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Jim Cramer's Action Alerts PLUS

Portfolio Update on 8 Key Holdings

By Jim Cramer and Jack Mohr | 09/27/16 - 05:08 PM EDT
Stocks in Focus: AAPL, C, CMCSA, COST, NXPI, PNRA, SBUX, WFC

With the stock market having traded on a higher note today following yesterday’s selloff (even in the face of crude oil down 3%), we wanted to provide members with a rundown of key holdings, encompassing relevant news as well as where we stand at current levels.

First, Apple (AAPL:Nasdaq). The stock remains one to own, not trade. If anything can be learned from Samsung’s latest high- profile scandal –- which we discussed in a comprehensive case-study published Monday -- Apple fights competition quietly and surgically, stripping emotion out of the equation. The company has prioritized patience over rush-to-market in order to ensure that once it launches a new product or feature, it does so knowing that its capability is superior to its competitor (Samsung on the high-end and no one else). Management’s lack of desperation -- and proper sense of security amidst constant innovation -- allows the company to play for the long term, using incremental share gains in the smartphone market to fuel the flywheel effect that is their Services businesses. This methodical strategy can be seen in today’s news that Aetna is joining forces with Apple to make its watch available to “select large employers and individual customers during enrollment season,” with the insurance titan subsidizing a significant portion of the Watch and made available to Aetna’s 50,000 employees. The partnership is the first of its kind and will feature iOS-exclusive health initiatives that will incentivize consumers to improve their health. Although the solutions will take time to monetize, we believe this is the very beginning of what should prove to be Apple’s strongest competitive advantage: leveraging its products, software, ecosystem and massive active user base to extract insightful data that have the potential of revolutionizing the healthcare industry (see recent Alerts here and here that provide more detail on the company’s efforts).

Citigroup (C:NYSE) continues to be our favorite financial, albeit in a beleaguered space. The bank has a built-in upside given its ability to bridge the valuation gap from current levels to its tangible book value. Citi is a perfect example of a company whose buybacks are truly accretive, especially at these levels. We believe its solid regulatory positioning is only becoming increasingly important given recent issues with Deutsche Bank (DB:NYSE) and Wells Fargo (WFC:NYSE) and the propensity for the Fed and other banking oversight committees to initiate more stringent rules and harsher penalties. In addition, Citi's rate sensitivity falls near the lower tiers of its large-cap banking peers because it has done a brilliant job of structurally hedging its operations and trading books. That said, we remind subscribers that this is a long-term play and will likely be volatile in conjunction with the rest of the banking sector.

Comcast (CMCSA:Nasdaq) is another name we are actively monitoring. The company received a strong vote of confidence from an analyst at Pivotal Research who said the stock’s valuation is “very attractive” and raised his price target on the name to $90 from $81 to reflect a transition to next year’s estimates. We are bullish on shares and believe the company is well-positioned to grow broadband penetration, utilize operational leverage to scale into new revenue streams (most recently, its intent to build upon its 15 million Wi-Fi hotspots) and deliver solid cable segment growth amidst improvements in NBCUniversal. These themes converge to create a well-diversified cash flow stream coveted in the media world, likely to be applied to driving shareholder value via strategic capital deployment. We would be buyers on a pullback below $64.

Costco (COST:Nasdaq) is a name that we consider invaluable long-term yet difficult to own in the near-term. That’s because the company’s multiple contraction could be elongated amidst uncertainty around the direction of its comparable sales growth (“comps”). There’s a lack of consensus on how to accurately calculate the all- important comps metric; some analysts exclude currency, gas and food deflation headwinds while others do not, creating inherent confusion when it comes to valuation. For these reasons, we would await a deeper pullback – ideally below $145 – before adding to the position.

NXP Semiconductors (NXPI:Nasdaq) continues to trade like a commoditized chip maker, being swept up with its semiconductor cohorts in seemingly indiscriminate fashion. As the market searches for both value and growth, we believe NXPI represents a long-term investment opportunity that offers both, and the intangibles of management's credibility and heightened visibility add to the upside case. Investors have traded the name in volatile fashion over the past week given confusion around the chip company's evolving business (beyond traditional consumer electronic market and into the auto market, where it boasts leadership position by a wide margin). Its growth algorithm is predicated on its ability to grow market share at least 50% faster than its next-largest competitor. This growth trajectory is highly visible based on management’s impeccable track record of delivering at or above its long-term forecasts.

