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Trifecta Stocks

Trifecta Stocks

A Clean Investment

BY Bryan Ashenberg and Bob Lang | 08/27/14 - 03:11 PM EDT
Actions Taken:
Symbol Action # Shares Traded Recent Price Shares Owned After Trade % of Portfolio After Trade
WHR Buy 45 $152.22 45 2.00%

After you receive this Alert, we will initiate a 45-share position in Whirlpool (WHR:NYSE), which will account for 2% of the model portfolio. The stock was recently trading at $152.22. Due to the market’s recent run-up, we have decided to start with a position that is modestly below our targeted 3% initial weighting. We plan to add to the position on weakness.

Fundamental Approval and Analysis:

Whirlpool (WHR:NYSE) is a leading global appliance manufacturer with an estimated 40% share of the domestic market and growing market presences in Latin America, EMEA (Europe, Middle East and Africa), and Asia. The company has manufacturing operations in 11 countries and its major brands include Whirlpool, Maytag, KitchenAid, Jenn-Air and Amana. Laundry appliances account for approximately 30% of sales. Refrigerator/freezers also make up nearly 30% of sales, while cooking accounts for approximately 20% of sales and other products make up the rest. The company is making a push with its small appliances, which carry higher margins at lower average selling prices. Whirlpool is expected to launch a host of new products with cutting edge technological innovations in the current quarter.

Whirlpool is well positioned amid a resurgence in replacement demand, and some increased consumer confidence is bumping up the discretionary demand for appliances. Meanwhile, the company continues to expand its global operations with two recently announced large acquisitions: Indesit in Europe and Hefei Sanyo in China. Last, the stock carries a nearly 2% dividend yield and the company recently announced an additional $500 million share repurchase authorization, which it can fund with its vast cash flows.

For 2014, management expects the North American market (approximately 57% of sales in the second quarter and 75% of operating profit) to see a 5% increase in demand, with Europe (16% of sales) being flat to up 2%. Projections are for Latin America (23% of sales) to be flat to down 3% (Brazil is the company’s largest market and its economy and political outlook are quite muddied) and Asia (5% of sales) flat (India accounts for the bulk of sales). The company is anticipating $12.00 to $12.50 in non-GAAP earnings per share (EPS) and $600 million to $650 million in free cash flow for 2014.

Management has highlighted four drivers of demand for the company’s goods: replacement sales typically account for 40% to 50% of sales, discretionary demand drives 20% to 30% of sales and new housing and existing housing sales each account for 15% of annual demand.

On the domestic front, we continue to see robust year-over- year growth in U.S. housing starts. Each one offers Whirlpool a chance to sell a minimum of four appliances and a host of smaller housewares. The last U.S. housing boom occurred between 2004 and 2006, and the typical replacement cycle is 10 years. This means a robust replacement cycle is potentially upon us. Most important is that home prices continue to accelerate, feeding a surge in remodeling and replacement spending to record levels.

In 2006, Whirlpool acquired Maytag and increased industry price rationalization. Recent reports indicate that Electrolux is in talks to acquire GE Appliances, a move that we view positively, as it would further bring further price discipline to the industry.

Using a 14x multiple on 2015 consensus earnings of $13.75 (which we see as being conservative), we calculate that the stock is worth $193 a share. We expect that strong secular tailwinds will aid this stock’s ascent as management restructures, revitalizes and grows its global presence, which makes Whirlpool a clean investment.

Technical Approval and Analysis:

Appliance maker Whirlpool is quite the volatile name but it may have righted itself recently. Note the nice cup-and- handle formation -- the stock has pulled back to an area of support. The indicators are flashing a Buy signal and the recent relative strength is impressive. Resistance lies overhead at $155 or so but a move up toward that has this stock poised for much higher prices.

View Larger Chart Here

Taking a Profit in Foot Locker
Stocks in Focus: FL

The stock is up about 30% from our cost-basis price, so we are taking this opportunity to right-size our position.

08/25/14 - 03:05 PM EDT
Foot Locker Reports Strong Results
Stocks in Focus: FL

The company handily beat estimates and we remain bullish on this cash-rich, undervalued retail play.

08/22/14 - 10:10 AM EDT

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