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Jim Cramer's Action Alerts PLUS

Weekly Roundup

By Jim Cramer and Jack Mohr | 04/17/15 - 05:43 PM EDT

The market ended a volatile week in the red, as renewed concerns around Greece as well as an early rate hike domestically pushed stocks lower across the board. U.S. Treasury yields inched lower, gold traded flat 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.

First-quarter earnings this week were in strong form, with 72% of companies surprising to the upside, which, while impressive, is below the 77.5% beat rate at this point in earnings last quarter.

Within our portfolio, we saw strong 1Q’15 results from Wells Fargo (WFC:NYSE), Kinder Morgan (KMI:NYSE) and Schlumberger (SLB:NYSE). Wells kicked off the week with a strong top- and bottom- line beat which, while impressive, was dampened by a miss on the net interest margin line. We would note that a 9% influx in deposits drove the miss, which we believe will self-correct itself once interest rates rise. Kinder Morgan reported a strong quarter, with earnings per share (EPS) and distributable cash flow both relatively in line. More importantly, the company reiterated its budget, $2.00 targeted dividend in 2015 (15% y/y increase) and planned 10% dividend CAGR through 2020. Schlumberger topped off the week, reporting EPS of $1.06 vs. $0.91 consensus, with the beat primarily driven by higher margins. In our view, the results send a loud and clear message as to why SLB trades at a premium to peers.

On the economic side, retail sales rose in March for the first time since November as consumers stepped up purchases of automobiles and other goods, suggesting that a sharp slowdown in American economic growth in the first quarter was temporary. According to the Commerce Department, retail sales increased 0.9% in March, the largest gain since the same month last year and snapped a three-month streak of declines that had been attributed to harsh winter weather. With savings at their highest level in over two years, thanks to a tightening labor market and cheaper gasoline, there is great potential for consumers to bolster spending in the months ahead and cushion the economy against the strong dollar. Sales were buoyed by a 2.7% rise in automobile sales, the biggest increase since March 2014.

Separately, the Labor Department said Tuesday its Producer Price Index (PPI) for final demand increased 0.2% last month, with rising prices for goods accounting for over half of the increase. In the 12 months through March, producer prices fell 0.8%, the biggest year-on- year decline since the revamped series started in 2009. Low inflation and signs of a sharp slowdown in economic growth in the first quarter have prompted most economists to push back their expectations for the first Federal Reserve rate increase to either September or October, rather than June. Others say they believe the central bank will not tighten monetary policy until 2016.

On Wednesday, the Mortgage Bankers Association reported that mortgage applications decreased 2.3% from the prior week as interest rates ticked up slightly. It is important to note that purchase volume remains 7% above last year’s level, and has been up on a year over year basis for six consecutive weeks. Tight credit continues to hold back the mortgage purchase business. The problem, many believe, stems from regulations around income and appraisals.

Also on Wednesday, the Fed reported that U.S. industrial production output decreased 0.6% in March and posted the first quarterly decline since the recession ended, signs that a retrenching domestic oil industry and stronger dollar are limiting production. For the first quarter of 2015, industrial production declined at an annual rate of 1%, marking the first quarterly decrease since the second quarter of 2009. The decline resulted from a drop in oil and gas well drilling and servicing, as well as a 1.2% decrease in manufacturing production.

On Thursday, the Commerce Department indicated that U.S. housing starts rose 2% to from a month earlier to 926,00, falling short of economist expectations for 1.04 million units, suggesting the economy could struggle to rebound from a soft patch hit in the first quarter.

Also on Thursday, the Labor Department reported that initial jobless claims -- a proxy for layoffs across the U.S. -- climbed 12,000 to a seasonally adjusted 294,000 in the week ended April 11, coming in well above economists’ expectations for 280,000. Jobless claims have been choppy this spring, hitting a 15-year low last month before picking up. Still, they are hovering around levels posted during the mid-2000s’ economic expansion. That suggests that while economic growth has cooled in recent months, the labor market remains stable and companies continue to expand.

On Friday, the Labor Department reported that the consumer price index (CPI) rose 0.2% in March, in line with economist expectations. Rising gas prices in the month drove the slight increase in inflation, a sign that some of the broader economic impact from cheaper oil is fading. Outside food and energy, core prices also rose 0.2% in March. The cost of clothes, housing, cars, and medical care increased, while food and airfare decreased. Core prices have risen 1.8% in the past year.

