look to next quarter’s conference call to hear more, unless management is willing to provide further information in the meantime. Target has more than enough room to raise wages amid its massive $2 billion cost saving program. We reiterate our strong bullish view on the stock. Our target is $90.

Thermo Fisher Scientific (TMO:NYSE; $133.69; 800 shares; 4.16%; Sector: Healthcare): The shares took a breather this week on little news. We favor the company, for both its stability and leadership. It is truly the backbone of new innovation in health care, whether it's instruments, chromatography sequencing or diagnostics. We believe there is upside from a multiple re-rating, as the company is not getting proper credit for its high-growth Life Sciences asset (acquired last February). The Life Sciences acquisition secures lucrative exposure to the high-growth area of genomics. The other leader in genomics -- Illumina (ILMN) -- is trading at 35x EBITDA, compared to 15x for Thermo. While we acknowledge that Thermo’s core business does not deserve to trade that high, it is not getting nearly enough credit for its arguably-superior Life Sciences asset. As such, we think a 17x or 18x EBITDA multiple would be more appropriate. In essence, Thermo Fisher is a bastion of consistency in multiple areas: organic growth (mid- to- high-single digits), management execution, capital deployment and, importantly, shareholder returns. As health care research and discovery remain a top priority for developing nations, we expect the company to benefit from its role as the supplier of this discovery, through market-leading brands and products, unmatched scale, and best-in-class distribution. Our price target is $160.

Twitter (TWTR:NYSE; $50.01; 1,400 shares; 2.72%; Sector: Technology): Shares traded sharply higher this week on little news. Twitter is emerging as a battleground stock with Rosenblatt Research starting coverage on Thursday with a buy rating while Stifel reiterated its sell rating. The Rosenblatt analyst believes the company’s EBITDA margins are poised to rebound. Among the company’s positive catalysts are video clip ads which should prove popular with marketers, higher ad load rates, additional products that will increase user growth and the expansion of the company’s sales force, which is reaching critical mass. In general, the analyst and we believe Twitter can further monetize its ads starting this year by using targeted advertising. Twitter’s ad targeting capabilities are at least as strong as those of Facebook, in our view. Meanwhile, the company’s recently acquired Periscope product, which enables live video streaming, could significantly affect Twitter’s usage trends. We upgraded the shares to One from Two to reflect our eagerness to buy on any slight pullback and confidence in the long-term story. We reiterate our $55 target.

Wells Fargo (WFC:NYSE; $54.12; 3,000 shares; 6.31%; Sector: Financials): The shares retreated slightly on little news. This week, WFC’s treasurer met with J.P. Morgan analysts. Key takeaways from the meeting include: 1) Wells needs to maintain a minimum 10% Basel 3 Tier 1 common ratio; 2) Liquidity needs to remain robust with G- SIBs having to keep a lot more in cash, which will hurt net interest margin (NIM) as there’s likely to be a lesser shift to longer-dated high-quality liquid assets; 3) NIM is most sensitive to the short end of the curve and should benefit from rate hikes; and 5) Common equity Tier 1 ratio is the main capital ratio Wells focuses on in CCAR. We remain extremely bullish on Wells ahead of the inevitable rise in rates. Our target is $63.

WhiteWave Foods (WWAV:NYSE; $45.23; 2,100 shares; 3.69%; Sector: Consumer Staples) We initiated a new position in WhiteWave Foods this week, buying 2,100 shares at $42.56. WhiteWave is a leading consumer packaged food and beverage company focused on high-growth natural and organic product categories that are aligned with emerging consumer trends. We believe it is important to have exposure to this theme and think best-in-class WhiteWave provides the most compelling opportunity. The insatiable demand for organic and plant-based diets continues to grow materially faster than the overall food industry in developed markets. Currently, only 16% of WhiteWave's volume comes from outside North America, but we believe this could change over time as the company acquired the leading plant-based food and beverage company in Europe (Alpro) in 2009 and signed a joint venture with China Mengniu Dairy last year. According to WhiteWave, China is the largest plant-based beverage market in the world at greater than $2 billion annually, with 15% to 20% annual growth. Another reason we like WhiteWave is its outright leadership. Horizon, Silk, Earthbound Farm, and Alpro are all the number-one brands in the categories in which they compete and each one delivered over $500 million in annualized sales last year. As traditional food retailers play catch up in the groundswell of new emerging products in organic and plant-based food/beverages, we believe WhiteWave is set to play a pivotal role in filling the shelves with products for the next generation of consumers. We also think there is potential for the company to be acquired by a large-cap consumer packaged foods company (think: Coca-Cola (KO)) that is thirsty for growth and, in particular, exposure to natural and organic categories. We do not factor this into our valuation, however, and on a standalone basis believe WWAV should trade at 36x our 2016 EPS estimate of $1.40, or $50.

