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Jim Cramer's Action Alerts PLUS

Action Alerts PLUS

Weekly Roundup

BY Jim Cramer and Stephanie Link | 10/24/14 - 06:08 PM EDT

The markets rebounded nicely this week as earnings took center stage and concerns about the global slowdown eased after economic data came in ahead of expectations. Oil prices and the dollar settled down and there was continued chatter that the Fed would likely stay on hold with the first interest-rate hike also added fuel to the rally.

All the major averages responded well. The S&P 500 and Nasdaq were up more than 4% and the Dow was up more than 3%. The Dow would have been up more if not for the large drop in IBM (IBM) following its big earnings miss. On earnings, the tally so far has been 9.5% bottom-line growth and 5% top line, which compares with the 3-4% expectations headed into the season. What’s been equally impressive have been margins, which have stayed high, proving the naysayers saying they've peaked wrong.

The economic numbers in the U.S. were generally better. Numbers were good in housing sales, mortgage applications, CPI, continuing claims and an important series we like to follow, the Chicago Fed National Activity Index, which showed a big snap back on a month-to-month basis. But it was the surprising stronger PMI reports from both China and Germany that really got investors' attention, especially since both regions had seen deceleration of late. There was still talk of Europe needing QE and China injecting its banks with liquidity, but nothing was formally announced. We expect monetary policy to remain favorable, which should act as support.

As is usually the case during earnings season, we didn’t trade too much, wanting stocks to settle from the initial reactions. We did pick up a new position in Cummins (CMI) following the better results at Caterpiller (CAT) and Wabco (WBC). And we added to AIG (AIG) following the better results from Chubb (CB) and Travelers (TRV) and McDonald’s (MCD) and United Technologies (UTX) on the dips after earnings.

It will be a big week for earnings next week, with 158 companies, or 31.6% of the S&P 500, reporting. A few that we will be focused on: Masco (MAS), Hartford (HIG), Facebook (FB), Eaton (ETN), Cigna (CI), Ensco (ESV), Starbuck’s (SBUX), Twitter (TWTR), Panera (PNRA), AbbVie (ABBV), Royal Dutch Shell (RDS.A), and Vale (VALE. Analyst meetings of note are Amgen (AMGN), Kroger (KR), Kohl’s (KSS), Juniper (JNPR), CarMax (KMX) and Mattel (MAT).

Below is next week’s economic data that we will be watching for the U.S. and rest of world.


Monday (10/27)

Markit Services PMI (09:45)

Markit Composite PMI (09:45

Pending Home Sales MoM (10:00): +1.0% exp

Pending Home Sales YoY (10:00)

Dallas Fed Manufacturing Activity (10:30): 11.0 exp

Tuesday (10/28)

Durable Goods Orders (08:30): +0.4% exp

Durable Goods Orders Ex-Transportation (08:30): +0.5% exp

Capital Goods Orders Non-Defense Ex-Air (08:30): +0.6% exp

S&P/Case-Shiller 20-City Housing MoM (09:00): +0.15% exp

S&P/Case-Shiller 20-City Housing MoM (09:00): +5.65% exp

Consumer Confidence Index (10:00): 87.2 exp

Richmond Fed Manufacturing Index (10:00): 10 exp

Wednesday (10/29)

MBA Mortgage Applications (07:00)

Fed QE3 Pace (14:00): $0B expected

Fed Pace of Treasury Purchases (14:00): $0B exp

Fed Pace of MBS Purchases (14:00): $0B exp

FOMC Rate Decision (14:00)

Thursday (10/30)

Initial Jobless Claims (08:30)

Continuing Claims (08:30)

GDP Annualized QoQ (08:30): +2.8% exp

Personal Consumption (08:30): +1.9% exp

Friday (10/31)

Employment Cost Index (08:30): +0.5% exp

Personal Income (08:30): +0.3% exp

Personal Spending (08:30): +0.1% exp

ISM Milwaukee (09:00)

Chicago PMI (09:45): 60.0 exp

University of Michigan Consumer Confidence (09:55): 86.4 exp


Monday (10/27)

Eurozone M3 Money Supply YoY (05:00)

Japan Retail Trade YoY (19:50): +1.0% exp

Japan Large Retailers’ Sales (19:50): +1.5% exp

China Industrial Profits YoY (21:30)

Germany Import Price Index MoM: -0.1% exp

Germany Import Price Index YoY: -1.9% exp

Tuesday (10/28)

Japan Small Business Confidence (01:00)

Japan Industrial Production MoM (19:50): +2.5% exp

Japan Industrial Production YoY (19:50): -0.6% exp

China Leading Index

Wednesday (10/29)

UK Net Consumer Credit (05:30): 0.8B expected

UK Net Lending Secured By Dwellings (05:30): 1.9B exp

Japan Vehicle Production YoY (22:00)

Thursday (10/30)