Beyond the U.S., on Wednesday China announced that its economy grew by 7% in the first quarter of 2015, its lowest rate since the 6.6% recorded in the first three months of 2009. Analysts are divided over whether China is poised for a so-called hard landing as it seeks to rebalance its economy towards consumer-driven growth after the credit-fueled, investment-led recovery following the recession of 2008-09. The Chinese stock market is another story entirely, as the market has doubled and leverage has increased 300% y/y. Even more daunting, it was recently reported that 4 million trading accounts were opened in China in March alone, pointing to a potential bubble down the road. That being said, reports surfaced on Friday that Chinese regulators will begin cracking down on over-the-counter margin trading and regulations that allow fund managers to lend shares for short-selling. In fact, global markets sold off on the reports on the view that tighter regulation would limit the recent influx of money into China’s Shanghai Composite and Hong Kong’s Hang Seng.

With respect to our portfolio, this week we initiated a new position in Actavis (ACT:NYSE) with a $350 price target. Actavis is a global, integrated specialty pharma company focused on developing, manufacturing and distributing branded, generic, and biosimilar products. The company is one of the largest and most successful players in the generics market and its recent acquisition of Allergan provides another leg of growth. We believe Actavis has a good mix of growth drivers (brand, generic, biosimilar), diversity, the scale to help weather industry pressures, and a strong and shareholder-friendly management team to drive value. While the company is well positioned for organic growth and does not need deals to grow from here, we expect management to continue to be active on the business development front with the help of its efficient tax structure. We added further to our position later in the week on weakness.

Also this week, we added to Panera Bread (PNRA:Nasdaq), Morgan Stanley (MS:NYSE), Twenty-First Century Fox (FOXA:Nasdaq) and WhiteWave (WWAV:Nasdaq) while trimming our position in both Royal Dutch Shell (RDS.A:NYSE) and lululemon (LULU:Nasdaq). We added to Panera given our high level of conviction, Morgan Stanley following JPMorgan Chase's (JPM:NYSE) strong results and WhiteWave/21st Century Fox on sharp weakness. We trimmed Royal Dutch given a lack of near-term catalysts and lululemon to take profits on huge double digit gains.

First-quarter earnings season continued this week and over 5% of the S&P 500 has now reported. First-quarter earnings within the S&P 500 are expected to decline 3.2% year over year, which would mark the first decline in quarterly earnings since the third quarter of 2009.

Six of 10 S&P sectors are expected to show positive earnings growth in Q1, with financials (14.5%), health care (10.2%) and consumer discretionary (7.1%) expected to lead. The decline in the energy sector (-65.6% expected) earnings will weigh most heavily on the Index, with materials (-6.7%), utilities (-5.1%), telecommunications (-2.9%) and consumer staples (-0.8%) following. This is the first time since 2009 that five sectors of the S&P 500 were expected to report earnings declines in a given period.

Next week, 29% (143 companies) of the S&P 500 is set to report earnings. Key reports are: Morgan Stanley, United Technologies (UTX:NYSE), Thermo Fisher Scientific (TMO:NYSE), Facebook (FB:Nasdaq), Dow Chemical (DOW:NYSE), General Motors (GM:NYSE), Google (GOOGL:Nasdaq), Halliburton (HAL:NYSE), Starbucks (SBUX:Nasdaq), Hasbro (HAS:Nasdaq), Fortinet (FTNT:Nasdaq), IBM (IBM:NYSE), Baker Hughes (BHI:NYSE), Canadian Pacific (CP:NYSE), Credit Suisse (CS:NYSE), DuPont (DD:NYSE), Brinker (EAT:NYSE), Lockheed Martin (LM:NYSE), Manpower (MAN:NYSE), Verizon (VZ:NYSE), Under Armour (UA:NYSE), Chipotle (CMG:NYSE), Gilead (GILD:Nasdaq), Broadcom (BRCM:Nasdaq), Amgen (AMGN:Nasdaq), Yahoo! (YHOO:Nasdaq), Yum! Brands (YUM:NYSE), AutoNation (AN:NYSE), Bank of New York Mellon (BK:NYSE), Coca-Cola (KO:NYSE), McDonald’s (MCD:NYSE), eBay (EBAY:Nasdaq), Skechers (SKX:NYSE), Qualcomm (QCOM:Nasdaq), 3M (MMM:NYSE), Dr Pepper Snapple (DPS:NYSE), Hershey Foods (HSY:NYSE), PepsiCo (PEP:NYSE), Amazon (AMZN:Nasdaq), Hanesbrands (HBI:NYSE), Microsoft (MSFT:Nasdaq), Pandora (P:NYSE), and Lear (LEA:NYSE).

Walgreens Boots Alliance (WBA:Nasdaq) will be holding its analyst day on Wednesday. Notable conferences include the Wells Fargo Energy Fundamentals Forum, Bank of America Oil & Gas Conference, and the Morgan Stanley REIT Summit.

