An accommodating-sounding Fed, which said it is seeing
strength in many areas of the U.S. economy but will still only
move slowly to raise interest rates, helped push stock higher
this week. Meanwhile, global markets have been pressured as
the Russian ruble continues its rapid descent and the price of
oil continues to be depressed.
Since our most recent summary update, we have exited our
entire 140-share position in PepsiCo (PEP:NYSE) for a
fractional gain, due to the company’s significant Russian
exposure and the fact that we believe this (at best) stalls a
growth engine for the company.
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 model portfolio.)
Fundamental Approval and Analysis:
Allstate (ALL:NYSE, $70.75, 4.39%, $73 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 up 3% since our last update. Last week, RBC
Capital Markets reiterated its Overweight rating on the stock
and increased its price target to $75 from $70. We remain
bullish on the shares and continue to view Allstate as an
interest-rate play with a modestly improving fundamental
Boeing's (BA:NYSE, $130.03, 4.84%, $150 price target)
stock was in a holding pattern, trading sideways since our
last summary update. Boeing recently announced that its board
of directors has authorized the company to repurchase up to
$12 billion in stock and raise its quarterly dividend by 25%
to $0.91 per share. The repurchase authorization replaces the
previous authorization under which it had $4.8 billion
remaining. We remain convinced that Boeing continues to be a
solid play on a still-healthy commercial aerospace cycle.
ConocoPhillips (COP:NYSE, $71.05, 2.74%, $80 price
target) 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 popped 9% since our last summary update, as oil-related
stocks have seen some of the pressure ease from upon them. The
stock now offers a 4.1% dividend yield (which we believe is
safe) as we await stabilization in the commodity. The company
recently announced its 2015 capital budget would be down 20%
from 2014 as a result of the weakness in the price of oil.
Production focus will continue to be on operations in the
Eagle Ford and Bakken shale plays. Based on its shale
exposure, strong dividend yield and below-average net-debt
ratio, we consider the company's current valuation attractive
over the long term.
CVS Health (CVS:NYSE, $97.87, 6.05%, $105 price target)
is trading 7% higher since our last summary update on the
heels of a well-received analyst day last week. At its
investor meeting CVS issued 2015 guidance looking for revenue
growth of 7-8.25% and EPS in a range of $5.05 to $5.19,
bracketing consensus at $5.11. The company also announced a
27% increase to its quarterly dividend and a new $10 billion
share repurchase authorization. Management reiterated its
target of five-year adjusted EPS growth of 10-14%. The company
continues to successfully expand its services and offerings
and remains fiscally innovative.
Danaher (DHR:NYSE, $87.06, 3.84%, $93.50 price target)
is a diversified industrial conglomerate that is a serial
acquirer of businesses and is widely lauded for its
proprietary business integration system. The stock is trading
3% higher since out last summary update. Danaher hosted a
bullish 2014 investor and analyst meeting on Dec. 11 and
offered initial 2015 guidance that fell in line with
expectations. The company is guiding to 8.5% earnings growth
in 2015 at its midpoint ($4.35 to $4.45) on 3-4% core revenue
growth. We believe the company will boost its pace of
acquisitions and potentially increase its sales and
restructuring of underperforming assets over the near term.
Dow Chemical (DOW:NYSE, $45.98, 3.42%, $57 price
target) shares continued to slump, losing 5% since our last
summary update. On Tuesday, JPMorgan reiterated its Neutral
rating and lowered its price target on the shares to $46 from
$49 as the analyst points out that the decreases in the price
of oil is a headwind to the company’s earnings and EBITDA. We
believe the stock is also suffering from the company’s recent
announcement that it and Third Point, Dan Loeb’s activist
hedge fund, have agreed to a one-year customary standstill and
voting agreement in exchange for the addition of four new
independent directors to the company's board. Management has a
year to continue to execute its business and restructuring
plan. So, investors who were hoping for a realization of a
near-term event have been disappointed. 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, $30.55, 5.27%, $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 added 2% since our last
summary update. Activist investor Elliot Management’s
involvement in the company continues to unlock some of the
stock’s value as the sum-of-the- parts story becomes better
known. It also brings a fire to management’s feet to drive
improved business execution. Last week, Credit Suisse
published a report that examined EMC after a spinoff of VMware
and concluded that EMC is worth $36 on a sum-of-the-parts
valuation analysis. We believe EMC is extremely well
positioned in 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 services.
