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Trifecta Stocks

Trifecta Stocks Weekly Roundup

By Chris Versace and Bob Lang | 04/29/16 - 05:05 PM EDT

Even after the S&P 500 staged a late-day rally today, the index closed the week down 1.25%, which shaved the index’s April move higher to 0.5%. On a year-to-date basis, the S&P 500 closed April up just over 1%. Despite the weight of the market, the Trifecta portfolio had a number of outperformers during the week on both an absolute basis -- among them AT&T (T:NYSE), Foot Locker (FL:NYSE), PetMed Express (PETS:Nasdaq) and all three of our inverse ETF positions -- and on a relative one with Disney (DIS:NYSE), Danaher (DHR:NYSE) and CVS Health (CVS:NYSE).

During the week we had several companies report their quarterly results, with few negatives in tow. We chalk that lack of negative news to the triple-filter approach we apply here at Trifecta. While we were relatively unscathed, we’d note the growing number of earnings reports that either missed expectations or offered softer-than-expected guidance. (More on what this means below.)

We also heard from the Fed this week, and our central bankers left interest rates unchanged exiting their April Federal Open Market Committee meeting. The Fed met our expectation that we shared in Tuesday’s webcast for them to do nothing. Within the first few lines of the FOMC press release, the Fed said "growth in economic activity appears to have slowed" and "growth in household spending has moderated.” From our perspective, it sounds like the Fed saw the same rash of economic data that we have since Fed Chairwoman Janet Yellen last discussed monetary policy, with the data pointing to a slowing domestic economy. That was reinforced with the flat core capital goods order reading for March and today’s March personal income and spending report that showed consumers continue to favor saving over spending.

We've talked for weeks about the challenging growth environment that we have seen as we look for portfolio opportunities. As you know, our concerns led us to add the inverse ETFs, and much like insurance, we were glad we had them this week as market indigestion took hold. Despite the environment, as you saw on this week’s webcast, we continue to turn over prospects for both the active portfolio and the Bullpen. Our most recent addition, PetMed, has climbed nearly 4% since we added it, and we still feel as strongly about Costco Wholesale (COST:Nasdaq) and Disney (DIS:NYSE) as we did when we added those shares.

Turning our view to next week, on the earnings front, we have CVS Health (CVS:NYSE) reporting its quarterly results next Tuesday (May 3) and we’ve briefed you on consensus expectations for the March quarter. We’ll have more detailed comments this Monday. Even though the number of portfolio positions reporting March quarter results next week will be light, overall there will be more than 1,400 companies reporting next week -- a 40% increase compared to this week. Mixed in that horde will be 124 S&P 500 companies (including 2 Dow Jones Industrial Average components) reporting. By the end of next week, 87% of the S&P 500 group of companies will have reported March quarter results.

As the results are tabulated, we plan on dissecting the revised expectations for the June quarter as well as the back half of 2016. As we’ve shared with you thus far, overall earnings expectations for the S&P 500 group of companies have continued to trend lower since the end of the third quarter of 2015. Despite some high-profile and stellar results from Amazon (AMZN:Nasdaq), Facebook (FB:Nasdaq) and others, expectations exiting this week call for that group of companies to deliver just 1% earnings growth in 2016 over 2015. And for those wondering, we still see the forecast 13% earnings improvement in the second half of 2016 relative to the first half as aggressive in light of the current economic backdrop. More on this point after next week.

As for economic data, it will be a busy few days next week as we start to the usual monthly data that will help shape our view for the current quarter. On tap we will have both the April ISM manufacturing and services, which we dig into to assess the underlying order trends; Markit Economics will issue the full take on April PMIs across the globe; April car and truck sales data; and, of course, the April employment report. While the Fed is not likely to do anything until the back half of 2016 at the soonest, we will continue to churn through all the coming data to keep a pulse on what the Fed may do or say in the coming weeks. As we’ve seen more often than not lately, Fed jawboning can whip the market up or down despite what the data are telling us. We’ll continue to listen to the Fed, but let the data talk to us.

Get some rest this weekend -- it’s going to be even busier next week. Rest assured we will be here to help get you through it.

If you aren’t following us on Twitter, be sure to do so -- you can find us @TrifectaTST.

As a reminder, 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. (The information in parenthesis at the start of each company rundown contains the company's stock symbol, the stock's most recent closing price and its percentage weighting in the model portfolio. For up-to-date information about the model portfolio, click here.)