Economic Data (*all times ET)

U.S.

Monday (4/20)

Chicago Fed National Activity Index (8:30 AM)

Wednesday (4/22)

MBA Mortgage Applications (07:00 AM)

FHFA House Price Index (9:00 AM)

Existing Home Sales (10:00 AM)

EIA Petroleum Status Report (10:30 AM)

Industrial Production MoM: (09:15): -0.2% expected

Thursday (4/23)

Initial Jobless Claims (08:30)

PMI Manufacturing Index Flash (9:45 AM)

New Home Sales (10:00 AM)

EIA Natural Gas Report (10:30 AM)

Friday (4/24)

Durable Goods Orders (8:30 AM)

International

Monday (4/20)

German PPI MoM (02:00 AM)

Tuesday (4/21)

German Economic Sentiment Index (05:00 AM)

Japan Leading Compositive Index Final (01:00 AM)

Japan Exports YoY (07:50 PM)

Wednesday (4/22)

China Manufacturing PMI (09:45 PM)

Thursday (4/23)

Germany Consumer Confidence (02:00 AM)

German PMI (03:30 AM)

Friday (4/24)

Japan All Industry Activity Index MoM (12:30 AM)

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

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

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

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

ONES

Actavis (ACT:NYSE; $297.05; 275 shares; 3.13%; Sector: Health Care): We initiated a new position in Actavis this week and then added to our holdings on weakness. Actavis is a global, integrated specialty pharma company focused on developing, manufacturing and distributing branded, generic, and biosimilar products. The company is one of the largest and most successful players in the generics market and its recent acquisition of Allergan provides another leg of growth. We believe Actavis has a good mix of growth drivers (brand, generic, biosimilar), diversity, the scale to help weather industry pressures, and a strong and shareholder-friendly management team to drive value. While the company is well positioned for organic growth and does not need deals to grow from here, we expect management to continue to be active on the business development front with the help of its efficient tax structure. Our target is $350.

Cisco Systems (CSCO:Nasdaq; $27.92; 2,750 shares; 2.95%; Sector: Technology): The shares essentially traded flat this week on little news. William Blair did publish a note on Friday morning citing upbeat channel commentary fueled by unified computing system (UCS) strength and product cycles. The firm noted that recent discussions with enterprise resellers across North America and Europe point to relative strength in spending on Cisco gear, driven by UCS share gains, product refreshes across multiple product categories (against an aging installed base), competitive momentum for Meraki, and easy comparisons vs. last year. While roughly two weeks remain in the April quarter, we believe Cisco is in good shape to meet or beat consensus estimates for its fiscal third quarter, which calls for revenue growth of 4% y/y and earnings per share of $0.53. We recognize some pressure on international demand from the strong dollar, but believe the market has more than priced this in to the stock. Our target is $33.

Dow Chemical (DOW:NYSE; $49.66; 2,550 shares; 4.86%; Sector: Materials): The shares charged higher this week in sympathy with oil’s rebound. Credit Suisse published a note on Wednesday recapping its conversations with Dow AgroSciences' CEO Tim Hassinger, indicating that CS has a better appreciation for the opportunities Dow has in the Ag business as well as the near-term challenges for Dow and the industry. According to CS, Dow’s pipeline of new products, in both seed and Ag chemicals, should help to drive robust growth over the long term and ultimately help toward reaching the company's goal of $1 billion of incremental EBITDA over the next five to seven years. Management did note that while the longer-term opportunities appear solid, near- term industry headwinds exist, led by FX, inventory issues and some minor trading down in seed. Despite challenges, continued new product adoption and modest portfolio competitive advantages should allow the company to modestly outperform the market. In our view, while some of Dow’s expectations may be a bit optimistic, the long-term outlook for its Ag platform is solid. With that in mind, and considering solid near-term fundamentals, we continue to believe that DOW will outperform the broader chemical space throughout the balance of 2015. Our target is $60.

