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Jim Cramer's Action Alerts PLUS

Weekly Roundup

By Jim Cramer and Jack Mohr | 04/24/15 - 05:44 PM EDT

The market charged higher this week, as a host of strong earnings and economic reports gave investors a reason to stay bullish on U.S. stocks. U.S. Treasury yields moved higher, gold declined, and the dollar weakened against the euro. West Texas Intermediate (WTI) oil ended the week lower, while Brent crude oil finished higher.

First-quarter earnings this week were strong, with 67% of companies surprising to the upside. Within our portfolio, we saw strong first-quarter 2015 results from Morgan Stanley (MS:NYSE), Dow Chemical (DOW:NYSE), Thermo Fisher Scientific (TMO:NYSE), Facebook (FB:Nasdaq), Google (GOOGL:Nasdaq), Starbucks (SBUX:Nasdaq) and United Technologies (UTX:NYSE) and weak results from General Motors (GM:NYSE).

Morgan Stanley kicked off the earnings week in convincing fashion, delivering a top- and bottom-line beat. Impressively, the bank's return on equity (ROE) topped 10%, proving the benefits of its efficiency efforts. Trading results truly stood out as revenues increased 25%, year over year, and 90% sequentially.

United Technologies followed with a bottom-line beat, reflecting strong organic growth across nearly every division as well as discipline related to controlling expenses.

Dow Chemical also reported strong results, topping EPS estimates by 11%. Not only was first-quarter 2015 Dow's tenth straight quarter of EPS, EBITDA, and EBITDA margin growth, it was the company's best margin quarter since 2005, a testament to its revamped portfolio characterized by innovation-driven growth, differentiated products and more sustainable pricing.

Thermo Fisher's results were strong, in our view, and while revenues missed the mark by 2%, the miss was driven almost exclusively by FX headwinds and fewer selling days in the quarter. We see these issues as transitory in nature, and believe the company is washing out expectations, resetting the bar, and likely low-balling 2015 guidance.

In similar fashion, Facebook's results were not appreciated nearly enough by the market, in our view. Although it missed on the top line, that was exclusively a result of FX headwinds. Meanwhile, on each key engagement metric (Daily Active Users, Monthly Active Users, Mobile DAUs, Mobile MAUs) the company simply crushed expectations.

Google shares charged higher this week after reporting results that, while seemingly weak at first, turned out to be stellar, with free cash flow (FCF) growing 80%, year to year, and margins expanding 270 basis points.

Starbucks also blew it out of the ballpark, posting 7% growth in comparable store sales (comps), 200 basis points ahead of expectations. The company's China/Asia- Pac division posted 12% comps, with a 10% contribution from traffic, a truly incredible feat.

Unfortunately, General Motors did not deliver, with both EPS and revenue falling short of consensus. We are concerned around the company’s dwindling Latin American operations, and would be inclined to trim on any strength.

On the economic front, mortgage applications increased 2.3% for the week, with loan requests for home purchases rising 5% to the highest level since June 2013. Existing home sales followed suit and showed a nice increase of 6.1% -- the highest percentage rise since December 2010. This recent surge marks the highest level in the past 18 months for U.S. home re-sales. The strength is due in part to the addition of about 2 million homes on the market (an advance of 5.3% from a month ago), which provides a bright view into the strength of the housing market for the upcoming spring season.

Jobless claims grew by 1,000, week over week, to 295,000 for the week ended April 18. The rise marks the third consecutive sequential increase and also represents the highest figure in the past seven weeks. The four-week moving average subsequently moved up to 284,500 from the previous average of 282,750.

U.S. Manufacturing PMI decreased to 54.2 from 55.7 in March. The decline can be attributed to slower growth momentum in output and new business as compared to the prior month. Although the production volume rate did increase, it was the slowest thus far for the year. In addition, export sales dropped in April for the first time since November 2014. The decline in exports, according to survey respondents, can be partly attributed to the strong dollar and less demand from the European market. Despite the slowdown in production and new business growth, the survey did provide reassurance as job creation continued at its solid pace. Lastly, the survey illustrated the continuation in falling costs for manufacturing companies, marking a four-month run, as a result of another decline in overall input prices.

The new home sales data showed a decrease of 11.4% in sales of new single-family homes to 481,000 units, down from 543,000 in the prior month. Although this figure still shows improvement from the record low of 270,000 units in February 2011, sales are still down from the approximate 655,000-unit average over the past 50 years. This past month, the only region that saw growth was the Midwest (+5.9%), with every other market experiencing sequential declines.