UK Nationwide Housings Prices MoM (03:00): +0.3% exp

UK Nationwide Housings Prices YoY (03:00): +8.5% exp

Germany Unemployment Change (04:55): +5M exp

Germany Unemployment Rate (04:55): +6.7% exp

Eurozone Economic Confidence Indicator (06:00)

Eurozone Industrial Confidence Indicator (06:00)

Eurozone Consumer Confidence Indicator (06:00)

Eurozone Services Confidence Indicator (06:00)

Eurozone Business Climate Indicator (06:00)

Germany CPI MoM (09:00)

Germany CPI YoY (09:00)

Japan Jobless Rate (19:30): +3.6% exp

Japan Overall Household Spending YoY (19:30): -4.2% exp

Japan National CPI YoY (19:30): +3.2% exp

Friday (10/31)

Japan Housing Starts YoY (01:00): -17.1% exp

Japan Annualized Housing Starts (01:00): 850K exp

Japan Construction Orders YoY (01:00)

Eurozone Unemployment Rate (06:00)

Eurozone CPI Estimate YoY (06:00)

Eurozone CPI Core YoY (06:00)

Germany Retail Sales YoY (06:00)

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 Stephanie Link co-manage a diversified portfolio and make money. You'll see every position in every stock, and we'll send you alerts BEFORE every trade. And best of all, all profits go to charity -- we've donated $1.8 million to date.

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

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

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


AbbVie (ABBV:NYSE; $60.29; 900 shares; 2.04%; Sector: Healthcare): This week, the company officially announced that it had terminated its proposed acquisition of Shire due to the new rules on tax-inversion deals that were presented by the Treasury Department in September. The new rules, which will be applied retroactively, made the acquisition much less synergistic -- it would have gone from 13% accretive to 2% accretive -- and we believe the board has made the correct decision to walk away from the transaction. The company also announced this week a 17% dividend increase to $0.49 per share, bringing the dividend yield to 3.6% (the second highest in the group), as well as a $5 billion share-repurchase deal, which is 6% of its market capitalization. Both of these are positive developments, and shares reacted very well to the news, climbing more than 10% this week and erasing all of the losses that followed the initial announcement that the board would reconsider the Shire deal. We like the fundamentals of the company with Humira’s dominance, the Hep C rollout and its dozen drugs in the pipeline. At 14.3x forward estimates, the stock trades at more than a 10% discount to the company’s peer group average. We’re looking to add when our restrictions are cleared and when the stock pulls back. Our target is $65.

American International Group (AIG:NYSE; $52.16; 1,500 shares; 2.93%; Sector: Financials): The stock trended higher this week and we added to our position, lowering our cost basis in the process. Shares had declined about 10% from their September highs, mostly due to the Starr International trial, Ebola concerns and uncertainty over recent management changes. We think that the concerns over the trial are overblown, as Starr’s case is undermined by the fact that it likely would have gone bankrupt if not for the government rescue, which would have been more harmful than any of the terms imposed during the bailout. The Ebola fears are understandable, but will likely continue to wane each day without a new domestic case, and the management shakeup is not atypical of a company with new leadership and we believe new CEO Peter Hancock will continue to advance former CEO Bob Benmosche’s vision for the company. The stock is quite cheap on a valuation basis, at 0.67x tangible book value (TBV) vs. the 1x TBV from peers. There is much room for improvement in the stock’s book value, expense level and ROE, and progress in these measures would be a positive catalyst for shares. Our target is $65.

American Express (AXP:NYSE; $86.40; 1,600 shares; 5.19%; Sector: Financials): Shares finally participated in this week’s rally and finished the week up about 3%, despite disappointing earnings results from some of the company’s competitors, Discover and Capital One. AXP’s third-quarter earnings were encouraging, with in-line top line, better bottom line and 9% increase in billed business. We believe the higher spending will carry over to the fourth quarter in what should be one of the busier holiday spending seasons in recent memory. We continue to like this position -- now our No. 1 one holding -- as a play on the recovery of the American consumer, as 81% of the company’s operating income comes from its domestic business, and as a way to get exposure to the financial sector without a heavy dependence on rising interest rates. We also like the setup into 2015 as investment spending trends ease and operating leverage improves. Shares trade at a discount to its rivals at 16x forward estimates compared with MasterCard (MA: NYSE) and Visa (V:NYSE), which are at 21.6x and 32.3x, respectively. We will continue to build this position while shares remain below our cost basis. Our target is $95.

Cummins (CMI:NYSE; $137.25; 100 shares; 0.51%; Sector: Industrials): We initiated a new position in the stock this week following the 15% decline in shares from its peak and down 10% from where we sold out of the position in July. We like this best-in-class engine maker, its dominant market share and the global emission standard changes that offer a secular tailwind. Its business structure positions it well for these standard changes and its low breakeven point and outsourcing strategy lead to industry-high margins. The catalyst for buying followed Caterpillar and Wabco. Both reported earnings that were better than feared and share prices went higher. We like the risk/reward into Tuesday’s report, but started with just a small position and will build up accordingly. Estimates for earnings are $2.28 a shares and revenues of $4.72 billion. Our target is $155.