TWOS

Apple (AAPL:Nasdaq; $123.25; 820 shares; 3.93%; Sector: Technology): Shares traded slightly lower this week. Next month, Apple will enter its first new product category in five years, while media reports over the past several weeks have highlighted potential new areas of future innovation. Also, we believe Apple's iPhone portfolio and position in China have never been stronger. Finally, Apple has shown its commitment to returning cash to shareholders, and we expect more in April. We believe the combination of these forces will drive the market to reward Apple's stock with an expanded P/E multiple. We reiterate our $150 target.

Facebook (FB:Nasdaq; $83.30; 1,300 shares; 4.21%; Sector: Technology): Shares were essentially flat this week. The company hosted its F8 Developer Conference in San Francisco this week. While there were no major announcements, management continues to evolve its platform and ecosystem incrementally. The key items to note from the conference were the continued focus on video, evolution of Messenger into a platform, integration of the Audience Network and LiveRail, and updates to Parse. On video, the company reiterated its growth and importance, as the company now has more than 3 billion daily video views, of which 65% are on mobile and 53% of those come from shares. The company unveiled three new tools and updates for developers: featured API, video publishing with 10 partners and the embedded video player. Facebook is also now turning Messenger into a platform on which developers can create apps that directly integrate into Messenger. Finally, Facebook pointed out that native ads represent more than half of the inventory on the Facebook Audience Network and can have CPMs up to 7x higher than traditional banner ads. We emerge from the event incrementally bullish. Our target is $90.

General Motors (GM:NYSE; $37.31; 3,100 shares; 4.50%; Sector: Consumer Discretionary): Shares moved slightly lower this week on no news. Based on recent analyst reports and management commentary, we see an upbeat near- and medium-term picture for the auto giant. We believe that GM is currently benefiting from a number of larger-than-expected positives, including mix and price in North America, mix in consolidated Asia, and raw materials. China and Europe, meanwhile, are performing in-line with expectations. South America is a bit of a drag, but the magnitude is not sufficient to derail our expectations. Overall, we see near-term risk/reward as favorably skewed. Our target is $45.

Google (GOOGL:Nasdaq; $557.55; 150 shares, 3.25%; Sector; Technology): Shares traded lower this week after the company announced a change in CFO, with Ruth Porat succeeding Patrick Pichette. We believe Porat's background (CFO of Morgan Stanley -- another company under the regulatory microscope -- plus co-head of MS tech-banking practice) is an ideal match. The hire could address two chief investor concerns: namely, it could signal a sharper focus on opex discipline, and it could hint at future changes in philosophy around a potential capital-return program. Overall, we continue to see great value in Google shares at 18x forward estimates, slightly below historical levels, with double-digit earnings and revenue growth and industry dominance. We now look for any news about its cash hoard and whether it will announce a distribution of some sort -- something hinted at on the 4Q call. Our target is $600.