ONES

AT&T (T:NYSE, $38.83, 1.99%): Our shares in this mobile connectivity consumer non-discretionary company were one of the stronger performers this week. We attribute the better-than-market move to the solid March quarter earnings report that was well-received by the market as well as to the characteristics of its business that first attracted us to the shares. As a quick reminder, generally speaking we like the sticky, consumer non-discretionary aspect of the core wireless business and we see both growth and margin expansion coming from the Entertainment business as the company cross-markets products and realizes post-DirecTV acquisition synergies. With renewed concerns over growth rearing their head this earnings season, there is a high probability investors will flock to T shares as a port in the storm given the enviable 5% dividend yield at current levels. Our price target on T shares is $44. The Street Quant Rating on T shares is A.

Costco Wholesale (COST:Nasdaq, $148.12, 4.93%): Costco shares dipped 1% this week, with the bulk of the decline coming on the heels of this morning’s March personal income and spending report. That report revealed the trend over the past few months of consumers saving rather than spending any modest income improvement. More specifically, the data reported by the Commerce Department showed personal income climbing 0.4%, but personal spending rose just 0.1% as the personal savings rate ticked higher to 5.4% from 5.1%-5.2% in January and February. This tells us that the consumer continues to be cautious, which jives with other data, such as monthly retail sales figures, that we’ve been tracking as part of our "Cash-Strapped Consumer" investing theme. We’d remind subscribers that COST has been painted with the same retail brush as other merchants even though it consistently has outperformed them. We look forward to the company’s April same-store-sales metrics, which will be released next week. Several other catalysts remain, such as the soon-to-be-upon-us credit card switch and related marketing effort as well as a potential membership price hike in the back half of the year. Remember, the next quarterly dividend at 45 cents a share is payable May 13 to shareholders of record April 29. We remain bullish on the shares. Our price target remains $170. Initial and current Street Quant Ratings: A-.

CVS Health (CVS:NYSE, $100.49, 5.53%): CVS shares dipped last week and did so again over the last several days. Even so, the shares outperformed the broader market indices this week. We attribute the better-than-market performance to the company’s inelastic business model, which we suspect is attracting investors seeking a port in the storm as March quarter earnings season gets more than a little wobbly and domestic growth metrics are once again worrisome. CVS will report its March quarter results next Tuesday (May 3), and heading into that event consensus expectations call for the company to deliver earnings per share of $1.16 on $43 billion in revenue. Topics to watch will be integration synergies and timing with Target pharmacies, the continued transformation and addition of health businesses, the impact of the consumer on front-of- store sales, and an update on the company’s capital return program. Our price target remains $120. Initial Street Quant Rating: A-; current Street Quant Ratings: A+.

Walt Disney Company (DIS:NYSE, $103.27, 4.84%): After several weeks of being the star of the show, Disney shares turned tail this week and dipped a bit. Following the meaningful outperformance of the last few weeks that saw DIS shares climb to just over $105 from $96 and change, we are not surprised the shares gave some ground along with the overall market this week. We are unfazed by the drift lower, as in our view there are several positive catalysts ahead for DIS shares in the short and medium term. The next such event will be Marvel’s "Captain America: Civil War." It is expected to have at least a $175-million opening at the domestic box office when it opens next week (Friday, May 6), and we expect the company will talk this up big when it reports quarterly earnings May 10. We also expect much attention to be paid to the mid-June opening of Shanghai Disney. Commentary from Viacom (VIAB:Nasdaq) this week over firmer domestic ad sales for the current quarter will set the table conversation for Disney’s ESPN business during the company’s earnings report. Our price target on DIS shares remains $115. Initial and current Street Quant Ratings: A-.

Foot Locker (FL:NYSE, $61.44, 4.67%): This retailer of shoes and apparel operates in two segments: Athletic Stores and Direct to Customers. The Athletic Stores unit operates more than 3,400 stores in 23 countries. Foot Locker shares moved higher this week, reversing course from the last few weeks. With a robust slate of new athletic shoes coming to shelves over the coming months from key partners such as Nike (NKE:NYSE) and Under Armour (UA:NYSE), we continue to see meaningful upside in FL shares. Moreover, we continue to see Foot Locker picking up incremental share as rival Sports Authority and Sports Chalet locations close and as FL flexes its online and mobile muscle. One interesting data point that caught our attention was in Finish Line’s (FINL:Nasdaq) 10-K filing that showed digital sales were the primary driver of the company’s same-store-sales growth given the contraction in brick-and-mortar sales. We expect to hear more about FL’s digital initiatives, particularly as more consumers migrate to online and mobile shopping. And yes, this is another positive data point for our UPS (UPS:NYSE) shares. With more than $600 million remaining under its current buyback authorization and its strong balance sheet and cash generation, Foot Locker strategically continues to shrink its share count outstanding. We continue to evaluate price points to round out the FL position size relative to the overall portfolio. Our price target is $80. Initial and current Street Quant Ratings: A-.