Dow Chemical (DOW:NYSE; $48.21; 2,550 shares; 4.61%; Sector: Materials): The company reported strong 3Q earnings that beat the top and bottom lines and on margins. Adjusted earnings came in at $0.72 per share, up 44% y/y and $0.05 above analysts’ expectations, while revenue was up 5% y/y to $14.4 billion, also above expectations. EBITDA margin expanded 240 basis points to 15.9%, volume rose 2% and prices increased 3%. The standout divisions were performance materials (revenue up 8% y/y) performance plastics (revenue up 8%) and electronics and functional materials (revenue up 3%). Sales increased in all geographic areas as well, led by 7% growth in North America and a surprising 6% increase in Latin America. It is clear that the company’s restructuring efforts are working and management once again affirmed its commitment to these efforts. It reiterated its target of $4.5 billion to $6 billion in asset sales or other portfolio moves and management reiterated that shareholder cash distributions would be the main priority much of the cash that is raised through the asset sales. Management hinted that we will get more details with regards to these and other restructuring moves during the company’s investor day in early November. If the dollar and oil prices are able to stabilize or gain some of their lost ground, expect shares to trend higher into the Investor Day. Our target is $65.

Ensco (ESV: NYSE; $38.88; 2,025 shares; 2.95%; Sector: Energy): It was another positive week for shares after the company reported new contracts, some existing contract extensions and some asset sales for its fleet. The new contracts came in West Africa and the Gulf of Mexico at reasonable rates for their respective regions, while existing contracts with Saudi Aramco and OMV were extended, all which should be seen as positives. Also noteworthy was the announced sale of four jack-up rigs in Mexico for $53 million each, a good value considering that all of the rigs were built in the late 1970s/early 1980s. The company will lease back the rigs for the duration of their current contracts, for a fee of $39,000 a day, low enough to ensure profitability for the rest of the time they’re used. The company reports its earnings next week, and expectations are low at earnings of $1.61 per share (down 5% y/y) on revenue of $1.232 billion (down 3% y/y). More important will be management’s guidance for 2015, which looks to be a weak year industry-wide, but again, not unexpected given the 40% drop in shares from recent highs, trading at 7x estimates. Our target is the mid-$50s.

Eaton (ETN:NYSE; $63.06; 1,900 shares; 4.49%; Sector: Industrials): Shares were essentially flat this week, despite volatile trading for this and other industrial names. The company will get a chance to trade on its own merits next week when it reports third-quarter earnings and this is an extremely important test for the company. After delivering three straight earnings misses, CEO Sandy Cutler will need to deliver performance that is at least in line with expectations. Estimates call for earnings of $1.23 per share on revenue of $5.8 billion and end-market commentary from management will also be key as well as margin performance. At 12.5x forward estimates, shares trade at almost a 20% discount to the group and strong outperformance could mark the beginning of the catch up process. Our target is $80.

Kinder Morgan (KMI:NYSE; $39.03; 2,000 shares; 2.93%; Sector: Energy): The stock gained about 5% this week, a strong result considering that natural gas fell about 3% during the same period. The S-4 Registration Statement that KMI’s management had filed with the SEC in order to consolidate its four master limited partnerships (MLPs) into one corporate entity was declared effective on Wednesday, paving the way for a Nov. 20 vote to finalize the transaction. In a macro environment that is punishing most energy companies, one of the best ways to play the domestic energy boom is to own a pipeline and storage company like KMI, which collects tolls for transportation and fees for storing natural gas, liquefied natural gas and oil. This holding is also set up well for the long term, as it plans to increase its dividend, which already yields a robust 4.6%, by 16% to $2.00 per share in 2015 and by 10% every year until 2020. While there is some concern in the MLP/pipeline space that companies will not be able to sustain their high dividends, KMI should be fine, as it projects to generate $2 billion more than it intends to pay out each year. The consolidated company will be one of the largest energy companies in the world, with enough scale to tap capital markets easily and make acquisitions for further growth. We’ll likely continue to add to our position while we’re below our cost basis. Our target is $50.

