All eyes turn to the U.S. Federal Reserve today
for insight as to when it will begin to tighten interest
rates and how fast they plan to proceed. We believe the
market volatility is directly related to the tightening
policy and not to the Alibaba IPO or eastern
European political unrest.
Since our most recent summary update, we have trimmed 13
shares from our position in Boeing (BA:NYSE), 50
shares of Citigroup (C:NYSE), and 50 shares of
EMC (EMC:NYSE) for a gain of 14%, a 2% loss, and
an 8% gain, respectively. The move is entirely for risk
management and not indicative of a change in our
fundamental outlook on the companies.
We also closed out our 174-share stake in Xilinx
(XLNX:Nasdaq), locking in an 8% gain when the stock was
trading higher a bounce. We have little confidence that
management has the ability to improve its execution.
As a reminder, One-ranked stocks are names that we would
buy at their current levels and Twos are stocks we would
not purchase at their current share prices.
(Each company paragraph begins with the stock's most
recent closing price and its percentage weighting in the
Fundamental Approval and Analysis:
Allstate (ALL:NYSE, $61.71, 4.08%, $65 price
target) is the second-largest personal insurer in the
U.S. This interest-rate play has a modestly improving
fundamental business. The shares have traded sideways
since our last update on little company-specific news. We
remain bullish on the shares and the company’s modestly
improving fundamental business.
Automatic Data Processing (ADP:Nasdaq, $83.41,
4.33%, $87.50 price target) is a business software and
services company that is poised grow steadily along with
an improving economy, job growth and rising interest
rates. The stock has traded a fraction lower since our
most recent summary. ADP has announced that it
anticipates the distribution date for its dealer services
unit (CDK Global) will take place on Sept. 30 to ADP
shareholders of record after the market close on Sept.
24. ADP shareholders will receive one share of CDK Global
common stock for every three shares of ADP stock. We plan
on immediately liquidating our CDK position. We continue
to focus on ADP's traction within its human capital
management (HCM) suite as its key growth driver.
Boeing's (BA:NYSE, $127.32, 5.05%, $150 price
target) stock gained a bit of altitude, trading up 1%
since our last summary update. Last week, Bloomberg
reported that Boeing is set to receive an $11 billion
order for its 737 Max jets from Ryanair Holdings (RYAAY),
Europe's largest discount carrier. Boeing CEO James
McNerney said he expects "strong pressure" to increase
the 737's production rate above current targets. We
remain convinced that investors have unduly soured on
what we consider a still-robust commercial aerospace
cycle, and we remain bullish on the company.
ConocoPhillips (COP:NYSE, $80.75, 3.32%, $94 price
target). ConocoPhillips is a global oil-and-gas
exploration and production company. The company has
assets in 19 countries and is one of the largest North
American shale acreage holders. The stock has increased
1% since our most recent summary update, as the price of
oil has continued to be weak. This week, The Financial
Times reported that the company is auctioning off its
stake in the Clair oilfield in the North Sea. This, if
substantiated, continues COP’s progress in disposing of
international assets to align its focus on the domestic
market. Based on its shale exposure, strong dividend
yield and below-average net-debt ratio, we consider the
company's current valuation attractive.
CVS Health (CVS:NYSE, $82.22, 5.41%, $87 price
target) is trading 3% higher since our last summary
update. As a savvy PR move, the company announced that it
has changed its name from CVS Caremark to CVS Health to
reflect its broader health care commitment. CVS also
announced that the company had ended tobacco sales at its
stores on Sept. 3, which was almost a month earlier that
its target date of Oct. 1. The company also announced a
smoking cessation campaign. We remain bullish on the
shares as the company continues to successfully expand
its services and offerings and remains fiscally
Dow Chemical (DOW:NYSE, $53.48, 4.24%, $57 price
target) has closed mostly unchanged from our last summary
update. Investors continue to focus on potential asset
sales as the company works to right-size its businesses.
The company announced the retirement of CFO William
Weideman, who has been with the company for 38 years.
Management named Howard Ungerleider his replacement.
Ungerleider has been with the company since 1990 and a
part of the senior executive team since 2012. We expect a
smooth transition. Our investment thesis for the stock is
built upon management’s continued restructuring and
streamlining of its businesses and we believe investors
should focus on these positive actions.