EOG Resources (EOG:NYSE; $97.23; 500 shares; 1.87%; Sector: Energy): The shares moved higher in sympathy with oil. Last week, we initiated a new position in EOG. Few companies, if any, have benefited more from the U.S. shale revolution than EOG, which has been a leader in discovering and exploiting unconventional oil plays. Being at the leading edge in exploration expertise has enabled the company to build large- scale, core acreage positions at attractive costs in the two largest unconventional oil plays in the U.S. (Eagle Ford and Bakken). Capturing the core, maximizing recoveries with innovative completion techniques, and proactively managing cost and marketing logistics has allowed EOG to deliver leading oil production growth and returns on capital employed among exploration and production companies (E&Ps). EOG is the best-in-class U.S. conventional oil E&P, bar none. In our view, the company can continue to deliver leading oil growth and return on common equity (ROCE) in the large-cap E&P space, and its resource base will continue to be upgraded in the company’s three core oil plays -- Eagle Ford, Bakken, and Permian. In particular, we believe EOG’s risked high- return Eagle Ford inventory can drive impressive long- term oil growth, while generating a sizeable, increasing wedge of free cash flow. In terms of upgrading its resources, we expect both Bakken estimated ultimate recovery (EUR) and locations to go higher, along with upward revisions to the company’s Wolfcamp inventory, and continued movement of Eagle Ford locations into the high- return category. Finally, we find the valuation reasonable, with the shares trading near historical multiples and possessing several levers for upside. Our target is $110.

Halyard Health (HYH:NYSE; $48.51; 2,300 shares; 4.28%; Sector: Health Care): The shares gave back some gains this week on no news. We note that our thesis was emboldened by the company’s strong earnings results last 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 EPS forecast fell a bit short of Wall Street expectations. We think 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). 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; $43.90; 2,400 shares; 4.04%; Sector: Energy): On Wednesday, Kinder Morgan reported its 1Q’15 results, delivering $1.24 billion in distributable cash flow (or $0.58/share), matching company guidance. Consolidated EBITDA of $1.86 billion was in line with Wall Street expectations and EPS of $0.22 fell a penny short. As we expected, the company reiterated its budget, $2.00 targeted dividend in 2015 (having raised its quarterly dividend 14% to $0.48), and planned 10% dividend CAGR through 2020. The company reported $18.3 billion in backlog which, while slightly below expectations, is still quite strong relative to peers. All in, we liked the quarter and continue to view KMI as a core midstream holding based on its size, geographic footprint, diversified asset base, proven track record, investment-grade balance sheet, demonstrated access to capital, and strong management. KMI’s dividend growth over the next few years is likely to be sustained by a healthy slate of organic growth projects across the Kinder complex. In addition, KMI is in a strong position to act as a consolidator in the midstream area given its competitive cost of capital. Our target is $50.

Lowe’s (LOW:NYSE; $72.55; 950 shares; 2.64%; Sector: Consumer Discretionary): The shares fell this week despite receiving a convincing upgrade from Piper Jaffrey. The analysts upgraded LOW to "Overweight" and raised their price target to $88 based on what they see as a confluence of sales tailwinds: 1) homeowner remodeling activity accelerating; 2) housing turnover picking up; and 3) earlier spring weather. While Piper is admittedly late to the party, they expect LOW shares to be a healthy relative outperformer within their coverage group over the next 12 months and believe the current valuation is reasonable at 22x NTM EPS when compared against peers with a much slower EPS growth profile. We echo the analysts’ sentiment and have been arguing the same thesis for several months. Our target is $80 target.

lululemon athletica (LULU:Nasdaq; $66.70; 570 shares; 1.46%; Sector: Consumer Discretionary): The shares gave back some gains this week after surging nearly 10% last week after analysts at Sterne Agee upgraded the stock to "Buy" from "Neutral" and set a $77 price target following meetings with new CFO Stuart Haselden. The upgrade was grounded in their belief that 2015 investments should pay off more than anticipated in 2016, and perhaps as early as the fourth quarter of this year. The analysts expect new systems and processes will enable the company to improve execution across the board. The upgrade was especially important considering analysts at Sterne Agee had -- as recently as March 26 –- been highlighting a variety of concerns around LULU, including long-term margin opportunities, the payoff from needed investments and increased competition. Their tone has completely changed since meeting with Haselden, however, as they regained confidence that ongoing margin and sales growth is not only the new norm but set to accelerate in 2016 and beyond. The analysts also pointed to supply chain improvements and a new merchandise planning system as margin and sales drivers in the years to come. Overall, we agree with Sterne Agee’s new thesis and would remind subscribers that we have been saying the same all along. Our target is $80.

MasterCard (MA:NYSE, $86.93; 1,350 shares; 4.50%; Sector: Financials): The shares retreated this week on little news. We are bullish ahead of the company’s 1Q’15 results as we expect continue strong local currency fundamentals. In addition, we believe an improving European macro backdrop and continued European processing market-share gains will be meaningful growth tailwinds over the near- to medium-term. We do acknowledge FX headwinds but believe the market will be able to look past that and recognize just how strong the fundamentals continue to be. Our target is $95.

