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Jim Cramer's Action Alerts PLUS

Weekly Roundup

By Jim Cramer and Jack Mohr | 05/29/15 - 05:47 PM EDT

The market ended a volatile week in the red as disappointing economic news pushed the S&P 500 lower by nearly 1%. Treasury yields slipped, the dollar strengthened slightly against the euro, gold fell, and both West Texas Intermediate (WTI) and Brent crude oil prices ended the week relatively flat.

First-quarter earnings this week were strong, with 62.7% of companies surprising to the upside. We did not have any companies in the portfolio report quarterly earnings this week.

On the economic front, the U.S. Census Bureau reported on Tuesday that new orders for manufactured durable goods in April decreased $1.2 billion, or 0.5%, to $235.5 billion, compared with economists' expectations for a 0.3% decline. Durable goods orders have now been down in two out of the last three months. However, Nondefense Capital Goods Orders excluding Aircraft (otherwise known as “Core Capex” and typically viewed as the headline figure) improved by 1.0%, above expectations for a meager 0.3% increase. Aircraft goods are typically excluded due to their volatile nature.

Core Capex, which is a closely watched proxy for business investment and overall economic activity, has now posted better-than-expected results for two straight months. This is an encouraging sign for overall manufacturing activity, which had been slow in the prior several months, and we are hopeful that the April figure proves that the factory sector is working its way back following the extreme cold weather in the Northeast and the West Coast port disruptions earlier in the year.

The Commerce Department also reported on Tuesday that sales of newly built homes rose 6.8% in March to a seasonally adjusted rate of 517,000 compared with expectations of around 500,000. New-home purchases are now up 26.1%, year over year. Although the increase is encouraging, we note that new-home sales only reflect about 10% of all home purchases, and existing home sales were previously reported to have declined 3.3% last month.

The other important figure worth noting is median home sale prices, which are now up 8.3% from the prior year, indicating the lack of supply in the market and homebuilders' overall pricing power over buyers. Moreover, although the 517,000 annual rate for new-home sales is being viewed as modestly positive, it is still significantly below the 1.4 million peak reached in 2005.

On Thursday, the Labor Department reported that initial jobless claims for the week ending May 23 were 282,000, a 7,000 increase from the prior week's revised number and above expectations of 270,000. The 282,000 figure is the highest in the past five weeks. As a result, the four- week moving average for claims jumped up to 271,500 from 266,500. Claims have now remained under the 300,000 threshold for 12 straight weeks. Continued claims were also reported to have risen slightly (for the week ended May 16, since there is a one-week lag), to 2.222 million from 2.211 million the prior week, above expectations of 2.208 million.

Also on Thursday, the National Association of Realtors reported that the Pending Home Sales Index rose 3.4% in April to 112.4 compared to the final reading of 108.7 in March. The increase is the fourth straight for the index, which is a forward-looking indicator for home sales based on contract signings, and is 14% higher than the reading of 98.6 in April 2014 -- the largest jump, year over year, since September 2012. The index has increased on an annual basis for eight consecutive months now and is at its largest level in the past nine years. All four major regions (Northeast, South, Midwest, West) experienced increases in April, with the Northeast and Midwest leading the charge.

On Friday, the Commerce Department released its second (revised) estimate of first-quarter GDP, which showed the economy contracted by 0.7%, vs. expectations of a 1.0% decline and compared to the initial estimate (released last month) of 0.2% growth (which was well below the initial expectations of 1.0% growth). The Q1 economic shrinkage marks the third time since the recession ended that the U.S. economy has fallen into negative territory.

The decline in real GDP was partly attributed to falling exports, rising imports (which are a subtraction on GDP), subdued inflation (price index for personal consumption expenditures (PCE) fell 2.0% and prices excluding food and energy rose at a decelerating rate of 0.8%), deteriorating final sales (which fell 1.1% -- the biggest drop since Q1 2009) and declining nonresidential fixed investment (which fell 2.8%). In addition, the release showed that personal consumption increased a meager 1.8% for Q1, below the 2% consensus increase and a decrease from the initial 1.9% reading posted last month.

The weakening GDP number certainly highlights economic instability, but also augments the recent questions surrounding the "statistical quirks" in government data that may be contributing to the historically low Q1 GDP figures. Furthermore, expectations are that GDP will increase in Q2 (as it typically does).

On the commodity front, the Energy Information Administration signaled this week that commercial crude oil inventories fell by 2.8 million barrels last week, well above the predicted drop of 1.8 million barrels and compared with the prior report where inventories fell 2.7 million barrels. The fall in crude inventories marks four straight weeks of declines. The overall number stands at 479 million barrels (as of last week), down from 482 million barrels from the prior report. That being said, oil inventories are still at 80-year highs for this time of year. Domestic production, however, spiked to its all- time high, hitting 9.566 million barrels per day.