MasterCard (MA:NYSE, $97.00, 4.26%): Shares of this payment processing network company closed the week lower despite delivering March quarter results that beat on the top and bottom line. Peering into other operating metrics for the quarter, processed transaction rose 14% year over year and worldwide purchase volume during the quarter was up 12% on a local currency. Subsequent to that report, RBC Capital Markets hiked its price target to $110 (in line with our target) from $104, citing the favorable outlook. We continue to see MA as a cornerstone of our Cashless Consumption investing theme, believing the global opportunity to replace checks and cash with digital payments has tremendous runway. With just 15% of global payments occurring digitally, another $8 trillion can be converted to digital payment volumes over the next five years. The looming catalyst for MasterCard and its shares remains details on the pending entry into China; we wait with bated breath. Our price target remains $110. Initial Street Quant Rating: A+; current Rating: A-.

ProShares Short S&P 500 ETF (SH:NYSE, $20.32, 2.85%): Shares of this inverse ETF for the S&P 500 moved into the green this week, rising 1.3%., as the S&P 500 declined. As we move deeper into March quarter earnings, we will continue to keep this position as well as our other two inverse ETFs intact to serve as a hedging mechanism amid what looks to be increasing market volatility. We continue to rate SH shares a One with a near-term price target of $22.50. The current Street Quant Rating on SH shares is E+, which fits with the mandate that inverse ETFs and shorts have a quant rating below C+.

ProShares Short Dow30 ETF (DOG:NYSE, $21.76, 2.84%): Much like SH shares, shares of this inverse ETF for the Dow Jones Industrial Average were in the green this week as its underlying index came under pressure. Much like SH shares, we see DOG as helping hedge the portfolio and limit losses should market volatility pick up, and given our comments above we will look to hold this position in the coming weeks. DOG shares have a Street Rating of D+; that's well below a C rating, which means its inverse nature meets our investment criteria. Our price target for DOG shares is $25.

ProShares Short Russell2000 ETF (RWM:NYSE, $60.90, 1.14%): RWM is an inverse ETF for the small-cap-heavy Russell 2000 Index (IWM:NYSE). Much like SH and DOG shares, RWM shares moved higher this week as more volatile small- and mid-cap stocks came under pressure amid wobbly earnings reports and renewed concerns over growth prospects. Given our comments over the last few weeks that have us increasingly concerned about the mismatch between the global economy, the movement in the overall stock market and current market valuations, we will look to add to this position opportunistically. RWM shares have a Street Rating of C-; that's well below a C rating, which means its inverse nature meets our investment criteria. Our price target for RWM shares is $67.

United Parcel Service (UPS:NYSE, $105.09, 4.32%): UPS shares fell modestly this week despite delivering a bottom-line beat on March quarter earnings yesterday. Package volumes for the quarter were favorable year over year, due in part to the continued emphasis by retailers and other companies on growing their online/mobile business in our increasingly Connected Society. On its earnings call, UPS shared that "E-commerce customers drove both B2C and B2B shipments higher, with B2C up more than 6%." Continued productivity gains helped drive profit and margin expansion in the domestic business. On the International side, lower fuel surcharges and currency effects weighed on revenue for the quarter, but UPS continues to see margin benefits associated with improving network efficiencies and cost controls. Despite the upbeat quarter and affirmation of its 2016 EPS guidance in the range of $5.70 to $5.90 versus the $5.78 consensus heading in March quarter earnings, investors who didn’t read the 2015 10-K were caught somewhat off-guard by a potential charge of up to $3.8 billion related to potential pension fund obligations. Back in 2007, UPS exited the Central States Pension Funds; part of its exit includes covering any losses. UPS said, "We estimate that if Central States Plan is approved as proposed and implemented, we would be required to record a charge of approximately $3.2 billion to $3.8 billion later this year." As UPS described in its 10-K, it is challenging the Central States Plan, and barring some agreement, UPS expects a decision from the Department of Treasury on or before May 7. We’d note this was not a new development, and management remained steadfast that even if the charges are imposed, this year’s earnings would not miss the company’s forecast of $5.70 to $5.90 per share. Should UPS need to fork over more than $3 billion, we could see some sticker shock hit the shares, but we would be of a mind to use such weakness to our advantage. Our price target on UPS shares remains $118 with a One rating. Initial Street Quant Rating: B; current Street Quant Rating: A