EMC (EMC:NYSE, $29.55, 3.25%, $35 price target) is
the largest global storage vendor and the company also
owns 82% of VMware (VMW:NYSE), which has brought it into
the cloud-computing marketplace. The stock has gained a
fraction since our last summary update. The recent
attention the company is receiving -- instigated by
activist investor Elliot Management’s involvement in the
stock -- is helping to unlock some of its value. Last
week, The New York Post reported that EMC was
considering a sale of its stake in VMware. We do not
believe this is likely and note that management has said
as much. EMC is extremely well positioned in the hottest
technology marketplaces: big data, cloud computing,
security and data storage. We expect improving economic
environments worldwide will boost the sales environment
for storage and data management equipment, software and
Foot Locker (FL:NYSE, $57.98, 5.48%, $62 price
target): Shares of this leading athletic footwear and
apparel retailer have gained 1% since our most recent
summary update. Last week, JPMorgan reiterated its
Overweight rating on the stock and bumped its price
target to $60 from $51. In addition, almost two weeks
ago, The Daily Mail reported on private equity
buyout rumors surrounding the stock at $70 per share. We
doubt these rumors are true, but we sure hope they are!
The company offers robust cash flow generation, a strong
balance sheet, share repurchases and a 1.5% dividend
yield, which allow for extra breathing room in a
competitive and capital intensive industry. This cash-
rich, undervalued retail play has a growing European
presence and we expect it will benefit from increasing
consumer sentiment as well as its new store remodeling
G&K Services (GK:NYSE, $56.06, 4.94%, $60 price
target): G&K is the fourth-largest uniform services
company in the U.S. The stock gave back 1% since our last
summary update on little company specific news. A recent
strong fiscal fourth- quarter results and continued
progress with its rate of organic growth have reinforced
our bullishness on the name. Recent strength in domestic
economic data bode well for increasing levels of demand.
Illinois Tool Works (ITW:NYSE, $88.70, 4.79%, $95
price target): Shares of this diversified global
manufacturer of industrial products and equipment have
traded fractionally higher since our last summary update.
Management recently reiterated its target to use 25% of
its operating cash on organic investments, 25% on
dividends and 50% on mergers and acquisitions (M&A)
and/or share repurchases. Management is now focused on
organic growth and improving the company's operating
margin through restructuring its businesses. Last week,
FBR Capital raised its price target on the stock to $105
from $97, citing its increased conviction in the
company’s long-term 2017 earnings model. We expect the
company’s ongoing restructuring efforts will lead to
upside relative to its conservative guidance when volumes
International Paper (IP:NYSE, $49.08, 4.15%, $58
price target): Shares of this global paper and packaging
company climbed 1% since our most recent summary update.
Last week, IP management announced that the company will
increase its annual dividend to $1.60 from $1.40. The
company also said Mark Sutton, the current COO, would
succeed John Faraci as CEO on Nov. 1. The move was
anticipated though the timing was ahead of expectations.
Management also commented that they are studying the
master limited partnership (MLP) structure and are
evaluating whether it makes sense for IP, which would
create significant cost advantages for the company. IP's
strong dividend yield and its active share repurchase
program continue to mitigate downside from current
levels. We believe improved economic conditions could
fuel upside, though pricing trends will be monitored
3M (MMM:NYSE, $144.85, 4.47%, $155 price target):
Shares of this broad, high-quality, industrial products
company have gained a fraction since our last update.
Two-thirds of the company's sales come from international
markets. Management plans to repurchase $17 billion to
$22 billion of its shares from 2013-17. The company is
scheduled to present at the Citi 2014 Industrials
Conference on Sept. 22. The event will be webcast on the
company’s website at 12:50 p.m. EDT. The stock currently
offers a 2.4% dividend yield, and we consider 3M a
defensive way to play an expanding economic recovery.
Merck (MRK:NYSE, $59.99, 4.77%, $62 price target):
Shares of this leading pharmaceutical company have moved
up slightly since our last update. We are especially
attracted to Merck's defensive drug company
characteristics, strong cash flows and 2.96% dividend
yield. On Monday, Merck reported data from its phase III
fracture outcomes study of its osteoporosis drug
odanacatib. The study was positive and showed a marked
reduction in vertebral, clinical hip, and clinical
nonvertebral fractures. However, questions about
odanacatib's cardiovascular safety profile were
maintained. Merck plans to file the product with the FDA
in 2015. We believe management’s solid execution along
with upcoming catalysts will push the shares higher.