In response, oil prices (WTI) remained volatile throughout this week, closing down on Tuesday and Wednesday before finally edging higher on Thursday, when they closed up 0.3% at $57.68 after registering a one- month low of $56.51 earlier in the day. On Friday, WTI continued its surge higher towards the $60 threshold in response to a fade in the dollar and ahead of the highly anticipated drilling data. Though the oil-rig count has declined at a rapid pace in recent months, it fell by just one rig last week, igniting conjecture that the count is nearing a bottom. An increase in rigs and a rebound in the dollar could add renewed pressure on WTI prices.

With respect to our portfolio, this week we initiated a position in both Johnson & Johnson (JNJ:NYSE) and Occidental Petroleum (OXY:NYSE); added to our holdings in Starwood Hotels & Resorts Worldwide (HOT:NYSE) and Halyard Health (HYH:NYSE); trimmed Twenty-First Century Fox (FOXA:Nasdaq); and closed out of Kinder Morgan (KMI:NYSE) and Merck (MRK:NYSE).

On Johnson & Johnson, we find the shares extremely attractive at current levels given robust near- and long- term growth prospects, balance sheet optionality, a compelling sum-of-the-parts and fundamental valuation, an attractive yield (about 3%) and, finally, downside support with the bear thesis well understood. In addition, we believe the pharma business has both near- and long-term growth drivers. For starters, near-term outlook appears strong, absent earlier-than-expected generic competition for its high-profile drug Remicade (9% of total sales), as a generic version of Remicade is at least 12-18 months away.

A longer-term catalyst for JNJ shares, in our view, is the more aggressive use of the company's balance sheet. We would expect JNJ to look at assets in the following therapeutic categories: 1) infectious disease; 2) oncology; 3) neuro (depression, schizophrenia and Alzheimer's); and 4) metabolic (cardio and diabetes). From a fundamental valuation perspective, we get to a $120 price target by applying a price-to-earnings (P/E) multiple of 18.5x 2016 estimated company-wide EPS of $6.35, which seems fair given the high-single-digit plus long-term earnings growth outlook.

We also initiated a position in Occidental Petroleum, which is an international oil and gas exploration and production (E&P) company that holds a net proved reserves base of about 2.8 billion oil-equivalent barrels with operations spanning across the U.S., the Middle East and Latin America. Our bull thesis is predicated on the company's leading position in the Permian Basin. The company also has a streamlined portfolio, with a nice mix of both stable and growth assets. In addition, it has an attractive yield (4%), strong FCF generation and a best- in-class balance sheet (lowest leverage and highest dividend coverage vs. peers).

We added to Halyard Health below our cost basis as we are still confident in the company's vision and long-term prospects and the shares have fallen in dramatic fashion over the past several weeks despite no incremental news. We believe the selloff was driven by one or two large holders exiting their positions, given the company's small market cap and light volume for the stock. We spoke with management recently, and we were reassured that their original strategy is going as planned. Overall, we believe that accelerating growth, the phasing out of spinoff-related disruptions, a ramp in R&D and potential deal-making over the next three quarters will help drive the shares back into the high $40s and, over the longer- term, the low- to mid-$50s.

At the beginning and end of the week we added to our position in Starwood Hotels, which we believe is benefiting form a favorable supply/demand dynamic in the U.S. and the organic global growth in travel, which supports its large international exposure long-term. In addition, the company is not standing still and continues to embark on new and existing initiatives to improve hotel brand performance, with special focus on Sheraton, Aloft and its newest brand, Tribute. In order to raise funds for the Friday trade, we trimmed our Fox position. While we see several legs of growth over the coming years for Fox, we remain cautious in the near-term given the potential for a 2016 guidance cut.

As we opened Johnson & Johnson, we exited our position in Merck, but not for a lack of conviction. The decision was less the result of any loss of confidence fundamentally and more that we simply see considerably more upside in JNJ. Despite high expectations for its Keytruda and hepatitis C drugs, we found it difficult to argue for a higher multiple for Merck given the increasingly competitive landscape in immuno-oncology (IO), Hep-C, diabetes and lipids. We would be more constructive in the mid- to low-$50s in the second half, ahead of its Hep-C triplet and new IO data.

Lastly, we also closed our position in Kinder Morgan. The shares have rallied well above our cost basis, and as a result we see more upside potential in Occidental Petroleum (which we swapped in for KMI), especially since both companies offer similarly attractive yields.

First-quarter earnings season continued this week and 98.2% of the S&P 500 has now reported. Total first- quarter earnings growth is 0.6%; excluding financials; that growth is -1.1% vs. expectations at the beginning of the season for a 0.5% increase. Revenues are declining 3.30% vs. expectations at the beginning of the season for a 3.31% decrease.

The results have been solid across the board, with 62.7% having beaten expectations, 33.6% missing the mark and 3.7% in line with consensus. The health care, consumer staples, energy, and utilities sectors have led the strong performance. Materials, financials, industrials, and consumer discretionary have posted the worst results so far in the S&P 500.