Beyond the U.S., on Wednesday, Chinese Manufacturing PMI came in at 49.2 for April, marking a one-year low. The figure was down from a final reading of 49.6 in March. In general, a figure above 50 demonstrates growth from the previous month, meaning April was a period of contraction for the nation. The down reading, according to HSBC representatives, was due to the decline in new business for the second straight month. On a brighter note, the report showed an improvement in new export orders.

Oil prices (WTI) edged higher in a choppy week of trading in which the commodity had trouble picking up any sustained momentum. In a volatile week of trading, prices moved higher amid concerns over a potential supply shortage out of the Middle East due to the civil war in Yemen. The rally came after prices weakened on Wednesday when the U.S. government reported that U.S. crude stockpiles increased by 5.3 million barrels last week, almost double consensus expectations. That being said, with mounting expectations that U.S. shale oil production has peaked and may begin to drop in the coming weeks, there seems to be some nascent legs behind this rally.

The market is still looking for a concrete sign of the eventual reduction in the flow of crude oil into the market, yet according to Baker Hughes, the number of active oil rigs in the U.S. declined to 734 last week, the lowest level since 2010. We will be closely monitoring the energy complex in the coming weeks as we look to add to our EOG Resources (EOG:NYSE)/Schlumberger (SLB:NYSE) positions on any sustained weakness.

With respect to our portfolio, this week we added to EOG and Thermo Fisher, trimmed our MasterCard (MA:NYSE) position and sold out of Royal Dutch Shell (RDS.A:NYSE). We are bullish on EOG and were intent on making it a larger portion of our portfolio. For TMO, we added on weakness as we believe its quarter represented strong organic growth prospects amid a myriad of headwinds. We trimmed MA into strength as we believe the news around a potential China opportunity, while certainly a positive, will take years to come to fruition. Finally, we exited our Shell position as we see no near- to medium-term catalysts and did not like the price the company paid on the BG deal.

First-quarter earnings season continued this week and 40% of the S&P 500 has now reported. Total first-quarter earnings growth is 6.1%; excluding financials, that growth is 4.8% vs. expectations at the beginning of the season for a 2.9% decline. Revenues are rising modestly at 0.4% vs. expectations at the beginning of the season for -3.4% growth. The results have been solid across the board with 67% having beaten expectations, 29% missing the mark and 3.5% in line with consensus. Utilities, telecom services, consumer staples and health care have led the strong performance. Information technology, materials and energy have posted the worst results so far in the S&P 500.

Next week, 33% of the S&P 500 is set to report earnings. Key reports are: Apple (AAPL:Nasdaq), The Container Store (TCS:NYSE), Bristol-Meyers (BMY:NYSE), BP (BP:NYSE), Coach (COH:NYSE), Honda Motor (HMC:NYSE), Merck (MRK:NYSE), T-Mobile (TMUS:NYSE), UPS (UPS:NYSE), GoPro (GPRO:Nasdaq), Kraft Foods (KRFT:Nasdaq), MasterCard (MA:NYSE), Panera Bread (PNRA:Nasdaq), Twitter (TWTR:Nasdaq), Wynn Resorts (WYNN:Nasdaq), GrubHub (GRUB:NYSE), Norfolk Southern (NSC:NYSE), Time Warner (TWX:NYSE), Marriott (MAR:NYSE), Yelp (YELP:NYSE), GNC Holdings (GNC:NYSE), Royal Dutch Shell (RDS.A:NYSE), Viacom (VIAB:Nasdaq), Expedia (EXPE:Nasdaq), LinkedIn (LNKD:NYSE), Visa (V:NYSE), and Chevron (CVX:NYSE).

Economic Data (*all times ET)


Monday (4/27)

Markit US Services PMI (9:45): 59.5 expected

Markit US Composite PMI (9:45):

Dallas Fed Manf. Activity (10:30): -12.0 expected

Tuesday (4/28)

Consumer Confidence Index (10:00): 102.5 expected

Richmond Fed Manufact. Index (10:00): -2 expected

Wednesday (4/29)

MBA Mortgage Applications (07:00):

GDP Annualized QoQ (8:30): 1.0% expected

Personal Consumption (8:30): 1.8% expected

GDP Price Index (8:30): 0.5% expected

Core PCE QoQ (8:30): 1.0% expected

Pending Home Sales MoM (10:00): 1.0% expected

FOMC Rate Decision (Upper Bound) (14:00): 0.25% expected

Thursday (4/30)