Paccar (PCAR:Nasdaq, $59.20, 3.65%, $75 price
target): Shares of this high-quality manufacturer of
medium- and heavy-duty trucks (which make up about 80% of
sales) and after-market parts (around 17% of sales) gave
slid 6% since our most recent summary update. The entire
group continues to be under pressure as some investors
believe new orders have peaked. Last week, the company’s
board of directors declared a quarterly cash dividend of
$0.22 per share, which is payable on Dec. 5 to
stockholders of record at the close of business on Nov.
14. Market rumors that Volkswagen is planning to make a
bid for Paccar is not part of our investment thesis
(though we would love for that to happen). Growth in the
commercial-vehicles market, which is being driven by
replacement of aging fleets in developed market and
growth and replacement in emerging markets, will continue
to benefit the company.
PepsiCo (PEP:NYSE, $92.57, 2.99%, $109 price
target): Shares of this global food and beverage company
have increased 1% since our last summary. On Monday,
Cowen and Company initiated research coverage on the name
with an Outperform rating and a $106 price target. We
believe increasing operating leverage, cost savings,
modest commodity inflation costs and activist
shareholders' influence will combine to provide a nice
tailwind for the stock and make it a satisfying
Vanguard Total Stock Market ETF (VTI:NYSE,
$103.54, 3.65%): We are using the VTI as a cash proxy as
we roll out new names while allowing the cash balances to
be invested in the market. The ETF seeks to track the
performance of the CRSP U.S. Total Market Index. The VTI
invests in large-, mid- and small-cap equity diversified
across growth and value styles and employs a passively-
managed, index-sampling strategy. Shares of the ETF
closed 0.4% below the level of our last update.
VF Corp. (VFC:NYSE, $66.34, 4.97%, $68 price
target): Shares of this global clothing manufacturer and
marketer traded up 3% since our most recent summary
update. We believe the stock continues to be buoyed by
the decrease in raw material input costs. We remain
bullish on the name and are impressed with the company's
traction with Timberland and the strength its European
business. We expect to see upside from the company's
overseas expansion as it fully builds out each of its
portfolio brands. We believe the company will continue to
outgrow the weak retail peer group.
Whirlpool (WHR:NYSE, $152.60, 2.02%, $193 price
target): Shares of this leading global appliance
manufacturer have decreased fractionally since out most
recent update. Last week, General Electric (GE:NYSE)
announced that it had reached an agreement to sell its
appliance business to Electrolux for $3.3 billion. We
view the consolidation as positive as larger competitors
generally bring better price discipline to the industry.
On Monday, the company received final written approval
from the China Securities Regulatory Commission for its
acquisition of a 51% stake in Hefei Sanyo. The
announcement was widely anticipated is important to the
expansion of Whirlpool’s presence in the Chinese
marketplace. Management has stated that the acquisition
will be accretive in its first full year of integration.
We believe strong secular tailwinds will aid this stock’s
ascent as management restructures, revitalizes and grows
its global presence.
Citigroup's (C:NYSE, $52.36, 5.00%, $58 price
target) shares added 1% since our last update. Wells
Fargo recently reiterated its Outperform and $56 to $58
valuation target range after leaving a meeting with CFO
John Gerspach convinced that the stage is set for a
brighter 2015. Citigroup’s second- quarter performance
proves Citi is a financial powerhouse that has lost
investors’ confidence, but it clearly has the potential
to battle its way back. As the stock is trading below its
tangible book value of $56.40, it remains attractive for
long-term investors. Management commented on the second-
quarter earnings call that they are expecting better
revenue performance in the second half of the year. We
believe investors are not focusing on the near term as
they await Citi's response to the Fed's concerns about
Citi's capital plan in light of the 2014 Comprehensive
Capital Analysis and Review (CCAR) results. For now,
expectations of an increased share buyback program and
increased dividend will not materialize. Citigroup offers
investors an attractive long-term opportunity as the
company regains its former prestige and as global
KLA-Tencor (KLAC:Nasdaq, $78.28, 3.93%, $82 price
target): Shares of this leading designer, manufacturer
and marketer of process control and yield management
solutions for the semiconductor industry have traded 1%
higher since our most recent summary update. Following
the company’s recently lowered forward guidance,
investors are gravitating back toward the stock. As a
reminder, management said they expect the weakness to
persist in the first quarter, but anticipate sequential
improvements in quarterly shipments for the rest of
fiscal 2015 as its customers resume spending in rolling
out new technologies (20, 16 and 14 nanometer). We
believe the weakness remains an industry issue and not a
competitive or technological problem. Increasing
semiconductor complexity and the company's dominant
market share position should powerfully drive revenue and
Magna (MGA:NYSE, $108.48, 3.19%, $120 price
target): Shares of the world's largest diversified auto
supplier have stalled and retreated 4% since our most
recent summary update. Last week, BMO Capital Markets
pointed out that August dales from German Manufacturers
slowed below the rate of growth they have achieved year-
to-date causing the analyst to take note as Germany
accounts for approximately 70% of Magna’s European
business. We believe European auto production (38% of
Magna's revenue) should provide a tailwind to results.