Lear (LEA:NYSE; $90.26; 1,300 shares; 4.40%; Sector: Industrials): The company reported a strong third-quarter earnings beat this week and shares jumped on the news, ending the week up almost 10%. The company beat expected earnings per share by 5 cents at $1.93 with in-line revenue of $4.23 billion. The primary reason for the beat was improving margins. Gross margin came in at 9.1%, above the 8.8% consensus, and operating margin was 5.9%, above the expected 5.7% and last year’s 5.3%. The segment performance was somewhat surprising as seating sales grew 10% y/y but saw margins fall below the YTD trend, while electrical sales rose just 2% (in line with expectations), but saw margins expand to 13.3%, well above expectations and the YTD trend. On a regional basis, there were puts and takes as unit sales grew 10% in China, 8% in North America, 4% in India and 1% in Europe and Asia, offset by double-digit declines in Russia and Brazil (which was expected). On its earnings conference call, management also discussed the Eagle Ottawa acquisition, reiterating the 5% accretion forecast and noting that the deal should provide more exposure to China, the company’s fastest- growing market. Importantly, the company raised its 2014 net income guidance to $640-655 million, which is up 2-5% from prior outlook and translates to $7.85-$8.05 in earnings per share. As the company continues to improve margins in both of its businesses and sees sales growth both organically and through the Eagle Ottawa acquisition, we expect that the share price could get back to its highs of $105.

Macy’s (M:NYSE; $58.98; 1,600 shares; 3.54%; Sector: Consumer Discretionary): It was a positive week for this name, which traded almost in lockstep with the consumer discretionary sector as a whole to finish up more than 4%. We still like this name as another way to play the secular trend of the gradually improving domestic economic picture. The employment picture has been improving and oil prices are down over 25% from their mid-summer highs, which will leave consumers with more money to spend, especially during the upcoming holiday shopping season. The International Council of Shopping Centers recently forecast a 4.1% y/y increase in holiday spending and Macy’s supported this bullish sentiment for the season, announcing that it would hire 86,000 seasonal employees to handle demand during the period. While there may be no immediate catalyst here until the company reports its third-quarter earnings in early November, we think the stock is well positioned heading into the fourth quarter and the holiday season. The stock trades right at 12x forward estimates, at its historical level, but it still is valued at a 13% discount to its peers, a bargain for what we consider to be the best-in-class operator in the department store space. Our target is $65.

McDonald’s (MCD:NYSE; $91.67; 500 shares; 1.72%; Sector: Consumer Staples): The stock underperformed this week after the company missed expectations with its third-quarter earnings report. Though its adjusted EPS was in line with expectations, reported revenue was a disappointing $6.99 billion, below consensus expectations of $7.19 billion and down 4% y/y. Same-store sales fell in every region, down 3.3% in the U.S., 1.4% in Europe, and 9.9% in China and Japan, with the APAC decline due to the chicken supply issues also seen at Yum! Brands (YUM:NYSE) recently. We did expected to see a tough result this quarter, and we used the stock’s subsequent decline to build out our position and improve our cost basis, because the uglier this gets the more likely an activist will come in and/or the company will implement a bigger restructuring and/or lever the balance sheet further for more cash deployment. Plus, the stock’s 3.7% dividend gives us support as we wait for strategic changes to be implemented. At 16x forward estimates, the stock currently trades at a 20% discount to its peer group. Not much needs to go right for a bounce higher and we’ll stay patient for changes to come. Our target is $100.

Microsoft (MSFT:Nasdaq; $46.13; 1,600 shares; 2.77%; Sector: Technology): Shares traded higher this week after the company reported a very good quarter that beat expectations on both the top and bottom lines. Earnings per share came in at $0.54, 6 cents above expectations, while revenue came in at $23.2 billion, a 25% y/y increase. Operating margins were also a positive surprise at 25.2%, vs. the consensus 23.4%. The commercial segment, which represents 54% of total revenue, saw sales increase 10% y/y and exercised impressive cost discipline, while cloud grew 128% y/y and server products and services was up 13% y/y. There was strong growth in several specific products as well, with a 25% increase in Office 365 Home and Personal, a 102% increase in Xbox console sales and strong Surface performance, driven by demand from students, enterprises and professionals. For us, one of the main highlights from the quarter was the fact that corporate customers are now buying more premium products and full suites of offerings, showing that the company’s focus on services such as cloud and SQL server is working, shown by the 10% sales increase and the increasing gross margins, which grew 9% in the segment. In addition to the strong operating performance, the company spent $1.3 billion on capex, investing in new and existing data centers, and the company bought back $2.9 billion of stock in the quarter, a 45% increase from the second quarter, and there is $35 billion remaining on the company’s current buyback program. Our target is $52.

Panera Bread (PNRA:Nasdaq; $169.20; 450 shares; 2.86%; Sector: Consumer Discretionary): The company’s shares were flat this week, lagging the overall market and the consumer discretionary sector. The stock participated in Monday’s rally, gaining 4% in that session alone, but gave up most of the gains on Tuesday, as the whole QSR space fell in sympathy with McDonald’s (MCD:NYSE), which missed consensus expectations in its earnings report and cited an increasingly competitive domestic landscape as one of the reasons its same- store sales fell 3.3%. But we believe in Panera’s long-term growth and the restructuring concept of the 2.0 will lead to better same-store sales and EBITDA and eventually to the bottom line. The new format, designed to improve customer in- store experience and improve efficiency, is being introduced to 100 stores this year and the company has plans to roll out the concept in 750 stores next year and virtually all of its locations will feature the design by the end of 2016. In the locations where the PNRA 2.0 design has been tested so far, same store-sales have approached 10% growth and the speed of service has increased by more than 30 seconds, which makes a big difference for customers. The company reports its third quarter earnings next week and analysts’ estimates call for earnings of $1.43 per share on revenue of $620 million. We’ll also be looking closely at overall same-store sales growth and hopefully will receive more color from management on the progress of PNRA 2.0. Our target is $185.