Employment Cost Indext (8:30): 0.6% expected

Personal Income (08:30): 0.2% expected

Personal Spending (08:30): 0.5% expected

Initial Jobless Claims (8:30):

Continuing Claims (8:30):

Chicago Purchasing Manager (9:45): 50.0 expected

Bloomberg Consumer Comfort (9:45):

Friday (5/1)

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): 42.0 expected

U of Michigan Sentiment (10:00): 96.0 expected


Monday (4/27)

Japan Retail Trade YoY (19:50): -7.5% expected

Japan Retail Sales MoM (19:50) : 0.6% expected

Tuesday (4/28)

UK GDP QoQ (4:30): 0.5% expected

UK GDP Yoy (4:30): 2.6% expected

Wednesday (4/29)

UK Nationwide House PX MoM (2:00): 0.2% expected

UK Nationwide House Px NSA YoY (2:00): 4.1% expected

Eurozone M3 Money Supply YoY (4:00): 4.3% expected

Eurozone M3 # month average (4:00): 4.1% expected

Eurozone Consumer Confidence (5:00): -4.6 expected

Germany CPI MoM (8:00): -0.1% expected

Germany CPI YoY (8:00): 0.4% expected

Germany CPI EU Harmonized MoM(8:00): -0.1% expected

Germany CPI EU Harmonized YoY (8:00): 0.2% expected

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

Japan Industrial Production YoY (19:50): -3.4% expected

Japan Industrial Production (19:50): -2.3% expected

Thursday (4/30)

Japan Housing Starts YoY (1:00): -1.9% expected

Germany Retail Sales MoM (2:00): 0.4% expected

Germany Retail Sales YoY (2:00): 3.0% expected

Eurozone Unemployment Rate (5:00): 11.2% expected

Eurozone CPI Estimate YoY (5:00): 0.0% expected

Eurozone CPI Core YoY (5:00): 0.6% expected

Japan Jobless Rate (19:30): 3.5% expected

Japan Job to Applicant Ratio (19:30): 1.15 expected

Japan National CPY YoY (19:30): 2.2% expected

Japan National CPI Ex Fresh Food YoY (19:30): 2.1% expected

Japan National CPI Ex Food, Energy YoY (19:30): 2.0% expected

Japan Tokyo CPI YoY (19:30): 0.7% expected

Japan Tokyo CPI Ex Fresh Food YoY (19:30): 0.5% expected

Japan Tokyo CPI Ex Food, Energy YoY (19:30): 0.2% expected

China Manufacturing PMI (21:00): 50.0 expected

Japan Markit/JMMA Manufacturing (21:35):

Friday (5/1)

UK Mortgage Approvals (4:30): 62.5k expected

UK Markit PMI Manufacturing SA (4:30): 54.6 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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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.


Actavis (ACT:NYSE; $295.41; 275 shares; 3.07%; Sector: Health Care): The shares were relatively flat this week on little news. Overall, we continue to see an attractive path forward for ACT, with earnings per share increasing from $17.75 (expected) in 2015 to $28 (expected) in 2018, driven by a highly diversified portfolio of branded and generic products. With the recent pullback in the shares, ACT is trading at 14x estimated 2016 EPS, an approximate 20% discount to the major pharma group, which creates an attractive opportunity. With the potential for high single-digit top-line/double-digit EPS growth over time, several potential earnings upside drivers, upcoming pipeline catalysts (including meaningful late-stage branded projects like cariprazine, eluxadoline, Esmya and Semprana), and business development optionality, ACT is one of our highest conviction ideas. Our price target is $350.

Cisco Systems (CSCO:Nasdaq; $28.82; 2,750 shares; 3.00%; Sector: Technology): The shares traded sharply higher this week as Goldman Sachs added the stock to its Conviction Buy List, modeling 20% upside. Goldman analysts expect the stock to outperform on both upside to estimates and multiple expansion. They see upside to FY 16 (July) estimates from an emerging product cycle in campus switching and enterprise WLAN, driven by the move to 802.11ac Wave 2, which requires an upgrade to multi- gigabit switching speeds. Goldman also sees room for meaningful multiple expansion, with the stock trading at a 30% discount to the S&P 500, as the market’s focus shifts to Cisco’s improved secular position with its Intercloud solution for public/hybrid cloud and its leadership in the emerging Internet of Things (IoT). Our target is $33.