Foot Locker (FL:NYSE, $55.22, 4.90%, $63 price target):
Shares of this leading athletic footwear and apparel retailer
slid 2% since our most recent summary update. The stock traded
with increased volatility as the shares were negatively
impacted by poor Finish Line (FINL:Nasdaq) quarterly results.
Though Finish Line looks to have some company-specific issues
and we believe Foot Locker will still achieve expectations of
a 6% same-store sales rise in the fourth quarter, investor
caution and concern has been increased. The aforementioned
weakness and a management change at Foot Locker are increasing
investment consternation on the name. Foot Locker company
offers robust cash flow generation, a strong balance sheet,
share repurchases and a 1.6% 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
G&K Services (GK:NYSE, $70.57, 5.84%, $72 price
target): G&K is the fourth-largest uniform services company in
the U.S. The stock has gained 5% since our last summary
update. Recent domestic economic data, supported by the Fed’s
recent commentary about an improving domestic economy, and
solid results with strong commentary from its competitor’s
Cintas’ (CTAS:Nasdaq) second quarter earnings report last
week, continue to portend increasing levels of demand.
Harman International Industries (HAR:NYSE, $105.19,
4.64%, $136 price target): Harman develops, manufactures and
markets audio products, lighting solutions, electronic systems
and digitally integrated automotive infotainment systems. The
stock has slipped 3% since our last summary update. Last
Friday, the stock was hit hard after Reuters article about
Google’s automotive operating system was understood as an
attack on Harman. We don’t view Google as trying to unseat the
company and, in any event, view such an attempt as a likely
failure. We believe Wall Street is underestimating the
adoption rate of infotainment systems in automobiles. Harmon
is the leading player in this segment, with material margin
leverage and incremental revenue upside to further industry
adoption. We believe global auto production is tracking ahead
of Wall Street expectations, which will contribute to the
potential upside in the name.
Illinois Tool Works (ITW:NYSE, $97.21, 4.93%, $100
price target): Shares of this diversified global manufacturer
of industrial products and equipment have tacked on 1% since
our last summary update. Management hosted an analyst day a
month ago and boosted its 2017 operating margin target by 300
basis points to 23%. They guided its fiscal 2015 earnings in
line with Wall Street expectations. Revenues were guided up
0.5% to 1.5%, which is based on 2.5% to 3.5% organic growth
and a 2% drag from currency. Management said they expect weak
oil prices will have a negligible effect on its business. The
company continues to focus on organic growth and improve its
operating margin through restructuring its businesses. We
expect the ongoing restructuring efforts will lead to upside
relative to its conservative guidance as volumes return to
International Paper (IP:NYSE, $54.54, 4.33%, $58 price
target): Shares of this global paper and packaging company
have given back 1% since our most recent summary update. The
industry continues to see positive trends in containerboard
consumption, which has led to a decline in supply. The stock
has been weighed down by its significant exposure to the
decline in the Russian ruble through its debt exposure to its
Ilim joint venture. The company will be required to take a
non-cash charge to account for the impact paying off the JV’s
debt would have on the company today. While the debt does not
have to be repaid in the short term, the amount of the charge
could easily wipe out this quarter’s earnings. This issue is
well known and we believe investors will look past these
charges and focus on the cash flow generation of IP’s core
operations. We note that 4% of IP’s EBITDA comes from Russia
and that will be negatively impacted by the country’s economic
woes. Meanwhile, the conversion to a master limited
partnership (MLP) talk has cooled as the process rolls on
(such a conversion would create significant cost advantages
for the company). The company’s strong dividend yield, its
active share repurchase program and potential for an MLP
conversion continue to mitigate downside from current levels.
We believe improved economic conditions could fuel upside,
though pricing trends must be monitored carefully.