Next week, 1.4%% of the S&P 500 is set to report earnings. Key reports are expected from: Akorn (AKRX:Nasdaq), PVH Corp. (PVH:NYSE), American Woodmark (AMWD:Nasdaq), Cracker Barrel (CBRL:Nasdaq), Dollar General (DG:NYSE), Medtronic (MDT:NYSE), Ascena Retail Group (ASNA:Nasdaq), G-III Apparel (GIII:Nasdaq), Guidewire Software (GWRE:NYSE), Vera Bradley (VRA:Nasdaq), Brown-Forman Corp (BF.B:NYSE), Five Below (FIVE:Nasdaq), Ciena (CIEN:NYSE), Cyberonics (CYBX:Nasdaq), J.M. Smucker (SJM:NYSE), Joy Global (JOY:NYSE), Diamond Foods (DMND:Nasdaq), Global Power Equipment (GLPW:NYSE), Rally Software Development (RALY:NYSE), VeriFone (PAY:NYSE), Vince Holding (VNCE:NYSE), Zoe's Kitchen (ZOES:NYSE), Zumiez (ZUMZ:Nasdaq), Ixys (IXYS:Nasdaq), LightInTheBox Holding (LITB:NYSE), and Yingli Green Energy (YGE:NYSE).

Economic Data (*all times EDT)


Monday (6/1)

Personal Income (8:30): 0.3% expected

Personal Spending (8:30): 0.1% expected

Markit US Manufacturing PMI (9:45):

Construction Spending MoM (10:00): 0.5% expected

ISM Manufacturing (10:00): 52.0 expected

ISM Prices Paid (10:00): 42.8 expected

Tuesday (6/2)

Factory Orders (10:00): -0.2% expected

Wednesday (6/3)

MBA Mortgage Applications (07:00):

ADP Employment Change (8:15): 190k expected

Trade Balance (8:30): -44bn expected

Markit US Composite PMI (9:45):

Markit US Services PMI (9:45):

ISM Non-Manf. Composite (10:00): 57.0 expected

Thursday (6/4)

Initial Jobless Claims (8:30):

Continuing Claims (8:30):

Bloomberg Consumer Comfort (9:45):

Friday (6/5)

Change in Nonfarm Payrolls (8:30): 220k expected

Change in Manuf. Payrolls (8:30): 5k expected

Unemployment Rate (8:30): 5.4% expected


Monday (6/1)

Japan Vehicle Sales YoY (1:00):

Germany Markit/BME Manufacturing PMI (3:55): 51.4 expected

Eurozone Markit Manufacturing PMI (4:00): 52.3 expected

UK Markit PMI Manufacturing (4:00): 53.0 expected

Germany CPI MoM (8:00): 0% expected

Germany CPI YoY (8:00): 0.7% expected

Germany CPI EU Harmonized MoM (8:00): 0% expected

Germany CPI EU Harmonized YoY (8:00): 0.6% expected

Japan Monetary Base YoY (19:50):

Tuesday (6/2)

Germany Unemployment Change (000s) (3:55): -10k expected

Germany Unemployment Rate (3:55): 6.4% expected

Germany Markit Services PMI (3:55): 52.9 expected

Germany Markit Composite PMI (3:55): 52.8 expected

UK Mortgage Approvals (4:30): 63.5k expected

UK Markit CIPS Construction PMI (4:30):

Eurozone CPI Estimate YoY (5:00): 0.1% expected

Eurozone CPI Core YoY (5:00): 0.7% expected

Japan Markit Services PMI (21:30):

Japan Markit Composite PMI (21:30):

China HSBC Composite PMI (21:45):

China HSBC Services PMI (21:45):

Wednesday (6/3)

UK Nationwide House PX MoM (2:00): 0.3% expected

UK Nationwide House PX NSA YoY (2:00): 4.8%

UK Markit CIPS Composite PMI (4:30):

UK Markit CIPS Services PMI (4:30): 59.1 expected

Eurozone Markit Services PMI (4:00): 53.3 expected

Eurozone Markit Composite PMI (4:00): 53.4 expected

Eurozone Unemployment Rate (5:00): 11.3% expected

Eurozone Retail Sales MoM (5:00): 0.3% expected

Eurozone Retail Sales YoY (5:00): 1.7% expected

ECB Main Refinancing Rate (7:45): 0.5% expected

ECB Deposit Facility Rate (7:45): -0.2% expected

ECB Marginal Lending Facility (7:45): 0.3% expected

Thursday (6/4)

UK BOE Asset Purchase Target (7:00):

UK BOE Bank Rate (7:00): 0.5% expected

Friday (6/5)

Germany Factory Orders MoM (2:00): 0.5% expected

Germany Factory Orders WDA YoY (2:00): -0.8% expected

Eurozone GDP SA QoQ (5:00): 0.4% expected

Eurozone GDP SA YoY (5:00): 1.0 % expected

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

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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.


3M Company (MMM:NYSE; $159.08; 600 shares; 3.68%; Sector: Industrials): 3M, simply, is executing its playbook to create value. The company is expanding its relevance to its customers and working to expand its penetration in all markets in which it competes. Achieving regional self-efficiency and using innovation to fully leverage emerging new mega trends all help to ensure 3M’s sails are set optimally to leverage regional growth in the global economy. Ideally, 3M works to maximize the technology it uses to create a portfolio of unique products, optimize its global manufacturing footprint, and fully leverage its brand. These constitute the three key drivers that create value for 3M’s shareholders. Our target is $185.