Dow Chemical (DOW:NYSE; $51.12; 2,550 shares; 4.93%; Sector: Materials): The shares were up this week following a strong earnings report, with EPS beating by 11%. Not only was first-quarter 2015 Dow’s tenth straight quarter of EPS, EBITDA and EBITDA margin growth, it was also Dow's best margin quarter since 2005, a testament to the company's revamped portfolio characterized by innovation-driven growth, differentiated products and more sustainable pricing. While EPS will likely be down 4% in 2015 due to FX, lower olefins spreads and Sadara start-up costs, as well as the fact that buybacks have been suspended until the chlor-alkali transaction is closed (year-end), we see upside in 2016 as buybacks resume ($5 billion-plus) and recent project startups (Sadara, PDH) drive a resumption of growth. We also view the valuation as attractive, with the shares trading at just over 14x estimated 2016 EPS. Our target is $60.

EOG Resources (EOG:NYSE; $96.72; 900 shares; 3.29%; Sector: Energy): The shares traded lower as oil prices fell in a choppy week of trading. We added to our position as we wanted to avoid chasing the shares and found EOG attractively valued. EOG is a peer leader in shale-oil production growth. It manages to find new core shale plays at low costs through internal exploration, applies technology to those plays, and operates with increasing efficiency to expand its resource base in terms of both size (drilling locations) and quality (i.e., estimated ultimate recovery, or EUR). We believe EOG can be a relative beneficiary in the down-cycle by adding to core acreage positions, as well as benefiting from cost efficiencies on service pricing and getting premium crews. We also think technology (completion design, improved recoveries) will enable the company to maintain leadership. As a reminder, EOG plans to defer completion on a portion of its wells. While some investors have criticized this strategy, we believe it gives the company important production leverage whenever commodity prices rebound. EOG deferred the completions at roughly $45 per barrel West Texas Intermediate oil prices, which (assuming current prices above $55) means that the incremental return benefit as a result of the decision is roughly 10%. Our target is $110.

Google (GOOGL:Nasdaq; $573.66; 150 shares, 3.25%; Sector; Technology): The shares traded up nearly 10% following strong results this week. At first, Google's first-quarter 2015 results appeared disappointing, as both EPS and revenue came in below consensus expectations. Upon further review, however, we are incredibly impressed with the quarter, and believe the market appropriately bid up the shares. For one, total costs as a percentage of revenue were 270 basis points lower year over year (34.7% vs. 36.4% in 1Q '14). Next, 1Q '15 free cash flow of $3.69 billion came in nearly $700 million above consensus and, even more remarkably, represents an 80% increase year over year, putting the company's total cash balance at more than $65 billion. It appears Google has figured out how to contain costs and pursue a more selective spending strategy. Third, mobile continues to be a significant focus for product development. The mobile search product has been retooled to provide direct answers, accept voice queries, and surface the most relevant content (as was the aim of the recent algorithm change). Google is also helping to connect marketers with customers by adding video and app- install ads to its mobile network. In fact, despite further declines in cost per click, management reiterated its strength and instead attributed those declines to lower monetization of YouTube video ads. We would note that YouTube is set to become quite monetize-able in the coming quarters as the company leverages the platform's outstanding growth and drives its CPC. All in all, we are excited by the quarter and believe the performance quells any fears around revenue instability or cost management. We view Google as a core holding and do not plan on trading it in the near-to-medium term, as the business is fundamentally sound and growth drivers are abundant. Our target is raised to $650, which represents 20x our 2016 EPS estimate of $33. We are also upgrading the stock to One.

Halyard Health (HYH:NYSE; $49.27; 2,300 shares; 4.28%; Sector: Health Care): The shares charged higher 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 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; $44.34; 2,400 shares; 4.02%; Sector: Energy): Last week, Kinder Morgan reported its first-quarter 2015 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; $73.16; 950 shares; 2.63%; Sector: Consumer Discretionary): The shares traded higher this week on little company-specific news. We were impressed by Stanley Black & Decker's (SWK) results earlier in the week, in which the company reported strong growth across the board, with tools and storage increasing 3% organically, year over year, well above expectations. We view this as a positive read-through for Lowe’s as it sells through many of SWK’s products. We believe the current valuation is reasonable at 22x NTM EPS when compared against peers with a much slower EPS growth profile. Our target is $80.