Panera (PNRA:Nasdaq) shares have been kicked to the ground over recent weeks amidst a strange selloff, which appears driven by a variety of factors, most of which are industry-wide. Firstly, restaurant analysts have struck a largely bearish tone in light of two key concerns: rising labor costs and commodity cost deflation. Fears around rising labor costs are hardly new but have received increased attention ahead of Monday’s debate and into the election as analysts struggle to model wage inflation expectations over the coming years. If Secretary Clinton is elected, the potential for a minimum hourly wage hike to $12 or $15 represents a major overhang. Secondly, food-cost deflation has driven grocers to lower prices, which induces less spending on away-from-home meals and more at-home. PNRA actually bucks the trend when it comes to commodity-cost correlation and labor costs, as it very efficiently schedules its employees, taking labor out of the stores, I would say they’re well positioned relative to the group. Finally, according to analyst conversations, third-party credit/debit-card trend data suggest weak spending at PNRA, although the validity of these data is at best anecdotal (apparently last time it suggested weak spend, PNRA posted blowout numbers). We are not concerned long-term, and would note that PNRA actually bucks the trend when it comes to commodity cost correlation and labor costs, as they very efficiently schedule their employees, taking labor out of the stores through their 2.0 technological initiatives. We would recommend buying below $190/share.

Starbucks (SBUX:Nasdaq) shares intrigue us at current levels, although we are keeping on the sidelines for now given that we are comfortable with its current weighting in our portfolio in light of our overall restaurant exposure. If shares were to drop below $50, however, we would be remiss not to pick up additional shares. Overall, we believe the company is on the right track towards getting back to 5% same-store-sales growth domestically, thereby appeasing those growth investors who have exited the name since the company’s latest quarterly report. Although Starbucks will have to prove itself in the next couple of quarters given increased investor skepticism, we believe the risk/reward is favorable and trust management's proven track record of success and continued innovation. Over the long term, although EPS growth will be slightly subdued over the next year or two (likely about 15%, due to, among other items, increased wages and investment), we believe current levels have priced in that re-rating, but fail to account for the upside of increased mobile order and pay usage, additional loyalty membership, expansion in China and strong free cash flow generation.

Wells Fargo (WFC:NYSE) shares are trading slightly higher today after the bank announced today the board is actively considering executive claw-backs, specifically pay from CEO Stumpf and the bank's former retail- banking head, Carrie Tolstedt. A decision is expected to come prior to Thursday, when Stumpf is again scheduled for testimony. We would welcome claw-backs, noting in a recent Alert that “we believe the first step to turning around this reputational disaster would be for [John Stumpf] to agree to give up pay -- and have other top executives follow suit.”

Regards,

Jim Cramer, Portfolio Manager & Jack Mohr, Director of Research
Action Alerts PLUS

DISCLOSURE: At the time of publication, Action Alerts PLUS was long AAPL, C, CMCSA, COST, NXPI, PNRA, SBUX and WFC.

Exiting a Financial Services Position
Stocks in Focus: PYPL

We are selling our remaining shares in PayPal as they are trading above our price target and cost basis.

09/27/16 - 10:20 AM EDT
Samsung's Ambition Fails vs. Apple's Discipline
Stocks in Focus: AAPL

Samsung's Galaxy Note 7 troubles highlight the contrast between the 2 companies and why Apple remains the one to beat.

09/26/16 - 04:59 PM EDT
Weekly Roundup

With the Fed decision behind it, the market focuses on earnings and oil. In the portfolio, we added to three positions and exited from one.

09/23/16 - 07:02 PM EDT

Markets

Chart of I:DJI
DOW 18,228.30 +133.47 0.74%
S&P 500 2,159.93 +13.83 0.64%
NASDAQ 5,305.7120 +48.2210 0.92%

Action Alerts PLUS Holdings

Holdings 1

Stocks we would buy right now

Symbol % Portfolio
Weighting
Industry
AA 2.91% Metals & Mining
AAPL 3.73% Consumer Durables
AGN 4.81% Drugs
BMY 1.12% Drugs
C 4.20% Banking
CSCO 4.94% Computer Hardware
DOW 3.12% Chemicals
FB 5.18% Internet
GE 2.82% Industrial
GOOGL 4.89% Internet
NWL 1.05% Consumer Durables
NXPI 3.32% Electronics
PNRA 4.67% Leisure
SBUX 3.81% Leisure
SLB 3.03% Energy
TJX 3.93% Retail
WBA 3.75% Retail
Holdings 2

Stocks we would buy on a pullback

Symbol % Portfolio
Weighting
Industry
AEP 1.32% Utilities
CMCSA 1.60% Media
COST 2.42% Retail
OXY 2.28% Energy
PEP 3.89% Food & Beverage
V 3.55% Financial Services
WFC 4.21% Banking