Actavis (ACT:NYSE; $306.81; 375 shares; 4.44%; Sector: Health Care): Earlier this week we learned that the FDA approved Actavis' new drug for irritable bowel syndrome (IBS) associated with diarrhea, Viberzi, with an expected launch in 2016. This is great news for the company, as it shows the $1.1 billion it spent last year to acquire drug maker Furiex Pharmaceuticals -- which developed Viberzi -- is already paying for itself. Plus, Viberzi appears to be very complementary to Linzess (ACT's existing IBS drug) and future gastrointestinal products as the company looks to further build its franchise. We believe Viberzi should easily be able to achieve sales in excess of 500 million. Given that the launch is expected for 2016, we expect the approval will be modestly accretive beginning in 2017. Our target remains $350.

Cisco Systems (CSCO:Nasdaq; $29.31; 2,750 shares; 3.11%; Sector: Technology): Intangible assets in the form of brand equity, scale advantages, and meaningful customer switching costs give Cisco a durable competitive advantage in its core markets of switches and routers. We expect the firm to remain a strong competitor for many years as it adapts to shifts in networking technologies while expanding the range of products it offers to address ongoing cloud and software-defined networking adoption. Cisco’s dominance in data networking is clear. Its Ethernet switches and routers, which move data along local computer networks, are considered the gold standard by network managers. The firm enjoys a 15%+ market share advantage in the number of port shipments over Hewlett- Packard (HPQ), its most significant competitor. Cisco is viewed as a premium provider and as such, the firm extracts 50% more revenue per port than HP. While Huawei and Alcatel-Lucent (ALU) have made recent inroads, Cisco still maintains a healthy global market share. Our target is $33.

Energy Transfer Partners (ETP:NYSE; $56.23; 1,700 shares; 3.69%; Sector: Energy): Heading into the balance of the year, we look forward to 1) ETP's integration of Regency and synergy realization; 2) updated pro-forma capex guidance (currently $4.3 billion to $4.7 billion); 3) results of Bayou Bridge open season; 4) the potential sale of its Bakken JV interest to Sunoco Logistics Partners (SXL); 5) continued growth toward natural gas exports to Mexico; 6) continued drop-downs of Sunoco LLC interest to its parent company Sunoco LP (SUN); 7) success-garnering project regulatory approvals, particularly for Rover; 8) guidance relating to the potential sale of SUN incentive distribution rights (IDRs) to ETP's parent, Energy Transfer Equity (ETE); and 9) potential M&A. Our target is $72.

EOG Resources (EOG:NYSE; $88.69; 1,250 shares; 4.27%; Sector: Energy): At a recent conference, EOG reiterated its returns-focused drilling methodology, which has helped the company capture strong well-level internal rate of returns (IRRs) at the corporate level unlike many others across the E&P universe. Over the last two years, EOG has managed to significantly outperform the group based on return on capital employed (ROCE) and return on equity (ROE) (i.e., 16.4% vs E&P peers at 6.9% in 2014). Beyond this, EOG is keenly focused on returning to a balanced cash flow drilling program capable of driving double- digit oil growth and believes that this is achievable at $65/barrel. The company is also encouraged by their Delaware Basin 2nd Bone Spring program, which is shifting into development mode this year. We believe EOG is significantly undervalued at current levels but accept that for the time being the stock will likely trade in lockstep with oil. Our target is $110.

Express Scripts (ESRX:Nasdaq; $87.14; 300 shares; 1.01%; Sector: Health Care): Earlier this week, The Wall Street Journal reported that Express Scripts is working on a new, dynamic pricing model for its oncology drugs that would directly link pricing to performance. For instance, the company's chief medical officer cited the example of Tarceva (produced by Roche and Astellas, costing $6,850 per month), which is more effective in treating lung cancer than in pancreatic cancer, and thus should be priced accordingly. While this is just one of many examples, it reflects a shift to payers pushing back against the recent rapid increase in drug pricing (vs. prior efforts of relying on negotiating larger discounts). We found this news intriguing and evidence of Express Scripts' realization that it must augment its business model by returning to its historical focus on developing innovative strategies to control drug costs (as it was able to do many times over its history). While the ultimate success of this strategy in cancer is uncertain, it is likely to spawn a broad discussion across the industry during this year's selling season and will build off the company's success last year with hepatitis-C pricing (which was generally positively received by many benefit managers). All in all, we applaud Express Scripts for its constant innovation and thoughtfulness as it pertains to its business model. Our target remains $105.