lululemon athletica (LULU:Nasdaq; $66.94; 570 shares; 1.44%; Sector: Consumer Discretionary): The shares traded slightly higher this week on little news. As a reminder, analysts at Sterne Agee recently 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, $90.72; 950 shares; 3.26%; Sector: Financials): The shares surged this week following reports that China plans to break up its monopolized sector of bank card settlement with competition from both Chinese and foreign companies. Currently, only the state-controlled China UnionPay, the sole bank card association of its kind in China, is allowed to settle yuan-denominated bank card payments. The new policy permits Chinese banks, third-party payment companies and foreign bank card associations, such as Visa (V) and MasterCard, to apply for a license to facilitate such transactions. While Visa and MasterCard are currently not accepted within the country, that is not to say both companies do not have strong relationships with Chinese authorities. In fact, both V and MA have existing co-brand deals in China that allow cardholders to transact outside of the country where China UnionPay cards are not widely accepted. In theory, the new rules mean both companies will be allowed to actively compete for share of the ever-so-lucrative Chinese market, which sees over $7 trillion in annual credit and debit transaction volume. While we recognize the opportunity is large ($1.5 billion in incremental sales for every 10% in market share) we believe it will be years before that benefit is fully realized. Our target is $100.

Morgan Stanley (MS:NYSE; $37.36; 3,050 shares; 4.31%; Sector: Financials): The shares moved higher this week following a strong first-quarter 2015 earnings report in which the company delivered a top- and bottom- line beat. Impressively, the bank’s return on equity (ROE) broke double digits and hit 10.1%. Morgan Stanley’s trading results truly stood out as institutional trading revenues increased nearly 25% year over year and 90% sequentially. This is particularly impressive considering the company managed down its trading risk-weighted assets over the past several years. Wealth management revenues were also strong, rising 6%, year over year. Bottom line, the company managed to deliver amid high expectations, and we are especially encouraged by continued signs of sales and trading market share gains and payoff from recent years’ efficiency efforts (capital, funding, expenses). The core ROE of over 10% is an affirmation that the franchise can earn/exceed its cost of capital, and we believe that the metric will only continue to grow from here. We reiterate our $44 target.

Panera Bread (PNRA:Nasdaq; $184.36; 725 shares; 5.05%; Sector: Consumer Discretionary): Panera shares edged higher this week after jumping 10% last week on news that the company is raising its share repurchase program to $750 million (17% of market cap) to reward shareholders for their patience. Beyond the buyback, accelerating restaurant trends give us greater conviction that “Panera 2.0” customer experience investments -- peak-hour throughput capacity, more accessible menu price points, new marketing tactics, and digital ordering -- have reinforced the brand intangible asset underpinning its business. We’re also optimistic about Panera’s new growth avenues, such as delivery and catering hubs, consumer packaged goods, and usage of mobile devices and other digital technology to engage with consumers and improve store-level operations, all of which are poised to become more meaningful cash flow contributors. Our target is $225.

Red Hat (RHT:NYSE; $76.83, 1,100 shares; 3.19%; Sector: Technology): The shares traded higher this week on no news. We continue to like Red Hat because we believe it will remain a “share gainer” against Unix and Windows, and we think JBoss and OpenStack can become meaningful contributors to the business over the next few years. Our ownership is also a play on increased IT spending this year and RHT being a beneficiary of the secular trend of increasing popularity of the Linux operating system. We believe RHT’s consistent market outperformance is deserved, as the company fits neatly within this theme and offers an attractive suite of products that serve some of the more popular trends in the IT space right now -- mobile, cloud and data security -- and has become a leader in the space of Linux operating-system support. The systems that RHT supports are often mission-critical enterprise projects for clients, so the subscription-based business is very sticky, and it has recently switched the sales approach to a more consultant-like model, allowing it to further penetrate existing clients' wallets. The stock is not cheap at 37x forward estimates, but is trading in line with historical levels, and we are willing to pay a premium for the impressive growth that the company has demonstrated as of late. Our target is $85.

Schlumberger (SLB:NYSE; $91.61; 1,200 shares; 4.16%; Sector: Energy): The shares lost steam this week in sympathy with weak oil. Last week, Schlumberger reported a bottom-line beat primarily driven by higher margins. In our view, the results send a clear message as to why SLB trades at a premium to peers. First-quarter 2015 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 especially impressive considering the general expectation that margins would be materially worse during this cycle. 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 last week's results proved, productivity and efficiency are much more powerful forces than expedience. Our target is $105.