Magna (MGA:NYSE, $107.58, 3.71%, $120 price target):
Shares of the world's largest diversified auto supplier
stalled, trading fractionally below its price at our most
recent summary update. We expect that the company will benefit
from the recent strength in automobile sales. Russia accounted
for just 1.3% of the company’s revenue in 2013 and is home to
six out of the company’s 312 manufacturing facilities
worldwide. We believe European auto production -- which
accounts for approximately 40% of Magna's revenue - - will
provide a tailwind to results. This pairs well with the
company's restructuring efforts in that region, which should
yield improving operating leverage.
Merck (MRK:NYSE, $57.21, 4.28%, $63 price target):
Shares of this leading pharmaceutical company have slumped 5%
since our last update. The shares have been weak since the
company announced it would acquire Cubist Pharmaceuticals
(CBST:Nasdaq) to learn shortly after that Cubist’s blockbuster
drug Cubicin lost an important patent battle in the courts,
which will bring generic competition faster than initially
expected. Merck cannot back out of the deal and the deal
remains accretive, just less than so initially anticipated. We
are especially attracted to Merck's defensive drug company
characteristics, strong cash flows and 3% dividend yield. It
is clearly taking action to shed the old pharma image we
believe it had attained. Management has demonstrated solid
execution and upcoming catalysts, such as data on Merck’s
immune-oncology and HCV drugs, will be the next drivers for
Union Pacific (UNP:NYSE, $120.68, 4.99%, $130 price
target) is the largest public North American railroad. The
stock has gained some steam, chugging 4% higher since our most
recent summary. The stock has gotten a reprieve from the
pressure it felt with the weakness in oil prices. We believe
the rails will benefit from a reduced fuel cost, though the
benefit is likely offset by weaker volumes in shipments of the
commodity. We expect transportation out of the shale plays
will remain robust. We remain bullish on the shares and view
Union Pacific as a play on a broad economic recovery.
Vanguard Total Stock Market ETF (VTI:NYSE, $107.01,
5.93%): 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 0.72% above the level we posted in
our last update.
VF Corp. (VFC:NYSE, $74.64, 5.25%, $75 price target):
Shares of this global clothing manufacturer and marketer have
traded 2% higher since our most recent summary update. We
believe the stock continues to be buoyed by the decrease in
raw material input costs and some cold weather that benefits
the company’s The North Face brand. Additionally, the lower
price of oil typically puts additional discretionary cash into
the hands of consumers, which bodes well for spending on
apparel. 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
outperform its retail peer group.
Whirlpool (WHR:NYSE, $191.13, 2.37%, $193 price
target): Shares of this leading global appliance manufacturer
have continued to push higher, gaining 2% since our most
recent summary update. The company hosted a bullish investor
day last week. Initial guidance for fiscal 2015 is sales of
$24 to $25 billion, non-GAAP EPS of $14.00 to $15.00, free
cash flow of $700 million to $800 million, and ongoing
operating margins of 7.8% to 8.2%. Management also guided to
longer-term targets (as expected) with fiscal 2018 EPS
projected at $22 to $24 and the ongoing operating margin to
between 9.5% and 10.5%. Management expects its 2015 growth to
predominately come out of North America with that region
looking to be up 4-6%, along with 2-5% growth in Asia, while
expectations are for Latin America and EMEA to be flat. The
company said about 3% of its sales are in Russia. We believe
the drop in the price of oil could add more discretionary cash
to consumers’ pockets that could in turn lead to increased
sales for Whirlpool. We believe strong secular tailwinds will
aid this stock’s ascent as management restructures,
revitalizes and grows its global presence.
Citigroup's (C:NYSE, $54.42, 4.88%, $58 price target)
shares have traded down 3% since our last update. As the stock
is trading below its tangible book value of $57.73, it remains
attractive for long-term investors. The stock has been weak
given the company’s exposure to Russia and oil. Citi has $1.6
billion of net investment in Russia and total third-party
assets of $7.4 billion in the company’s Russia subsidiary.