Google (GOOGL:Nasdaq; $545.32; 150 shares; 3.15%; Sector; Technology): On Thursday, Google held its annual I/O Conference in San Francisco. The company highlighted key areas such as Android M, Payments, Photos, Android Wear, Internet of Things and VR. We think the product and platform improvements discussed support Google’s deeper involvement in the global mobile economy, both directly, through mobile advertising and online and offline payments for goods and services, and indirectly, through data and monetization of a growing mobile user and developer base. We note that Google now serves one billion-plus users through each of its major services (Search, YouTube, Android, Maps, and Chrome, and serves nearly 1 billion for Gmail). Google’s new “Android Pay” platform is focused on simplicity, security, and choice. Google enhanced simplicity with the ability to initiate a payment without opening an app (by putting the phone in front of an NFC terminal). The company emphasized security features such as credit card information privacy, and finally highlighted choice, as users can use existing major credit and debit cards, can pay with Android Pay offline in 700,000 stores across the U.S., and can pay in-app for goods and services from developers and companies such as Lyft, GrubHub (GRUB) and Groupon (GRPN). Our target remains $650.

Honeywell (HON:NYSE; $104.30; 1,100 shares; 4.42%; Sector: Industrials): Honeywell has no intention of changing its parameters and hurdle rates for returns on acquisitions despite the current environment of low interest rates and high valuations; the company will continue to search for acquisitions that meet its return criteria or it will return net cash in excess of $1 billion to $2 billion to shareholders via dividends and share repurchases. Little has changed in the story since the beginning of the year -- Honeywell wants to be in technology-based businesses but it has to be those that can be defended and do not change so rapidly that the entire business can be superseded overnight. The company also wants to have unique processes by which it can run its operations to create value. We have infinite trust in CEO Dave Cote to drive this value. Our target is $115.

Johnson & Johnson (JNJ:NYSE; $100.14; 600 shares; 2.32%; Sector: Health Care): We initiated on Johnson & Johnson this week. We find the shares extremely attractive at current levels given robust near- and long- term growth prospects; balance sheet optionality; compelling sum-of-the-parts and fundamental valuation; a strong yield of about 3%; and downside support with the bear thesis well understood. The company recently held an analyst day devoted to its pharmaceuticals business and the incremental update on pipeline opportunities (10 early-stage drugs with more than $1 billion sales potential) provided us with added confidence that JNJ will be able to grow faster than the industry over both the near- and long-term. Our sum-of-the-parts valuation analysis conservatively assumes 5% sales growth and 10% or more of earnings growth, and yields a $120 price target.

Occidental Petroleum (OXY:NYSE; $78.19; 900 shares; 2.71%; Sector: Energy): We initiated a position in Occidental this week. Occidental is an international E&P company that holds a net proved reserves base of about 2.8 billion oil-equivalent barrels, with operations spanning across the U.S., the Middle East and Latin America. Our bull thesis is predicated on the company's leading position in the Permian (with strong legacy enhanced oil recovery, or EOR, cash flow generation coupled with an increasing focus on high-growth unconventional plays). There is also a streamlined portfolio, with a nice mix of both stable (Upstream ex-Permian Resources, Midstream and Chemicals FCF) and growth (Permian Resources) assets. And let's not forget the juicy yield (4%), strong FCF generation and best-in-class balance sheet (lowest leverage and highest dividend coverage vs. peers). Our target is $86.

Starwood Hotels & Resorts Worldwide (HOT:NYSE; $82.76; 1,300 shares; 4.15%; Sector: Consumer Discretionary): Management is focused on improving the Sheraton brand (about 45% of rooms and company-wide EBITDA), ensuring a successful launch of its new Tribute brand (a soft brand launched last month in the four-star category), growing its select service brand Aloft, its senior leadership being more responsive to the owned/developer community, and controlling/right-sizing operating expenses/SG&A (selling, general & administrative costs) while its formal strategic review is under way. We have tremendous faith in management and reiterate our $100 target.

Target (TGT:NYSE; $79.30; 1,700 shares; 5.20%; Sector: Consumer Discretionary): Last week, Target reported solid first-quarter 2015 results, with EPS coming in nicely ahead of consensus and comparable store sales in line, driven by a healthy balance of gains in both traffic and average ticket. Average unit retail increases were driven by channel mix, but also a lower level of promotional activity, year over year (y/y), with customers trading up to higher quality and premium- branded items. By category, beauty had a 5% comp gain, while apparel and home increased 4%. Among the drivers of this increase were swim, Ava & Viv, and the Lilly Pulitzer partnership. Impressively, 90% of the items in the new Lilly Pulitzer line sold out on the first day. Aside from the product improvements, it appears the company's digital initiatives are also gaining momentum, as sales in this channel increased 38% y/y, driven by higher traffic and a substantial increase in conversion. Lastly, U.S. REDcard penetration increased to 21.5% (vs. 20.5% in 1Q 2014). Our target is $90.