Target (TGT:NYSE; $82.70; 1,700 shares; 5.31%; Sector: Consumer Discretionary): The shares traded sharply higher this week after receiving a convincing upgrade (to "Buy") from analysts at Bank of America who believe the company is well positioned to benefit from an improving mid-cycle consumer backdrop given its middle- income ($64k median income) core customer base. Bank of America believes Target will continue to see higher spending at its stores and online as average retail prices are increasing as customers trade-up to more expensive items or are more willing to pay full price. We agree with this sentiment, and also note that the company’s new initiatives seem to be showing early positive results and should support acceleration in TGT’s same-store sales (SSS) and gross margin expansion through a favorable mix shift. Specifically, customers appear to be responding well to TGT’s renewed focus on improved assortment and merchandising in higher-margin signature categories, such as style (apparel and home), baby, kids and wellness. New and exclusive brand partnerships (including the successful Lilly Pulitzer collection and the Made to Matter collection) should also drive continued momentum. Finally, Target’s planned $1 billion in omni-channel investments this year should support continued SSS growth, with the digital channel expected to be the dominant comp sales contributor for the next five years. We reiterate our $90 target.

Thermo Fisher Scientific (TMO:NYSE; $130.02; 950 shares; 4.67%; Sector: Health Care): The shares declined slightly this week following, in our view, a solid earnings report. The revenue miss of 2% was due largely to fewer selling days and FX headwinds, which impacted many first-quarter company earnings reports, and TMO posted EPS of $1.63 (7% year-over-year growth) to beat consensus by $0.02. The company reported 4% organic revenue growth in the quarter (when adjusted for weekday changes y/y), which sets the stage for continued organic growth in 2015. Management noted a number of accomplishments to start the year, strengthening leadership in research and applied markets with a number of product launches across the business. Along with the earnings results, the company updated its expectations for the year to reflect both unfavorable FX and stronger operating performance -- placing revenue expectations in a range of $16.67 to $16.83 billion (which brackets consensus) and raising the bottom end of EPS guidance to a range of $7.25 to $7.40 (from $7.22 to $7.40 previously. Ultimately, we believe that investors will continue to look through FX and toward the company’s solid core fundamentals and consistent execution, which is why we added to our position this week. Our target is $160.

Twenty-First Century Fox (FOXA:Nasdaq; $34.65; 2,900 shares; 3.80%; Sector: Consumer Discretionary): The shares traded higher this week on little news. We remind subscribers just how powerful the company’s India exposure is, as its “Star” network commands nearly 25% of the country’s television viewership. Growth is likely to be quite skewed, with organic consolidation of the industry both on the distribution and content sides. As a result, Star expects to grow at double the pace of the rest of the industry and is projected to reach $800 million in annual EBITDA by 2019. We continue to be bullish on the shares and reiterate our $42 target.

Twitter (TWTR:NYSE; $50.82; 1,400 shares; 2.69%; Sector: Technology): The shares traded higher this week following strong performance and underlying trends seen in both Facebook’s (FB) and Google’s (GOOGL) results. We believe Twitter is partially out of the sentiment doghouse heading into first-quarter 2015 results next week, but is still largely under-owned relative to most large-cap Internet stocks. Twitter has likely the greatest array of company-specific catalysts of any company in its sphere this year, including Periscope, core monthly active user (MAU) acceleration from the Google partnership, and new core features like embedded video. Industry channel checks point to solid uptake of Twitter’s new targeting features and formats in the first quarter, but the greatest lever the company can pull, in our view, is the pace of on-boarding of new advertiser demand. For some perspective, we estimate that Google generates half of its revenue from smaller advertisers who spend less than $250k per year, which make up 95% of the 8 million-plus AdWords accounts, so building out the “tail” should allow Twitter to grow well-above average over the next several years. With a global ad load between 1% to 2% and 85% from mobile, we think TWTR has more revenue runway than any other company in the Internet space. Our target is $55.

Wells Fargo (WFC:NYSE; $54.70; 3,000 shares; 6.20%; Sector: Financials): The shares traded higher this week in sympathy with strong bank results across the board. Earlier this week we learned that Wells Fargo is in talks to buy more General Electric (GE) financial assets. GE has announced plans to divest the majority of its GE Capital business and is reportedly looking to sell its $74 billion U.S. commercial lending division, which makes loans to midsize U.S. businesses. Wells Fargo has been suggested as a potential buyer, which makes sense to us given its dominance in both commercial and personal lending. We will await further details before speculating further, but commend any action that leverages the bank’s existing scale and leadership. Our target is $63.

WhiteWave Foods (WWAV:NYSE; $45.60; 2,500 shares; 4.31%; Sector: Consumer Staples): The shares traded sideways this week on no news. Recently, 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.