Morgan Stanley (MS:NYSE; $36.75; 3,050 shares; 4.30%; Sector: Financials): The shares moved higher this week following strong bank earnings. We added to our position Tuesday following JPMorgan Chase’s (JPM) impressive results, in which they delivered EPS of $1.45 vs. consensus of $1.39. Notably, investment banking fees rose by a better-than-expected 26% y/y, driven by robust advisory fees (+42%). Issuance was also strong, with debt capital markets up 16% y/y and equity capital markets up 13%. Trading revenue rose 20%, with fixed income up 5% and equities up 22%. JPM’s results, particularly its investment banking performance, further solidify our confidence in Morgan Stanley. Our target is $44.

Panera Bread Company (PNRA:Nasdaq; $182.77; 725 shares; 5.08%; Sector: Consumer Discretionary): The shares surged 10% this week after the company announced Wednesday that it is raising its share repurchase program to $750 million in a highly accretive and bold move by management to reward shareholders for their patience. The $750 million in forthcoming share repurchases represents 17% of the company’s market cap, placing Panera in a league of its own as it relates to capital returns. The company expects to purchase $500 million of shares (11.5% of market cap) within the next 12 months, through a combination of cash on hand, cash flow from operations, and $500 million of new debt, intelligently taking advantage of the attractive current interest rate environment. In all, we applaud Panera’s management team, as they have now convincingly demonstrated to investors that they are here to drive enhanced value and shareholder returns. The timing couldn’t have been better, as we had been aggressively building up the position over the past several weeks and even added 75 shares earlier in the week. We have timed this trade perfectly, selling out before the company’s negative guidance in February and getting back in near 52-week lows. We raise our target following this week’s news to $225.

Red Hat (RHT:NYSE; $73.93, 1,100 shares; 3.12%; Sector: Technology): The shares traded down this week on no news. Last week, analysts at J.P. Morgan, after surveying 31 Red Hat partners, indicated that the company’s OpenStack business could more than double over the next three years. The firm believes RedHat OpenStack is positioned to become a couple-hundred-million dollar business in the next few years, likely equating to a market leadership position. J.P. Morgan raised its price target for the shares to $82 from $80 and reiterated an "Overweight" rating. Our target is $85.

Schlumberger (SLB:NYSE; $92.86; 1,200 shares; 4.28%; Sector: Energy): The shares moved higher this week following strong results. On Thursday, Schlumberger reported 1Q’15 EPS of $1.06 vs. $0.91 consensus, with the beat primarily driven by higher margins, offsetting revenue, which was 1.6% lower than expected. EBITDA also came above consensus, beating by 5%. In our view, the results send a clear message as to why SLB trades at a premium to peers. 1Q’15 was a particularly difficult period for the industry given the sharp decline in E&P spending, especially in North America. SLB’s North America (NAM) revenues fell roughly in line with consensus but margins came in at 13%, nearly double consensus at 7%. This is particularly impressive considering the general expectation that margins would be materially worse during this cycle. While International revenues fell 3% short of consensus, margins came in well ahead -- at 24.1% vs. 22.5% -- and were down a mere 100 basis points from the previous quarter. Management cited cost reductions and an acceleration of its transformation program as the primary drivers of the strong margin outperformance. This includes a plan to reduce the workforce by a further 11,000, leading to a total reduction of 20,000 (15% relative to the peak in 3Q’14). However, it is not clear if the headcount reductions have been completed, which of course begs the question of how much is left to go with the transformation program. All in all, the results are quite impressive and could suggest trough EPS 20%-25% above the prior downcycle. Management’s commitment to maintain international revenues and margins makes us even more bulled up as we head into the balance of the year. We remain very confident in our SLB position, as we believe companies that focus on maximizing well efficiency (rather than discovering new wells) will outperform. In the current environment, as this week's results proved, productivity and efficiency are much more powerful forces than expedience. Our target is $105.

Target (TGT:NYSE; $80.02; 1,700 shares; 5.22%; Sector: Consumer Discretionary): The shares moved sharply lower this week on little news. The company did, however, reach a settlement with MasterCard (MA) to resolve claims related to the retailer’s 2013 data breach. Under the agreement, Target will make available up to $19 million in alternative recovery offers to eligible banks and credit unions across the globe. These funds will settle their claims for operational costs and fraud-related losses. We are encouraged by this development and believe the lion’s share of the overhang has been removed. We reiterate our $90 target.