PVH (PVH:NYSE; $117.00; 600 shares; 2.63%; Sector: Consumer Discretionary): It was a strong week of outperformance for the company, as shares climbed more than 3% on the heels of a strong VFC (VFC:NYSE) earnings report and the company being viewed as a beneficiary of lower gasoline prices that are expected to come following the 25% drop in WTI prices from summer highs. The stock has clearly been oversold, as it is still down about 10% from its Sept. 4 high -- the day of its last earnings report -- without any real change to the company’s fundamentals or projected performance and we are more confident in the company’s ability to continue the strong performance seen in the second quarter. Most retailers do not report third-quarter earnings until November and PVH will not report again until early December so the stock lacks a near- term catalyst to send shares back towards their early September highs, but we’ll remain patient on the shares given the positive restructuring effects, the M&A synergies and new displays, which all should lead to another recovery quarter. The dividend yield is solid at 2.5% and the stock remains cheap at 13.9x forward estimates, more than 20% below its peers’ average. Our target is the low $130s.

Royal Dutch Shell (RDS.A: NYSE; $70.90; 1,550 shares; 4.12%; Sector: Energy): Shares gained ground this week for the first time in five weeks after oil prices stabilized and the company accomplished two major milestones in its restructuring efforts. First, the company announced that it had launched the initial public offering of common units for the master limited partnership, Shell Midstream Partners (Soon to be SHLX:NYSE), which houses a good amount of the company’s midstream assets in the U.S. The IPO is expected to raise about $750 million for the partnership, for which Royal Dutch Shell is the general partner and will own about 70% of the limited partner interest. Additionally, the company announced the sale of its remaining Nigerian onshore oilfield assets, which had been on the block since last year. Nigeria has presented numerous risks for Royal Dutch Shell, and though the economic terms or the deal are not yet known, it is almost certainly a positive for the company to rid itself of the security and legal hassles that its Nigeria operations have caused it in recent years. The company reports its earnings next week and we’ll look for an update on these and other restructuring deals, as well as guidance on where the company projects oil prices will settle -- and if it can be profitable at those levels. The company is expected to make $1.78 a share and any upside surprise would be quite helpful to the share price, which is down over 13% since the beginning of September. We’re looking to buy more ahead of the print. Our target is $87.

Starbucks (SBUX:NYSE; $75.81; 1,350 shares; 3.84%; Sector: Consumer Discretionary): The stock finally got a respite from negative sentiment this week, using the broader market rally to climb about 2%. It is still off more than 7% from its July highs and next week’s earnings report could not come soon enough, as CEO Howard Schultz will have the opportunity to remind investors about the impressive growth prospects for the company. Earnings are projected to increase 15-20%, an impressive figure for a company of Starbucks' size and age, and management will also have to opportunity to calm what seem to be irrational investor worries, namely the exposure to coffee prices (in the past, the company has stated that it hedges about 60% of its exposure to this cost). Analysts’ consensus expectations project earnings per share of $0.74, which would represent an 18% increase y/y, on revenue of $4.23 billion, an 11.5% increase y/y. Our target is $86.

Twitter (TWTR:NYSE; $49.95; 1,400 shares; 2.62%; Sector: Technology): The company held its first ever developers conference this week, dubbed “Flight,” in which it introduced the new three-part developers kit called Fabric. The kit is a modular unit that will aid app developers in three facets of their business: identity, stability and monetization by combining the services currently offered by Twitter, Crashlytics, and MoPub (the latter two businesses are Twitter subsidiaries, both acquired in 2013). The main feature of the Fabric system is Digits, a sign-in system that will allow developers to create login systems for their applications using just their users’ phone numbers. The Crashlytics capabilities will give developers clarity over when crashes happen for their app, where bugs might be and how to fix them. Finally, the MoPub component of Fabric will give developers access to MoPub Marketplace, a location for advertisers to bid on advertising space. We view the Fabric introduction favorably, as it will bring app developers into the Twitter ecosystem from their inception, and with advertising trends indicating that mobile will be the focus of the future, this is an important long-term strategic play. Investors received the news well, sending shares up more than 2% the day after the conference. Attention can now turn to the company’s third-quarter results, to be reported on Monday. Consensus expectations call for revenue of $439 million and earnings per share of $0.05, and growth metrics such as user growth, advertising revenue growth and ad engagement growth will be the movers for shares. We’ll also look for commentary on any of the company’s fledgling efforts to integrate e- commerce into its application. Our target is $60.