Apple (AAPL:Nasdaq; $130.28; 820 shares; 4.04%; Sector: Technology): The shares traded higher this week in anticipation of a strong earnings report this coming Monday. We would focus on two subjects heading into the print: capital allocation and the June quarter's gross margins. We believe Apple's capital allocation strategy is "steady is the course." On the April 2014 earnings call, the tech giant increased its targeted cumulative capital allocation to $130 billion from $100 billion, to be used by the end of 2015. Given consideration for current domestic cash, debt, debt capacity and our view on strong domestic free-cash-flow generation capability, we believe that Apple will increase the targeted cumulative capital allocation to the $160 billion to $170 billion range, to be used by the end of 2016. On gross margin, we believe iPhone mix may skew lower vs. the last quarter, which would affect ASP (average selling price) and margins. Next quarter, currency, mix and scale could have an adverse effect on gross margin, though Apple appears to have raised some pricing, which we presume is to offset some currency effects. We will be monitoring the company's commentary around margins very closely. Our target is $150.

Facebook (FB:Nasdaq; $81.53; 1,300 shares; 4.01%; Sector: Technology): Shares started the week strong but lost some steam following its quarterly results, which we viewed as positive. The company beat on the bottom line and missed slightly on the top line, with the miss driven exclusively by FX headwinds. Meanwhile, on each key engagement metric (daily active users, monthly active users, mobile DAUs, mobile MAUs) the company simply crushed expectations. The quarterly results, in and of themselves, are incredibly strong. In fact, we have no bone to pick with any of the line items, and believe 55% constant currency growth in advertising revenue is one of the most remarkable feats for a tech company that has been around for over a decade. That being said, this isn't a company that you evaluate for the quarter-to- quarter vicissitudes. This is a stock that, similar to Apple, you own, not trade. Beyond the impressive headline results, however, is a more powerful message that CEO Mark Zuckerberg conveyed on the call: the magnitude of the company's, size, reach and level of engagement. This is what the market truly overlooked. Our target is $90.

Merck (MRK:NYSE; $57.60; 1,950 shares; 4.25%; Sector: Health Care): The shares traded higher this week after presenting strong phase 2 results for its hepatitis C doublet (PI/NS5A) in both treatment experienced (TE) and treatment naïve (TN) patients. Overall, these studies suggest an initial Merck combination that is superior to existing agents. Its elbasvir/grazoprevir in TE patients showed a Sustained Virologic Response (SVR) of 92% at 12 weeks without ribavirin and a slightly higher SVR rate of 94% with the additional of ribavirin. Overall, with doublet data showing strong efficacy compared to the existing HCV regimens, we see a solid initial opportunity for Merck. Our target is $65.

Starbucks (SBUX:NYSE; $51.84; 1,000 shares; 1.96%; Sector: Consumer Discretionary): The shares traded higher following Thursday's stellar earnings report, in which the company delivered 7% global same-store sales ahead of 5% consensus and representing a y/y acceleration after lapping 6% comps in first-quarter 2014. We are even more bulled up on the name, as momentum appears to be building across many key growth drivers. Continued momentum, coupled with additional growth opportunities, have SBUX positioned to not only deliver on its long-term growth targets, but likely exceed expectations over the next several years. First, U.S. comps will likely continue to reaccelerate, with ticket growth playing a greater role in the near term, while Starbucks will likely begin to layer in stronger transaction growth over the next 12 to 18 months. Second, SBUX will likely reaccelerate margin expansion beginning in 2016, as one-time items dissipate and coffee becomes a greater tailwind. Third, the company's strong free cash flow provides the flexibility to increasingly deploy cash toward accretive actions, including a step-up in share repurchases and/or additional acquisitions, as SBUX is on track to generate $1.5 billion of free cash flow annually, beginning this year. Finally, mobile pay now comprises 20% of transactions, demonstrating the power of SBUX's digital ecosystem and the "flywheel effect" all of the underlying parts have on each other to drive growth incrementally and reinforce customer engagement. Overall, we are ecstatic about the quarter and raising our price target to $56, reflecting 30x 2016 EPS of $1.86.