Merck(MRK:NYSE; $57.75; 1,550 shares; 3.48%; Sector: Healthcare): Shares were slightly lower this week, which we find completely undeserved given two very bullish announcements by the company. First, earlier in the week, a Phase 3 study comparing Merck's Keytruda to Bristol-Myers Squibb's (BMY) Yervoy in the first-line treatment of patients with advanced melanoma was released strongly favoring Keytruda. The company says Keytruda met its goals in the head-to-head study matchup, dealing a blow to Bristol's growing immunotherapy franchise. Even better, Keytruda trounced Yervoy in previously untreated patients with advanced melanoma, a result that could lead to a bigger market for the Merck medication. Keytruda hit its primary endpoints not only for stalling cancer progression, but for extending patients' lives (or "overall survival," a key metric for regulators, doctors and payers). Currently, Keytruda is approved for patients with advanced melanoma previously treated with Yervoy and, in some patients, another kind of drug as well. That second- and third-line status limits the number of patients eligible for the drug. With solid data on first- line use, Merck could ask the Food and Drug Administration to expand that patient pool -- and with recent decisions, the agency has proved willing to decide quickly, provided the survival data are there. Keytruda's rival immunotherapy, Opdivo, recently won an indication in lung cancer merely days after Bristol-Myers filed for that approval, and the FDA's oncology chief cited its impressive overall survival numbers for the quick move. Separately, after the close, Merck announced a new $10 billion share-repurchase program, putting the company's total authorization at $11.7 billion, which includes the roughly $1.7 billion in authorized repurchases remaining under the program previously announced in May 2013. The buyback authorization, combined with the company's 3.07% dividend yield, puts its total capital-return profile into the double digits. This only serves to further strengthen our bull thesis on MRK shares. We reiterate our $65 target.

Royal Dutch Shell (RDS.A NYSE; $60.48; 1,650 shares; 3.88%; Sector: Energy): Last week, it appeared Royal Dutch Shell bottomed (finally!). The stock struggled to keep up the momentum this week on little news (besides one analyst downgrade). We believe the shares have found their bottom but also think upside will be limited for the next several months as the stock is subject to the whims of the energy market. Overall, we like the long-term story and real value at 5x EBITDA, strong cash, the 6.2% dividend yield and the restructuring story with asset sales and profitability a focus under its new CEO. We downgraded the shares to Two from One to reflect lack of yield support and our preference for Schlumberger (SLB) as the best way to invest in energy. Our target is $75.

Starbucks (SBUX:NYSE; $95.07; 500 shares; 1.85%; Sector: Consumer Discretionary): Shares retreated a bit after hitting all-time highs last week after the company held its annual shareholder meeting in Seattle. As a reminder, we emerged from the event even more bullish and believe the company continues to be a compelling global growth story. We are increasingly optimistic that SBUX has the right strategy to drive sustainable and ongoing growth. Its runway for growth is long, given its many comp growth drivers. Its 5% comp algorithm comes from 1% price, 2% food, 1% beverage innovation and 1% "other," and we remain confident that mobile ordering (and now delivery in the second half of 2015) can over-deliver on the 1% "other" component, and SBUX's own guidance has food growing to 3%. Between its elevated food offerings, vast tea opportunity and Evening Program (with wine and beer), we believe a 7% comp algorithm may be more appropriate. SBUX is focused on a number of strategic initiatives that we expect to drive accelerated earnings growth. First and foremost, we believe its mobile order and pay will increase speed of service and drive transaction growth. Mobile accounts for almost 20% of total payments and helps drive its loyalty program. We are also excited by its recently announced "Green Apron" delivery program, which will start testing in New York later this year, as well as a Seattle-based on- demand delivery pilot, which is set to begin in the second half of 2015. Both will charge a flat delivery fee. Starbucks also has an expressed goal of doubling food revenue over the next five years, which we believe is achievable based on recent success -- food has contributed 2+ points of comp growth almost every quarter for the past three years. Beyond food and coffee, tea is a growing category and we believe SBUX is well positioned to double its tea revenue in the next four years. Finally, we believe CPG is a global opportunity that we expect to be a game changer for the company, which has already made headway in China following a recent distribution and manufacturing agreement with Tingyi. As you can see, Starbucks has many "balls in its court" that we believe can be sustainable long-term growth drivers, both on the comp and earnings fronts. It is incredibly well positioned to grow into its committed goal of becoming a $100 billion global company over time. We reiterate our Two rating and $100 target.