Citi stated that the company’s exposure to the petroleum,
energy, chemical, and metal industry is 21% of the company’s
direct outstanding and unfunded lending commitments of $215
billion, of which oil is an undisclosed portion. While we
recognize that these risks will impact earnings, this comes
with the territory of owning a global bank. We believe
investor expectations are set low in the near term as
investors 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. As the company regains its former prestige
and as global economies recover, Citigroup offers investors an
attractive long-term opportunity.
KLA-Tencor (KLAC:Nasdaq, $72.63, 3.43%, $72 price
target): Shares of this leading designer, manufacturer and
marketer of process control and yield management solutions for
the semiconductor industry continued their vertical ascent by
tacking on an additional 4% since our most recent summary
update. The company has already paid out its special one-time
cash dividend of $16.50 per share. Despite a slow start to the
year, management anticipates sequential improvements in
quarterly shipments in the back half of fiscal 2015, as its
customers resume spending in rolling out new technologies (20,
16 and 14 nanometer). Yesterday, the company received a $500
million order from Taiwan’s TSMC. 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 will --
eventually -- powerfully drive revenue and earnings. We
believe the company’s valuation is full, but we respect the
stock’s price momentum and will continue to hold the shares.
MasterCard (MA:NYSE, $87.63, 2.30%, $90 price target)
is the world’s second-largest payments solutions company. The
stock traded sideways since our last update. We believe
MasterCard is an interesting investment opportunity with broad
exposure to the transition away from cash and the growth in
global consumer spending.
Technical Approval and Analysis
Since August, G&K Services (GK:NYSE) has been one of
our best performers. We can see the strong uptrend line
supporting price on the recent pullback, which was a minor 4%.
GK broke out of the channel the upside, often with a stock
that bases at a high level. Even better, the stock rose from
that base on higher turnover, what we like to see. Notice the
pullback, the %R showed a great spot to get on board. This
could base here soon, but find more upside down the road.
We'll stay with the name.
Click here for a
The industrial names have had some tough sledding since oil
started to slide. In fact, most of the highest-quality names
like Dow Chemical (DOW:NYSE) have come under severe pressure.
But, at some point, that will turn as the cream rises. We can
see the resistance on the chart lay ahead at $53 and coming
down each day, but the potential formation of a giant W is
apparent The MACD is about to flash a buy signal soon. We can
see some resistance here on the chart at $46 from the steep
downtrend line, but through there will target the gaps at $48
and then $51.
MasterCard (MA:NYSE) may show a potential h/s (bearish
pattern), but unless the neckline is penetrated under $82 then
it may not be valid. I like the recent consolidation after
reaching a new all-time high early in the month. The stock is
less than 4% away from an all-time high. The MACD is setting
up for a buy signal, but needs some more upside traction in
price. The stock is improving its relative strength after a
hot move from mid-October through Thanksgiving. We like the
name here and would add.
Here are the initial and current letter grades for the model
-- Allstate: Initial and current letter grade, A+.
-- Automatic Data Processing: Initial and current letter
-- Boeing: Initial and current letter grade, A-.
-- Citigroup: Initial letter grade, A-; current letter grade,
-- ConocoPhillips: Initial letter grade, B; current letter
-- CVS: Initial letter grade, A-; current letter grade, A+.
-- Danaher: Initial and current letter grade, A-.
-- Dow Chemical: Initial letter grade, A; current letter
-- EMC Corp: Initial and current letter grade, A-.
-- 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, A-.
-- International Paper: Initial and current letter grade, A-.
-- KLA-Tencor: Initial letter grade, A-; current letter grade
-- Magna International: Initial and current letter grade, A-.
-- MasterCard: Initial and current letter grade, A+.
-- Merck: Initial and current letter grade, B+.
-- Union Pacific: Initial letter grade A-; current letter
-- VF Corp.: Initial and current letter grade, A+.
-- Whirlpool: Initial and current letter grade, A+.
FireEye is ready for prime time.
The Russian ruble collapse will hurt the company.
We believe the company's capital return plan for 2015 will be positively received.
We jettisoned Pepsi due to its Russian exposure.
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