Thermo Fisher Scientific (TMO:NYSE; $129.63; 950 shares; 4.75%; Sector: Health Care): We have recently been thinking more about Thermo Fisher's decision to drop its bid for Pall (PLL), which was ultimately acquired by Danaher (DHR). We are so happy that Thermo decided not to get tangled up in a bidding war for an asset that, in our view, is not deserving of the valuation Danaher paid (22x EBITDA). Plus, while Danaher does have a cash hoard, Thermo’s leverage is slightly above the high end of its targeted range. Plus, our proprietary accretion analysis does not support a Thermo acquisition at the suggested valuation. In fact, the $13.8 billion price tag implies over 1% dilution, even under our most aggressive assumptions. Thermo would first have to lever up to 4.5x pro-forma EBITDA and borrow $8.3 billion at relatively high rates (we assume 3.2%), which would leave about $5.5 billion of equity to raise (or 42 million shares at the current price). The result of all this work suggests Thermo's pro-forma earnings per share would come in at roughly $8.00, $0.10 below current consensus estimates for $8.10. We believe other, more reasonably valued opportunities will present themselves in the space and look forward to Thermo paying down some debt in the meantime to build capacity. Our target is $160.

Walgreens Boots Alliance (WBA:NYSE; $85.54; 750 shares; 2.48%; Sector: Health Care): We perceive three important changes taking place at WBA: 1) greater transparency and communication about how the business is performing real-time; 2) more willingness to evolve the business model; and 3) increased engagement with payers ("active discussions" with health plans and pharmacy benefit managers (PBMs)). Management is laser-focused on improving operations, which will likely be successful given the incredible track record of Alliance Boots. Beyond this, in response to reimbursement pressures (which the company acknowledges), the company has a new mindset toward broadening access, untethered from a historical, singular focus on gross profit per script. While pharmacy margins may trend lower, the company aims to improve integration with marketing and operations to increase conversion once Walgreens is part of a family plan. We have confidence in management's ability to execute and reiterate our $105 price target.

Wells Fargo (WFC:NYSE; $55.96; 3,000 shares; 6.47%; Sector: Financials): We value Wells Fargo's simplicity, and view its dominant market position as a sustainable structural advantage. In an era of heightened regulatory sensitivity, Wells has a mastery over its operations and offers a level of transparency that does not exist anywhere else in the large-cap banking sector. From a high level, Wells Fargo is the largest deposit gatherer in major metropolitan markets across the country. In fact, we estimate that more than one-third of the bank’s deposits come from markets in which Wells Fargo is the pre-eminent player, and more than two-thirds are gathered in markets in which the bank ranks among the top three. As a result, the bank had access to more than $1 trillion in deposits at a cost of only nine basis points at the end of 2014. The virtually free use of customer funds ensures an above-average level of profitability while taking only modest risks on the asset side of the balance sheet. Our target is $63.

WhiteWave Foods (WWAV:NYSE; $48.03; 2,600 shares; 4.81%; Sector: Consumer Staples): Shares of WhiteWave rallied earlier this week on heavy volume amid speculation Coca-Cola (KO) may make a bid for the company. While we are not ones to chase stocks on takeover speculation, we do believe WhiteWave would be an intriguing strategic fit for any large-cap packaged- goods/beverage company thirsting for growth. In light of Hormel Foods' (HRL) announced acquisition of organic processed meats maker Applegate Farms for $775 million, which follows General Mills' (GIS) recent acquisition of organic mac-and-cheese maker Annie's Homegrown for $820 million, we see even more reason for WhiteWave to be acquired given its outsized growth, category leadership (its products literally dominate the supermarket shelf space) and marketing prowess. This week’s rumor specifically mentions Coca-Cola as the potential acquirer of WhiteWave. Coca-Cola is a large traditional beverages company growing at a de minimispace; WhiteWave is a natural, organic and plant-based beverages company growing at breakneck speed. Coca-Cola has over $21 billion in cash; WhiteWave's current market cap is $8.34 billion. We don't need to do the math for you on this one. All in, we do not think this will be the last of takeover speculation surrounding WhiteWave. It is by far the hottest asset in the packaged-goods space and regardless of M&A, we believe the growth story in and of itself will continue to propel the shares higher. We've increased our target slightly, to $52 from $50.


Apple (AAPL:Nasdaq; $130.28; 820 shares; 4.12%; Sector: Technology): Over the next year, we expect investors to doubt if Apple can deliver the same growth, with quarters of tough comps ahead. In fact, we believe some will argue that Apple will record its first y/y decline in iPhone sales in fiscal year 2015. This could put pressure on the stock as investors may start to believe that the iPhone growth story has run its course. However, we believe investors' fear of declining iPhone sales is premature due to Apple’s share gain over Android and sales momentum in China. Moreover, we think Apple's ecosystem, new product categories, and shareholder- friendly actions will keep earnings growth trajectory above consensus expectations while new revenue growth engines emerge.