Thermo Fisher Scientific (TMO:NYSE; $132.10; 800 shares; 4.06%; Sector: Health Care): The shares traded lower this week on little news. While bigger is not always better, Thermo Fisher continues to strengthen its competitive position by broadening its product portfolio organically and through acquisitions. The acquisition of Life Technologies fills a number of gaps for Thermo and underscores the firm’s desire to meet its clients’ every need in order to garner a larger share of wallet. We are wary of growth-by-acquisition firms, but TMO has a knack for delivering revenue synergies as well as integrating acquired businesses smoothly into its massive global operations. That said, the firm’s returns on invested capital have yet to exceed its cost of capital, mainly because of its acquisition strategy. The firm has steadily gained market share despite challenging conditions over the past few years mainly due to its one- stop shop strategy, which affords it pricing flexibility and strong customer relationships. The company finds a receptive audience with large pharma clients, which see sizable benefits in the simplified procurement process Thermo Fisher offers. As a result, the firm’s penetration of pharma continues to expand, providing revenue growth in an otherwise stagnant research spend environment. The firm’s emerging markets presence is also impressive, and growing rapidly. The company significantly expanded its manufacturing footprint in these areas, which allows it to compete effectively with indigenous manufacturers, and its brand carries great power among the researchers. The firm’s efforts have yielded organic market share gains, but its core strategy remains growth through acquisitions. The Life deal will be ultimately judged on the firm’s ability to extract operating synergies (which has been its modus operandi with all large deals), but also the success of Next Gen Sequencing (NGS), which is, in our opinion, a multi-billion dollar opportunity. Our target is $160.

Twenty-First Century Fox (FOXA:Nasdaq; $34.43; 2,900 shares; 3.72%; Sector: Consumer Discretionary): The shares fell in concert with the market this week on little news. We believe the company enjoys strong competitive advantages based on its worldwide cable networks, along with its film and television studios. The filmed entertainment segment generates a number of hit television programs and movies annually. Its studios currently produce 70% of the prime-time slate on Fox and the majority of the original programming on its cable channels, while also creating programs for other networks, such as Modern Family on ABC. The critical acclaim for the studio’s content, along with its willingness to place shows on the right outlet, creates a virtuous cycle that retains the creators of the studio’s hit shows and attracts new creators to the platform. The Fox broadcast network provides the company with an important platform for showcasing content as broadcasters are the only outlet to reach almost all 116 million households in the U.S. The network holds the rights for the NFL, college football, MLB and a medley other sports. We believe that the combination of original programming and exclusive sports rights will allow Fox to sharply increase its revenue from retransmission fees and reverse compensation in the near future. Our target is $42.

Twitter (TWTR:NYSE; $50.66; 1,400 shares; 2.72%; Sector: Technology): The shares traded lower this this week on little news and reports earnings in two weeks. We see little that gets in the way of the company’s efforts to capture growing budgets from its advertisers. The tripling of spending on Twitter during 2014 over 2013 reflected the traction the site is having with large brands and the heightened reliance the company has on this segment of advertisers. However, it also serves to highlight that there is opportunity as Twitter evolves its offerings for small businesses and performance-based marketers as well. Revenue growth should continue at a rapid pace, with guidance (and consensus) both quite beatable. Our target is $55.

Wells Fargo (WFC:NYSE; $54.05; 3,000 shares; 6.22%; Sector: Financials): The shares traded sideways this week after reporting a solid quarter, delivering 1Q’15 EPS of $1.04 vs. $0.98 Thomson Reuters consensus and revenues of $$21.3 billion vs. $21.24 billion consensus. The bank also posted an efficiency ratio of 58.8% vs. 58.0% consensus; average loans increased 5% to $863.3 billion. Investors will get picky around WFC’s net interest margin, which declined 9 basis points to 2.95% vs. 3.00% consensus, but we would note that this decrease was primarily driven by 9% growth in customer deposits. We appreciate just how clean of a quarter Wells reported. Net charge-offs of $708 million were $40 million below consensus, indicating that the quality of the company’s books is rapidly improving (from an already healthy base). Even more, nonperforming assets declined $618 million, or 16%, from the prior quarter, and early-stage delinquencies dropped. The amount of loans 90 days or more past due is now a mere $841 million, representing an 11% y/y decline. Wells Fargo is a core holding, and we continue to see the bank as a very strong beneficiary of higher interest rates, with a growing pool of zero interest-paying deposits that represents roughly 40% of the current loan base -- deposits that cost the same to service whether interest rates are 0% or materially higher. Furthermore, so long as housing and home purchase activity remain healthy, we expect underlying mortgage market dynamics to be a positive for the balance of 2015. Our target is $63.