Walgreen’s (WAG:NYSE; $2.62; 1,450 shares; 3.41%; Sector: Healthcare): Shares gained ground this week as investors ignored some noise from new litigation against the company. The stock rose more than 3%. Last Friday, the company’s former CFO Wade Miquelon filed a defamation lawsuit against the company, stating that the widely-known rationale for his dismissal -- a financial forecasting error to the tune of $1.1 billion -- was unfounded and that he has been defamed by the claim that the error was his. After the suit was filed, CfW, the activist adviser to union-sponsored pension funds, called for the company to put its Alliance-Boots merger on hold until the lawsuit’s allegations were addressed, a request that Walgreens dismissed, claiming that CfW has had objections to the merger for quite some time and was being opportunistic with its request. We’re pleased investors have ignored this whole sideshow for the most part, as have we because it is not material to EPS. Separately, a large portion of this week’s move could be attributed to chatter that activist investor Carl Icahn has taken a stake in the company, though that has not been confirmed one way or the other. We like the valuation, the Alliance Boots acquisition and the large new buyback program, which will support shares. Our target is $75.


Apple (AAPL:Nasdaq; $105.22; 820 shares; 3.24%; Sector: Technology): Shares gained almost 7% this week after the company delivered an impressive earnings report Monday that beat analyst expectations handily on both the top and bottom lines. Revenue increased 12% y/y to $42.12 billion, above the $39.88 billion consensus, and the company earned $1.42 per share, up 20% y/y and well above the $1.31 consensus. Gross margins -- one of the few concerns coming into the corner -- came in slightly above expectations at 38% and operating margin was solid at 26.5%. The company spent $17 billion during the quarter on share repurchases, bringing the total amount for its fiscal 2014 to $45 billion, and paid $2.8 billion in dividends during the quarter, making cash returns to shareholders a big component of this story. On a product basis, the iPhone and Macs were the key story. The company sold 39.27 million units, above the consensus of 38 million and a 16% y/y increase, and 5.52 million Macs, well above the 4.75 consensus and an 18% y/y increase. Importantly, the company saw strong growth in every region, despite FX headwinds, and emerging markets now account for 25% of total revenue. The company shows no sign so of slowing down, as it raised its revenue guidance for its fiscal 1Q 2015 to $63.5 billion to $66.5 billion and CEO Tim Cook commented that this upcoming holiday season could be the company’s best ever. Despite this incredible performance, shares trade at only 13.2x forward estimates, an almost 30% discount to the stock’s own historical level. Our target is $115.

Cigna (CI:NYSE; $92.83; 1,100 shares; 3.83%; Sector: Healthcare): The stock climbed higher this week, outperforming the S&P on no new news for shares. Looking ahead to the company’s third-quarter earnings report, due next Thursday, the company is expected to earn $1.83 per share on revenue of $8.77 billion. Costs will once again be in focus, after the company's second-quarter performance and management commentary led to concerns about the company’s Medical Loss Ratio (MLR). Additionally, we will look for management’s commentary on its strategy for continued expansion of its exchange business that is sourced from Affordable Care Act exchanges. To this point, the company has been very selective about the markets in which it chooses to participate in the exchanges, at least until it can better understand how to manage prices in that space. Last week’s strong results from competitor United Healthcare (UNH:NYSE) have set a high bar for the managed care space, but with a solid result we think the stock could at least charge back into the upper $90s levels seen in late July/early September. Our target remains $115.

Facebook (FB:Nasdaq; $80.67; 1,400 shares; 4.24%; Sector: Technology): It was another week of gains for the company, with the stock trading at all-time-high levels heading into next Tuesday’s earnings report. Shares are now up more than 45% YTD and expectations are quite high heading into the third quarter earnings report, with virtually every sell- side analyst predicting blowout results. The company is expected to deliver revenue of $3.12 billion (a 55% y/y increase) and EPS of $0.40 (a 62% y/y increase). As we wrote earlier this week, we would like to take some profits in this name as these types of heightened expectations for the quarter create little room for error. Trading restrictions have prevented us from doing that, but either way it would just be a trim as it is prudent to lock in some gains when expectations are this high and we have nice profits. Longer term, it remains a core positon and we like the social/Internet basket of FB, Twitter and Google for the long term. Our target is $90.

General Motors (GM:NYSE; $30.04; 3,400 shares; 3.83%; Sector: Consumer Discretionary): The company reported a solid third-quarter earnings report Thursday and investors sent shares up more than 4% for the week. Earnings per share came in at $0.97, above the $0.95 consensus on fairly in-line revenues at $39.3 billion. The strength of the report was clearly North America, which saw better-than-expected EBIT at $2.5 billion and margins at 9.5%, vs. the 9-9.3% consensus and was the fifth-straight quarter of improvement for what has become a key metric for investors. The progress indicates that management is well on track to achieving its goal of 10% margins by 2016. EBIT was also better in South America, which was partially offset by Europe and International, although China was a relative bright spot as well with margins up 20 basis points y/y to 9.6%. As a whole, the quarter was solid with peak cycle concerns unwarranted. At 7.7x forward estimates, the stock trades below its historical average and is at a 12% discount to the group. The yield remains attractive at 3.8% and we think the company can continue its outperformance domestically as its mix shifts to higher-margin trucks and SUVs, a trend likely to remain as gas prices continue to decline. Our target is $45.