Dow Chemical (DOW:NYSE; $52.07; 1,750 shares; 3.51%; Sector: Materials): Dow recently presented at an industry event, with topics of focus including ethylene expansions, potential pricing power in the ethylene chain, and regional supply/demand balances. A bullish undertone was underscored by the premise that commodity producers have done a formidable job of holding ethylene/polyethylene (PE) margins above market expectations given the move in oil. Some of the reasons should dissipate throughout the year (i.e., a heightened first-quarter turnaround season, distortions in EMEA) although, in general, chain profitability should still be at healthy levels throughout the balance of the year as inventories haven’t built much in the last three to four months. IHS forecasts 2015 U.S. ethylene margins at about $0.25 (in line with our estimate) and integrated margins at about $0.40 (vs. about $0.46 record highs in 2014). Ethylene prices could move up by another $0.05-$0.07 vs. netback based on derivative affordability in Asia. Separately, on the PE side, one producer spoke to a subsequent several cent increase in addition to the $0.05 already expected to be received for May. Our target is $60.

Facebook (FB:Nasdaq; $79.19; 1,300 shares; 3.97%; Sector: Technology): We believe Facebook is in the early stages of monetizing its base of 1.4 billion users, with strong franchises in Instagram, Messenger, & WhatsApp helping to enhance its ecosystem. Third-party data suggests continued strong engagement as Facebook’s share of mobile Internet time, excluding Instagram and WhatsApp, was 24% in April, and its share of total U.S. Internet time, including desktop, was 19%. Our target is $90.

Halyard Health (HYH:NYSE; $41.42; 3,100 shares; 4.95%; Sector: Health Care): Shares of Halyard have fallen in dramatic fashion over the past several weeks despite no incremental news whatsoever involving the company. We imagine the selloff is being driven by one or two large holders exiting their positions. Given Halyard's small market cap and light volume, this is a very real possibility. As a reminder, we spoke with management at length last week as part of our effort to perform extensive diligence on Halyard, leaving no stones unturned. We came away from the conversations incrementally encouraged -- not outright bullish near- term, but appreciative of management's transparency and commitment to delivering value over the long-term. They did not promise an immediate turnaround, but rather ensured us that every component of their original strategy is going as planned. We believe that accelerating growth, the phasing out of spinoff-related disruptions, a ramp in R&D and potential deal-making over the next three quarters will help drive the shares back into the high $40s and, over the longer-term, the low- to mid- $50s. In the meantime, we'll look to lower our cost basis and exercise patience as this slow-burn turnaround takes form. Our price target is $50.

MasterCard (MA:NYSE, $92.26; 950 shares; 3.38%; Sector: Financials): Recently, MasterCard’s President of Europe presented at an industry conference. Management was bullish not only on the pace of gradual macro improvements in Europe, but on the company’s competitive position as well. In addition, the company sees market share opportunities arising from legislation recently passed by the European Commission. Ultimately, we await MasterCard’s updated long-term guidance (likely at the September analyst meeting) but note the stock is set up quite attractively for 2016, as multiple headwinds (rebates, FX, gas, Chase) anniversary, improved European macro may help, and new volumes from recent Citi and Itau contract renewals could ramp. We maintain our $100 target.

Morgan Stanley (MS:NYSE; $38.20; 1,850 shares; 2.72%; Sector: Financials): At a recent industry conference, Morgan Stanley management indicated that it sees upside benefits from its six strategic priorities including: 1) ongoing wealth management upside through additional margin improvement; 2) continued execution of U.S. Bank strategy in wealth management and institutional securities; 3) progress in fixed income, currencies & commodities (FICC) return on equity; 4) the tailwind from lower funding costs; 5) maintaining focus on expense management; and 6) steadily increasing capital return. Our target is $42.

Schlumberger (SLB:NYSE; $90.77; 900 shares; 3.15%; Sector: Energy): On Friday, analysts at J.P. Morgan initiated coverage of Schlumberger with an "Overweight" (buy) rating and $101 price target, based on 20.5x its 2017 EPS estimate of $5.35, discounted back one year. The analysts believe that with the largest oil service platform globally, a dominant international franchise, and the smallest exposure to U.S. land among the diversified competitors (about 15%), Schlumberger is best positioned among the international services names to navigate the current downturn. The company is the clear technology leader in the sector, with a deep reservoir of talent globally, and a well-earned reputation for consistent execution. We agree with J.P. Morgan’s sentiment, and given our expectation for a recovery by 2017, we consider SLB to be a core oil service holding in the current environment. Our target remains $105.

Starbucks (SBUX:Nasdaq; $51.96; 1,000 shares; 2.00%; Sector: Consumer Discretionary): Starbucks continues to be a transformative restaurant company and instrument of change across the unit level (new product introductions, day-part expansion), employee relations (wages, benefits, culture), and technologically (mobile, loyalty). The result has been impressive same-store sales gains, increased global reach (about 22,000 units, expanded third-party channel distribution), and solid high-teens EPS growth in recent years. We believe this trajectory will continue and reiterate our $56 target.

Twenty-First Century Fox (FOXA:Nasdaq; $33.60; 2,000 shares; 2.59%; Sector: Consumer Discretionary): Fox’s management team is not about chasing short-term gains to hit certain numbers, and instead prefers to create long-term value for shareholders. We like to highlight the strength of the company’s regional sports networks (RSNs) as well as upside in India. In respect to RSNs, the company has strategically put together a mix of sports, which helps drive No. 1 viewership in many markets. As far as over-the-top (OTT) offerings, there is a demand for RSNs, but the issue seems to be more about bandwidth for streaming high-definition quality sports. On India, Fox is No. 1 in the country with a roughly 25% market share for entertainment. Our target is $42.