United Technologies (UTX:NYSE; $116.16; 175 shares; 0.77%; Sector: Industrials): The shares charged higher this week following strong first-quarter 2015 results in which the company reported a bottom-line beat with first-quarter adjusted earnings of $1.51 per share coming in $0.06 ahead of consensus of $1.45. Excluding one-time items, EPS increased 7% from a year ago. Sales came in a touch light, at $14.5 billion vs. the $14.9 billion consensus, with the miss driven by currency headwinds. Segment operating margins clocked in at an impressive 15.8%, a full 50 basis points ahead of consensus. Aerospace operating margins came in 130 basis points ahead of consensus, despite contracting 110 basis points from last year's quarter. Climate, controls and security operating margins moved in the other direction, expanding 110 basis points from the prior year. The company's Otis division (which manufactures elevators and escalators) impressed, with new equipment orders rising 8% on an organic basis, well above expectations for low single-digit growth. Climate controls and security orders also saw impressive growth, up 6% organically year over year. The company's Pratt division (engines) delivered revenue of $3.33 billion, which was flat but in line with consensus. Finally, the Sikorsky division (helicopters) saw revenue come in a bit weaker than expected, reflecting slowdown in demand in the oil and gas market, which comes as no surprise as the company has been cautious. Overall, we are pleased by the results and believe that they reflect strong organic growth across nearly every division. More importantly, we like the discipline related to controlling expenses. Our target is $125.


Eaton (ETN:NYSE; $68.58; 600 shares; 1.56%; Sector: Industrials): The shares traded essentially flat this week on no news. Recently, analysts at Wells Fargo (WFC) conducted channel checks of 30 U.S. industrial product distributors that sell Eaton 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.

General Motors (GM:NYSE; $35.59; 3,100 shares; 4.17%; Sector: Consumer Discretionary): The shares fell this week after the company reported disappointing first- quarter earnings of $0.86 per share that fell $0.11 short of consensus. The miss was driven by a higher tax rate (28% vs. 24% expected) and severe weakness in the company's South American operations, which reported a $200 million loss. Our concerns revolve almost exclusively around South America, and to a lesser extent Europe, as the issues in both regions seem to be long term in nature. Even more, we are not convinced that GM has been able to move past myriad company-specific headwinds. For the first quarter, the company reported an automotive free cash outflow of $1.7 billion due to three reasons: 1) an extra supplier payment, 2) restructuring payments, and 3) recall-related payments. These issues are certainly not yet in the rearview mirror, and threaten to continue pressuring the company's ever-so- important cash balance -- remember, it is committed to return anything in excess of a $20 billion cash balance to shareholders. We are generally disappointed by the quarter, and while we agree with bulls that two key variables for GM -- profitability from North American auto operations and China (which it expects to grow 6% to 8% this year) -- are heading in the right direction, the issues plaguing the company in Latin America are potentially crippling over the long term. We will closely watch this position following this week’s results and are inclined to trim on any strength. We are downgrading our rating on the shares to Three following the quarter.


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


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Keep an Eye on Apple and Twitter Next Week
Stocks in Focus: AAPL, TWTR

Jim Cramer reveals his expectations for these two core holdings.

04/24/15 - 03:52 PM EDT
We're Raising Google's Target
Stocks in Focus: GOOGL

No more fears regarding revenue instability or cost management.

04/24/15 - 10:22 AM EDT
We're Ecstatic About Starbucks
Stocks in Focus: SBUX

We are raising our price target after the results.

04/24/15 - 09:45 AM EDT
Weekly Roundup

It was a busy earnings week for the portfolio, with seven holdings reporting strong first-quarter results.

04/24/15 - 05:44 PM EDT

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Action Alerts PLUS Holdings

Stocks we would buy right now

Symbol % Portfolio
Industry Trade Now
ACT 3.07% Drugs
CSCO 3.00% Computer Hardware
DOW 4.93% Chemicals
EOG 3.29% Energy
FOXA 3.80% Media
HYH 4.29% Health Services
KMI 4.02% Energy
LOW 2.63% Retail
LULU 1.44% Consumer Non- Durables
MA 3.26% Financial Services
MS 4.31% Financial Services
PNRA 5.06% Leisure
RHT 3.20% Computer Software & Services
SBUX 1.96% Leisure
SLB 4.16% Energy
TGT 5.32% Retail
TMO 4.67% Health Services
TWTR 2.69% Internet
WFC 6.21% Banking
WWAV 4.31% Food & Beverage

Stocks we would buy on a pullback

Symbol % Portfolio
Industry Trade Now
AAPL 4.04% Consumer Durables
FB 4.01% Internet
GM 4.17% Automotive
GOOGL 3.25% Internet
MRK 4.25% Drugs
UTX 0.77% Aerospace/ Defense

Stocks we would sell on strength

Symbol % Portfolio
Industry Trade Now
ETN 1.56% Industrial

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