Goldman Sachs (GS:NYSE; $183.35; 425 shares; 2.92%; Sector: Financials): Shares were up this week, but underperformed both the financial sector and the sector as a whole. Having outperformed last week it’s understandable for the stock to pause. The 3Q was strong, with an earnings surprise of nearly 40% ($4.57 actual vs. expectations of $3.30) on revenue of $8.39 billion, also above expectations. Investment banking revenue was $1.46 billion, up 26% y/y, and trading revenue rose 32% y/y to $3.7 billion, while the investing and lending and investment management divisions. Within those groups, Advisory, up 40%, and FICC, up 74%, were clear positives. Costs fell 19% q/q and compensation expense fell to 40%, down from 41% at the end of the third quarter in 2013. Common Equity Tier 1 ratio, book value and tangible book value all increased in the quarter and the company bought back $1.25 billion of its own shares. There really were no weaknesses seen in the period and with the shares at 10x for a company with superior returns, a stronger balance sheet and continued market share dominance, we continue to like this stock. Our target is $190.

Google (GOOGL:Nasdaq; $548.90; 235 shares, 4.84%; Sector; Technology): The stock had a strong rebound this week jumping 6% and follows last week’s disappointing performance following what we believe was a strong quarter and underlying fundamentals. Revenue was in line with expectations, growing at 20% y/y. That's quite a rate for a company that brings in more than $16 billion per quarter, Cost per click (the metric used to determine mobile monetization) fell only 2%, a promising development after CPC had fallen 5% in the second quarter and 11% during the strongest declines and cash flow generation was strong at $6 billion while capex rose $2 billion. We like the investment strategy, but also the fact that the company can and does show strong growth and dominant market share. Shares now trade at 18.3x forward estimates, almost 8% below historical levels and a fraction of the valuation assigned to competitors such as Facebook (39.4x), Amazon (239.8x) and Yahoo! 31x). Shares are below our cost basis and we’ll look to build this position out further. Our target is $645.

Johnson & Johnson (JNJ:NYSE; $103.13; 620 shares; 2.40%, Sector: Healthcare): Shares climbed higher this week as investors finally began to reward the company for the solid earnings that it reported last week. After reporting revenue of $18.47 billion and $1.50 in earnings per share, both of which were above consensus estimates, shares actually declined 2.5% last week, mostly over concerns stemming from management’s commentary about the anticipated competitive nature of the Hepatitis C drug market, where JNJ’s Olysio drug has seen impressive, likely unsustainable growth. Since then, the stock is up 3.5% as investors come to their senses. The bigger piece of news for the company this week was its announcement that it has made a commitment of up to $200 million to accelerate and expand the production of an Ebola vaccine that is currently in development at one of its pharmaceutical subsidiaries, Janssen. The treatment, which combines a Janssen preventative vaccine with one from Bavarian Nordic, a Danish biotech company, is anticipated to begin testing in January and the company has set a goal of creating one million doses of the vaccine in 2015. There was not much discussion of the economics of this program after it was announced, but for the time being the move can at least be viewed as a positive for the reputation of JNJ. Our target is $115.

SunTrust Banks (STI:NYSE; $37.41; 2,500 shares; 3.51%; Sector: Financials): The stock rose almost 4% this week as the company continued to see the benefits of its efficient third quarter, easily outshining the competition. The company’s third-quarter headlines were in line with consensus, but the key to the quarter was declining costs, with core costs down 6% sequentially and an efficiency ratio of 62%, down from 64.1% seen in the previous year. The pain points were lower fees (tough second quarter comps for the investment banking), declining mortgage production (likely to improve in 4Q due to interest rate declines) and NIM pressure. With regards to the last point, rates have risen about 10 bps this week, which have also bolstered the shares. This is a trend that we will likely see for the next couple years and, as rates rise -- whatever pace that might be -- the company’s large deposit base and loan book will become more valuable. We still like the name for its regional exposure to the Southeast, its strong loan growth, and its valuation. At 1.3x Px/TBV, the shares remain cheap, compared with other regional banks such as M&T Bank (1.7x), BB&T Corp (1.6x), and U.S. Bancorp (2.4x). Our target is $45.