WhiteWave Foods (WWAV:NYSE; $45.98; 2,500 shares; 4.41%; Sector: Consumer Staples): The shares gave back gains this week on no news. Last week, analysts at Argus raised their price target on WhiteWave to $55 from $49 as the firm expects the company to beat its 2015 EPS guidance, driven by market share gains in Europe and wider distribution of several of its key products. The firm expects the company’s growth to enable it to outperform its peers. In our view, 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 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; $124.75; 820 shares; 3.93%; Sector: Technology): The shares traded lower this week, although the Apple Watch got off to a strong start last weekend, with roughly 1 million consumers pre-ordering the smartwatch on Friday alone, according to data compiled by Slice Intelligence. On average, customers ordered more than one watch (1.3), spending an average $503.83 a watch, with roughly 62% purchasing the less-expensive Sport model. We are encouraged by the initial demand and believe the Watch will quickly become embedded within Apple’s already-robust ecosystem. Given Apple’s powerful iPhone cycle, the momentum we see around the iPhone in China, and the launch of the Apple Watch, we believe there is still plenty to look forward to at Apple during this transformational cycle. At the same time, we believe Apple’s valuation has room to expand from depressed levels (10x FY’16 EPS estimates, ex-cash) and reiterate our $150 target.

Facebook (FB:Nasdaq; $80.78; 1,300 shares; 4.03%; Sector: Technology): The shares fell this week ahead of next week’s results (4/22). We expect Facebook to report results above consensus expectations on continued advertising momentum, specifically driven by strong user engagement, continued advertiser adoption and pricing gains based on improved targeting and to a lesser extent, video. Specifically, we will be watching for: 1) overall advertiser demand as manifested through advertising revenue and pricing growth; 2) engagement trends across Facebook’s properties; 3) with 3+ billion video views per day, we will be listening for the impact on both engagement and monetization; 4) an update on Facebook’s app strategy around Instagram, WhatsApp, and Oculus; and 5) EBITDA margins and cash operating growth guidance. Our target is $90.

General Motors (GM:NYSE; $36.64; 3,100 shares; 4.36%; Sector: Consumer Discretionary): On Wednesday, Reuters reported that a U.S. bankruptcy judge has ruled that General Motors can keep its bankruptcy shield, which allows it to block potentially billions of dollars in legal claims by hundreds of customers seeking damages over a defective ignition switch. The judge handed down a dense ruling saying he could not find any instances where GM had committed fraud upon the court when it was going through the bankruptcy process. This is key. The shield prevents customers from suing for compensation for declining resale values and injuries tied to older GM compact cars that were equipped with the defective ignition switch. We are obviously happy to see this clear overhang not only removed, but removed without any damages. GM is now fully protected against the pre-2009 claims and as a result will avoid billions of dollars of legal costs. Even more, GM will no longer have to expend its energy and resources toward fighting the hundreds of claims, which is not only exhausting, expensive and time- consuming but very detrimental to the company’s brand/perception. Our target is $45.

Google (GOOGL:Nasdaq; $532.74; 150 shares, 3.07%; Sector; Technology): The shares traded lower this week after the EU’s Competition Commissioner, Margrethe Vestager, formally charged the company with violating the European Union's antitrust laws by “abusing its dominance in web searches to the detriment of competitors.” The suit would become the biggest competition battle in the EU since its antitrust crusade against Microsoft (MSFT) a decade ago. We believe Google has a very strong defense against the EU’s allegations. For starters, people have more search choices than ever before. There are a bevy of search engines including Bing, Yahoo, Quora, DuckDuckGO and a new wave of search assistants like Apple’s (AAPL) Siri and Microsoft’s Cortana. Plus, there are a ton of specialized services like Amazon, Idealo, Le Guide, Expedia or eBay that facilitate the shopping experience. Second, many of the complainants have alleged that Google’s practice of including specialized results (Flight Search, Maps, Local results, etc.) in search has significantly harmed their businesses. However, their traffic, revenues and profits tell a very different story (over the last four years, Yelp (YELP) has seen 350% revenue growth, TripAdvisor (TRIP) has doubled its revenues and Expedia (EXPE) has grown revenues 67%). Google’s playing field is filled with innovation, new entrants, investments and competition. There is clearly not one dominant player, and we believe Google will at the very least be able to reach a reasonable settlement. Our target is $600.

Merck (MRK:NYSE; $56.88; 1,950 shares; 4.26%; Sector: Health Care): The shares traded lower this week but outperformed the market. On Tuesday, the FDA Endocrinologic and Metabolic Drugs Advisory Committee voted (13-1-1) that AstraZeneca’s (AZN) Onglyza has an acceptable CV safety risk profile and to change the product labeling to reflect the increased risk of heart failure (HF) found in SAVOR without taking more severe measures. Overall, we see this as a positive for Merck heading into the TECOS Januvia data at the American Diabetes Association (ADA) annual meeting. While the FDA remains vigilant on any potential safety signals for the class, we see the panel recognizing the limits of the data and emphasizing the benefit that the DPP-4 class brings to the larger diabetic population (i.e., beyond the severe patient population studied in SAVOR). Our target is $65.