United Technologies (UTX:NYSE; $116.90; 400; 1.82%; Sector: Industrials): We trimmed our position this week in order to raise cash for our WhiteWave initiation. The company recently delivered a strong showing at its 2015 analyst day, which was highlighted by the announcement of a potential spinoff of its Sikorsky Aircraft helicopter business and a new $2.6 billion accelerated share repurchase (ASR) program. Overall, while organic trends have started the year a little sluggishly (mostly due to weakness in China), we came away from the analyst day incrementally bullish. We heard enough to give us encouragement that many of the strategic items we were hoping for are under way or being set in motion. Aside from the strategic matters, we still see a path to double-digit EPS growth in 2016, which should help drive a further re-rating of shares. Next catalysts would include potential European demand acceleration, evidence that working capital efforts at aerospace are driving up free-cash-flow conversion or a material acquisition. Our target is $125.

THREES

Eaton (ETN:NYSE; $66.70; 900 shares; 2.33%; Sector: Industrials): Shares fell this week on little news. We have always liked Eaton for its fundamentals and secular exposure, but have more recently begun to appreciate its increasingly generous capital allocation strategy. Last month, Eaton’s board of directors declared a 12.2% increase in the quarterly dividend, to 55 cents per share from 49 cents. This takes the company’s implied annual yield to 3.1% from 2.75%. We are encouraged by this sizable increase, and appreciate the company’s focus on capital returns. We continue to view the shares positively given the company's favorable revenue mix exposure, strong cash flow that supports continued de- leveraging and potential valuation improvement, and cash redeployment optionality beginning in mid-2015. We believe the company has favorable revenue mix exposure based on an expectation that approximately 60% of ETN’s revenues will realize positive end-market demand momentum for the next few years (majority of its vehicle business, U.S. construction and aerospace), 30% flat with potential future growth (datacenter, utility and portions of industrial electrical exposure) and 10% exposure to declining markets in hydraulics.

Walgreens Boots Alliance (WBA:Nasdaq; $85.29; 375 shares; 1.24%; Sector: Healthcare): Shares fell this week in sympathy with the market. The potential to unlock value at WBA through a large sale-leaseback of company- owned stores and the closing of underperforming stores seems to be gaining some momentum in the market recently. We’ve explored each potential catalyst in detail and conclude that dramatic action is probably unlikely. While the company owns 20%+ of its real estate, a sale- leaseback may not be value-added enough to warrant pursuing. We do believe WBA has a large number of underperforming stores (probably more than the market appreciates), but addressing this issue is complicated and simply closing stores may not be the best answer. In the end, we would be surprised to see any type of real estate restructuring become a major component of the company's turnaround plan.

Regards,

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

DISCLOSURE: At the time of publication, Action Alerts PLUS was long AAPL, CSCO, DOW, ETN, FB, GM, GOOGL, HYH, KMI, LOW, LULU, MA, MRK, MS, RDS.A, RHT, SBUX, SLB, STI, TGT, TMO, TWTR, UTX, WBA, WFC and WWAV.

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Stocks we would buy right now

Symbol % Portfolio
Weighting
Industry Trade Now
CSCO 2.90% Computer Hardware
DOW 4.74% Chemicals
HYH 4.29% Health Services
KMI 3.85% Energy
LOW 3.44% Retail
LULU 4.50% Consumer Non- Durables
MA 3.73% Financial Services
MS 4.46% Financial Services
RHT 4.46% Computer Software & Services
SLB 2.92% Energy
STI 2.37% Banking
TGT 5.39% Retail
TMO 4.16% Health Services
TWTR 2.72% Internet
WFC 6.31% Banking
WWAV 3.69% Food & Beverage

Stocks we would buy on a pullback

Symbol % Portfolio
Weighting
Industry Trade Now
AAPL 3.93% Consumer Durables
FB 4.21% Internet
GM 4.50% Automotive
GOOGL 3.25% Internet
MRK 3.48% Drugs
RDS.A 3.88% Energy
SBUX 1.85% Leisure
UTX 1.82% Aerospace/ Defense

Stocks we would sell on strength

Symbol % Portfolio
Weighting
Industry Trade Now
ETN 2.33% Industrial
WBA 1.24% Retail

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