TWOS

PetMed Express (PETS:Nasdaq, $18.31, 2.59%): Shares of this online pet pharmacy company climbed slightly this week. There was no company-specific news this week. Our core thesis that centers on the spending outlook for pets, particularly for dogs and cats, remains bright as their owners continue to spoil them and care for them. This was confirmed by animal care company VCA’s (WOOF:Nasdaq) earnings call this week as the company delivered a solid top line. Some of PetMed’s core products are consumables (flea and tick treatments) that give rise to a very strong repeat business for the company. With shoppers increasingly shifting to online purchasing, we see PetMed as a prime beneficiary given its product mix. We also like the enviable dividend yield of roughly 4%, and we could see the company once again step up its quarterly dividend in the coming quarters. From an earnings perspective, the company is expected to deliver flattish earnings per share this year of around 98 cents versus $1.00 for the 12 months that ended this past March. At current multiples, we saw enough potential upside to warrant opening a position in PETS, which will afford us access to the ample dividend stream. However, much like our AT&T holding, we will look to scale into PETS on weakness, which to us is at or near $16. Our price target is $20. Initial and current Street Quant Ratings: A-

THREES

Danaher (DHR:NYSE, $96.77, 2.05%): Shares of this conglomerate that focuses on the health care, environmental and industrial sectors were essentially unchanged over the last several days. With modest upside to our $100 price target and a mixed economic environment that is keeping the Fed’s hand off the interest rate wheel, we will continue to monitor the coming economic data for signs of a firming global economy or we'll use any strength in the shares to close out the position. Next week’s flurry of economic data -- particularly from Markit Economics, which will publish its in-depth April PMI reports for the U.S., China, the eurozone and other key geographies -- will offer the first look at how the current quarter is shaping up. We also have the twin ISM reports for April that will shed even more light on the domestic economy. Given the eurozone’s 1.6% GDP print for the March quarter, which was far faster than the domestic reading of 0.5%, we’ll dig into the data to see if the momentum in the eurozone is sustainable. Street Quant Rating: A+

Is Inflation Coming Back for Real This Time?

If we were to point to one mystery in our economy, it is the lack of inflation. Let it be known the Fed has been doing everything possible to stoke some inflation fans but it hasn't been working. We need to go back to Ben Bernanke's reign as Fed chief to find where this effort first started, and even Janet Yellen seems frustrated about the lack of price increases in the economy. Deflation is far scarier than inflation at this point, especially if the Fed's toolbox is nearly empty (there are always tools the Fed can use).

We are not talking about the stock market per se, but certainly we have seen asset prices increase. That was expected to happen in a low interest rate environment. But what about the economy? The Fed has been talking for years about how its efforts eventually would take hold, yet we still have rates as low as they have ever been. Maybe now, though, we are seeing something occur -- but let's wait until there is something real.

Inflation is the chase of too many dollars for too few goods. It's as simple as this, but many make it far too complicated. There are many clues we can use to measure inflation -- a weak currency, strength in gold, prices increasing in commodities and at the consumer level. To be sure, the Fed has been keeping rates low to get some inflation in the system. It even may be willing to tolerate an overshoot of its 2% objective for a bit.

Lately, some price action has been seen with higher gold, silver and other commodities. This could be a result of higher demand, possibly from China. Steel prices have started to firm up; so has aluminum and other metals such as platinum, nickel, zinc and alloys. While it's a bit too early to say how these increased prices will be passed through, this is certainly a sign of higher prices ahead.

Perhaps this time around the Fed will get its wish.

Bearish Bets: Big-Name Retail and Consumer Products Stocks That Could Be Worth Shorting
Stocks in Focus: AGNC, ERIC, YUM, WFM, HVT

ERIC, YUM, WFM, HVT and AGNC were all recently downgraded by TheStreet’s Quant Ratings.

04/29/16 - 08:55 AM EDT
Chart of the Day: Paycom Software
Stocks in Focus: PAYC

The stock is showing strength.

04/29/16 - 05:11 AM EDT
PetMed Is Not a Dog
Stocks in Focus: PETS

It's not far from resistance, but the upward trend is strong.

04/28/16 - 09:34 AM EDT
Trifecta Stocks Weekly Roundup

Several portfolio names outperformed the market this week as April exited with a whimper instead of a bang.

04/29/16 - 05:05 PM EDT

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