Starbucks (SBUX:NYSE; $47.62; 1,000 shares; 1.83%; Sector: Consumer Discretionary): The shares were relatively muted this week. Analysts at BMO Capital Markets did initiate coverage on the name with an "Outperform" rating and $56 price target, arguing that SBUX is an attractive long-term investment opportunity and uniquely positioned within large-cap restaurants given the litany of growth opportunities available to a concept of its size and scale. The analysts forecast reliable multi-year earnings growth at least in line with its 15%-20% long-term growth algorithm. Plus, with a footprint of more than 21,000 stores globally and revenue of more than $16 billion, the company is in the early days of a strategy aimed at diversifying its business model across geographies, channels, food/beverage mix, and day parts, with a goal of nearly doubling sales and fully doubling operating income over the next five years. All in, the analysts believe SBUX can capitalize on its long-term growth potential as it leverages its 1) brand equity across regions and channels; 2) industry-leading innovation, marketing, loyalty program, and digital capabilities; and 3) existing retail size and scale. Our target is $50.

United Technologies (UTX:NYSE; $115.11; 175 shares; 0.77%; Sector: Industrials): The shares traded lower this week on no news. We would remind investors that 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 program. Overall, while organic trends have started the year a little sluggish (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. The 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; $69.11; 600 shares; 1.59%; Sector: Industrials): The shares traded essentially flat this week on no news. Last week, analysts at Wells Fargo (WFC) conducted channel checks of 30 U.S. industrial product distributors that sell ETN fluid power products (i.e., hydraulics, pneumatics, etc.) to determine whether March demand compensated for a weak start to 2015. The checks suggest trends were less bad in March compared to the end of February, but demand conditions remain sluggish. 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 Eaton'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 (data center, utility and portions of industrial electrical exposure) and 10% exposure to declining markets in hydraulics.

Royal Dutch Shell (RDS.A:NYSE; $62.74; 250 shares; 0.60%; Sector: Energy): We substantially trimmed our position in Royal Dutch this week into strength as we see few catalysts in the near term and find better areas to put our money to work, Last week, BG Group and Royal Dutch Shell announced -- following a leak in The Wall Street Journal -- that BG has agreed to be acquired by Shell in a cash-and-shares transaction. RDS is paying a hefty premium -- 50% above the current BG share price, which would value BG at $70 billion, representing one of the largest oil/gas deals in recent history. Following the deal, we expect that by 2018 Royal Dutch will become the largest publicly traded oil and gas producer at 4.2 million barrels a day, surpassing Exxon Mobil (XOM). We have an increasingly skeptical view on this deal as we try to reconcile the expensive price (the company simply paid too much) with the transformational nature of the assets Shell has acquired. BG provides Shell with a large and lucrative asset base, premium LNG (which is going to be in demand in a major way in Asia) and a chance to get much bigger in Brazil as some say it has the best assets there after the hobbled Petrobas. Our Three rating reflects the potential for a bidding war and the drawn- out nature of any deal this size. We see few catalysts in the near or medium term that could drive upside. Our target is $65.

Regards,

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

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

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Action Alerts PLUS Holdings

Stocks we would buy right now

Symbol % Portfolio
Weighting
Industry Trade Now
ACT 3.14% Drugs
CSCO 2.95% Computer Hardware
DOW 4.86% Chemicals
EOG 1.87% Energy
FOXA 3.72% Media
HYH 4.28% Health Services
KMI 4.04% Energy
LOW 2.65% Retail
LULU 1.46% Consumer Non- Durables
MA 4.50% Financial Services
MS 4.30% Financial Services
PNRA 5.09% Leisure
RHT 3.12% Computer Software & Services
SBUX 1.83% Leisure
SLB 4.28% Energy
TGT 5.22% Retail
TMO 4.06% Health Services
TWTR 2.72% Internet
WFC 6.22% Banking
WWAV 4.41% Food & Beverage

Stocks we would buy on a pullback

Symbol % Portfolio
Weighting
Industry Trade Now
AAPL 3.93% Consumer Durables
FB 4.03% Internet
GM 4.36% Automotive
GOOGL 3.07% Internet
MRK 4.26% Drugs
UTX 0.77% Aerospace/ Defense

Stocks we would sell on strength

Symbol % Portfolio
Weighting
Industry Trade Now
ETN 1.59% Industrial
RDS.A 0.60% Energy

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