Twitter (TWTR:NYSE; $36.67; 1,400 shares; 1.98%; Sector: Technology): According to tech news site Re/code, Twitter has been in talks to acquire the social media aggregation app Flipboard at a valuation of more than $1 billion. Flipboard's app aggregates links and other content shared by users on social networks, and presents them in an attractive magazine-style format. Re/code indicates that the deal would be all stock and notes that talks have been ongoing since the beginning of the year. At over $1 billion, this would be Twitter's largest transaction ever (TellApart was about $550 million and MoPub around $350 million), and an all-stock transaction would likely be roughly 4% to 5% dilutive. We continue to believe that M&A activity remains a focus area for Twitter, as it looks to expand its presence in ad tech, video, curation, e-commerce, and analytics. Flipboard's user-friendly content aggregation across multiple platforms, and content types as well as recent push for a more streamlined web-based experience and Promoted Items product could be a fit for Twitter. That being said, we're disappointed that the company is reportedly paying via equity, considering the shares are trading at such low levels. For instance, if Twitter purchased Flipboard when its stock was at $50, the deal would be 3% dilutive vs. 4.6% currently (assuming a $1.1 billion deal value). In other words, Twitter would be theoretically paying $330 million more than it would have if it launched its bid in late April, before reporting miserable first- quarter 2015 results. We’re lowering our target to $45, from $52, on more muted expectations in the near-term.


Eaton (ETN:NYSE; $71.59; 600 shares; 1.66%; Sector: Industrials): Eaton recently held an investor meeting at its Electrical facility to help better articulate the company’s Electrical Systems and Services business segment (ESS). ESS believes its speed to market (investment in front-end sales force, use of modular build techniques, and manufacturing process debottlenecking), product breadth, and large field sales (1,700 personnel) and service group provide key competitive advantages.

General Motors (GM:NYSE; $35.97; 1,600 shares; 2.22%; Sector: Consumer Discretionary): Earlier this week, The New York Times reported that the U.S. Justice Department has identified potential criminal wrongdoing in its investigation of the ignition switch defect at GM. The report also suggested that a negotiated settlement could be reached this summer, and that GM's fine could exceed the record $1.2 billion paid last year by Toyota (TM) (for concealing reports of unintended acceleration). We believe that most analysts have already factored a Justice Department fine into their GM valuation frameworks. We have been using $2 billion as a placeholder. At this point, we do not anticipate that a fine of this magnitude would have a significant impact on GM's shares, or on the company's ability to execute its plans to return cash to shareholders (i.e,. the company's $5 billion share repurchase or the $2 billion+ we expect GM to spend on annual dividends).


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

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

Reserving More Starwood; Pruning Fox
Stocks in Focus: HOT, FOXA

We'll cut back on our Twenty-First Century Fox position in order to accumulate more shares of Starwood Hotels.

05/29/15 - 12:29 PM EDT
Google's Prospects Are Bright
Stocks in Focus: GOOGL

The stock's valuation is compelling, too.

05/29/15 - 10:54 AM EDT
Actavis Added to Citigroup's U.S. Focus List
Stocks in Focus: ACT

Actavis' attractive near to medium-term organic growth profile is not reflected in current valuation levels.

05/28/15 - 02:59 PM EDT
Weekly Roundup

This week, we swapped new positions for old in the energy and health care sectors, as the market ended in the red.

05/29/15 - 05:47 PM EDT

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DOW 18,010.68 -115.44 -0.64%
S&P 500 2,107.39 -13.40 -0.63%
NASDAQ 5,070.0260 -27.95 -0.55%

Action Alerts PLUS Holdings

Stocks we would buy right now

Symbol % Portfolio
Industry Trade Now
ACT 4.42% Drugs
CSCO 3.10% Computer Hardware
EOG 4.26% Energy
ESRX 1.00% Health Services
ETP 3.67% Energy
GOOGL 3.14% Internet
HON 4.40% Industrial
HOT 4.13% Leisure
JNJ 2.31% Drugs
MMM 3.67% Industrial
OXY 2.70% Energy
TGT 5.18% Retail
TMO 4.73% Health Services
WBA 2.47% Retail
WFC 6.45% Banking
WWAV 4.80% Food & Beverage

Stocks we would buy on a pullback

Symbol % Portfolio
Industry Trade Now
AAPL 4.11% Consumer Durables
DOW 3.50% Chemicals
FB 3.96% Internet
FOXA 2.58% Media
HYH 4.93% Health Services
MA 3.37% Financial Services
MS 2.72% Financial Services
SBUX 2.00% Leisure
SLB 3.14% Energy
TWTR 1.97% Internet

Stocks we would sell on strength

Symbol % Portfolio
Industry Trade Now
ETN 1.65% Industrial
GM 2.21% Automotive