United Technologies (UTX:NYSE; $103.82; 1,275; 4.97%; Sector: Industrials): The company delivered a solid third- quarter earnings report this week, as expected, and its shares rose moderately on the news. Results were steady across the board, as UTC beat expectations on earnings, sales, orders and margins, a welcome development for the company that was trading at 52-week lows just last week. It earned $1.82 per share, vs. the $1.81 consensus, on revenue of $16.2 billion, vs. the $16.1 billion consensus. Organic sales growth accelerated to 5% from the 3% level seen in the second quarter, a key improvement that we were looking for in this report, and segment operating profit and operating margins rose as well. The highlight of the quarter was orders, which rose 4% at the Otis equipment segment, 5% in climate/HVAC, 11% in aerospace commercial spare parts/service, and 1% for large commercial orders at the Pratt & Whitney division. The company reiterated its guidance of $6.75-$6.85 per shares for the year and cash flow was on track to be 90% of net income. The company raised its buyback program slightly and we expect shares to appreciate over the coming weeks as analysts revise future estimates higher. We added to the position after earnings and we likely will continue to do so, despite our already large position, because, at its current level, we think the stock is one of the better values available in the market right now. Our target is $120.


Bank of America (BAC:NYSE; $16.72; 6,500 shares; 4.08%; Sector: Financials): The stock finished slightly higher this week, trading broadly in line with the financial sector most days. We continue to like this name and think that it is one of the better values in the financial sector. But if it approaches our $18 target, we’ll likely trim some of this large position back some. Last week, the company delivered a positive surprise on both the top and bottom lines for its third-quarter earnings report. One aspect of the quarter that was especially encouraging was that about half of the earnings beat came from better-than-anticipated trading revenue ($3.3 billion ex-DVA vs. the $2.8 billion consensus estimate), featuring solid y/y increases in both FICC (+11%) and equities (+6%) trading. If the first couple months of October are any indication, this trend is likely to continue for the fourth quarter, as volatility has returned and seems likely to persist for at least the immediate future. Last quarter likely marked the final time that the company’s earnings report featured a large litigation charge, so the company can finally be valued purely on its fundamentals and projected performance. The offset, of course, is the lower-rate environment which will be an offsetting headwind (for the entire group). At just 1.1x Px/TBV, the stock remains compelling on a valuation basis, and shares are likely to participate if we see broader market rallies, but no near-term catalysts and an outsized position likely will lead us to trim.

Vale (VALE:NYSE; $11.16; 3,500 shares; 1.47%; Sector: Materials): Shares traded lower this week after President Dilma Rousseff gained some momentum in the most recent Brazilian election polling. As of Wednesday, Rousseff held a 47%-43% lead over the centrist challenger Aecio Neves, indicating a dead heat heading into Sunday’s runoff election. Neves is considered the more pro-business candidate by the investor community and Brazilian equities had increased across the board in previous weeks as he received the endorsement of Marina Silva, the third place finisher in the general election, and temporarily became the runoff front runner. While Neves has vowed to slow inflation and boost growth, Rousseff has stated that his policies will threaten the country’s record-low unemployment rates and its current levels of social welfare spending, accusations that have begun to sway public opinion. The EWZ -- the Brazilian ETF -- fell more than 10% this week after Monday’s poll results were released and Sunday’s result will likely be a binary event for next week’s trading. A Rousseff victory will send shares even lower, while a Neves win will lead to a rally. Regardless of the election outcome, we still believe in the stock as a valuation play and, at 5.1x EV/EBITDA, shares currently offer an almost 20% discount to the mining group.


Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUS was long AAPL, ABBV, AIG, AXP, BAC,CI, CMI, DOW, ESV, ETN, FB, GM, GOOGL, GS, JNJ, KMI, LEA, M, MCD, MSFT, PNRA, PVH, RDSa, SBUX, STI, TWTR, UTX, VALE and WAG.

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Action Alerts PLUS Holdings

Stocks we would buy right now

Symbol % Portfolio
ABBV 2.04% Drugs
AIG 2.93% Insurance
AXP 5.19% Financial Services
CMI 0.51% Industrial
DOW 4.61% Chemicals
ESV 2.95% Energy
ETN 4.49% Industrial
KMI 2.93% Energy
LEA 4.40% Automotive
M 3.54% Retail
MCD 1.72% Leisure
MSFT 2.77% Computer Software & Services
PNRA 2.86% Leisure
PVH 2.63% Consumer Non-Durables
RDS.A 4.12% Energy
SBUX 3.84% Leisure
STI 3.51% Banking
TWTR 2.62% Internet
WAG 3.41% Retail

Stocks we would buy on a pullback

Symbol % Portfolio
AAPL 3.24% Consumer Durables
CI 3.83% Health Services
FB 4.24% Internet
GM 3.83% Automotive
GOOGL 4.84% Internet
GS 2.92% Financial Services
JNJ 2.40% Drugs
UTX 4.97% Aerospace/Defense

Stocks we would sell on strength

Symbol % Portfolio
BAC 4.08% Banking
VALE 1.47% Metals & Mining

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