This couples nicely with the company's restructuring
efforts in that region, which should yield improving
operating leverage. We remain bullish on the stock as a
play on the continued global recovery of automotive
MasterCard (MA:NYSE, $76.59, 2.14%, $80 price
target) is the world’s second-largest payments solutions
company. The stock added 1% since our last update. On
Monday, Sterne Agee initiated research coverage on the
name with a Buy rating and an $85 price target.
Management indicated on their second-quarter earnings
call that they remain confident they can bring the
numbers in at the lower end of their multi-year guidance
range of an 11%-14% net revenue compounded annual growth
rate (CAGR), and at least a 20% EPS CAGR. MasterCard is
an interesting investment opportunity with broad exposure
to the transition away from cash and the growth in global
Union Pacific (UNP:NYSE, $107.92, 4.12%, $117
price target) is the largest public North American
railroad. The stock has chugged 2% higher since our last
summary. On Tuesday, BMO Capital Markets reiterated its
Outperform rating on the stock and raised its price
target on the name to $122 from $115. We view Union
Pacific as a play on a broad economic recovery and will
consider adding more shares to our position on a further
pullback as the fundamentals look strong.
Technical Approval and Analysis:
Dow Chemical (DOW) has now come in nicely and
planted a higher low on the chart. On Tuesday, it posted
a higher low, higher high from the previous day so now
would be a great time to add to existing positions. The
channel is well defined and the pattern is very evident.
Volume this month has been strong and, while it corrected
a bit, it was more than 5% off the top. Momentum
indicators are ready to move higher.
One of our better performers since last year,
MasterCard (MA) is showing a nice wedge formation
that is about to be resolved. It appears from the latest
action that this will be resolved higher. Volume has been
good this month and momentum indicators are “hanging in
there” as buyers and sellers converge. Drops have been
picked up by buyers each time. One more day, and the MACD
will be on a new Buy signal.
Chip company KLA-Tencor (KLAC) has been on a tear
since we last talked about it in early July. While the
stock came down and corrected with the rest of the
market, we note that it fell less than 5%, found a bottom
later in the month and has been on a great run. The %R is
showing some amazing strength, as is the RSI, which may
be flashing a buy signal -- see the arrow on the chart
below. MACD is also bullish and is crossing over.
Tuesday's bullish engulfing bar (daily bar) needs some
follow-through, but this stock has shown power.
Quant Approval and Analysis:
Here are the initial and current letter grades for the
model portfolio stocks:
-- Allstate: Initial and current letter grade, A+.
-- Automatic Data Processing: Initial and current letter
-- Boeing: Initial letter grade, A-; current letter
-- Citigroup: Initial letter grade, A-; current letter
-- ConocoPhillips: Initial letter grade, B; current
letter grade, A-.
-- CVS: Initial letter grade, A-; current letter grade,
-- Dow Chemical: Initial letter grade, A; current letter
-- EMC Corp: Initial letter grade, A-; current letter
-- Foot Locker: Initial letter grade, A-; current letter
-- G&K Services: Initial letter grade, A-; current letter
-- Illinois Tool Works: Initial and current letter grade,
-- International Paper: Initial and current letter grade,
-- KLA-Tencor: Initial letter grade, A-; current letter
-- 3M Company: Initial letter grade A-; current letter
-- Magna International: Initial and current letter grade,
-- MasterCard: Initial and current letter grade, A+.
-- Merck: Initial and current letter grade, A.
-- Paacar: Initial letter grade A; current letter grade
-- PepsiCo: Initial and current letter grade, A+.
-- Union Pacific: Initial letter grade A-; current letter
-- VF Corp.: Initial and current letter grade, A-.
-- Whirlpool: Initial and current letter grade, A+.
-- Xilinx: Initial letter grade A; current letter grade
For the Trifecta stock selection methodology, click here.
Be sure to follow us on Twitter@TrifectaTST.
In general, it's best to wait until a newly listed company has had time to settle in before you invest in it.
China's regulators have cleared the way for Whirpool to take a majority stake in Hefei Sanyo.
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