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Jim Cramer's Action Alerts PLUS

Weekly Roundup

By Jim Cramer and the AAP Team | 2018-02-23 20:47:47.0
Stocks in Focus: APA, AMZN, WMT, QCOM, AVGO, NXPI, GS, FB, GOOGL, AGN, GE, ABT, AAPL, CMCSA, DHR, DWDP, LLY, EZU, HON, ITW, JPM, MSFT, JWN, PEP, RTN, SLB, STZ, WM, XEC, ATVI, ARNC, C, UTX, DXC, HPE, MMP, NUE, NVDA

Markets were volatile this week, with wide trading ranges during the shortened trading (U.S. markets were closed Monday for President's Day). We had limited macroeconomic data, but got the latest Federal Open Market Committee minutes on Wednesday as investors continued their laser-like focus on a 10-year Treasury yield that hit a multiyear high and began to offer equities some competition.

Treasury yields on Wednesday reached their highest levels since January 2014, although they trended slightly lower later in this week. Gold also moved lower as the U.S. dollar strengthened against the euro. Lastly, oil pushed higher following news that U.S. inventories declined at a time when investors were expecting an increase (see more about that below).

Meanwhile, fourth-quarter earnings season remains underway, with result so far relatively positive vs. expectations. Within the portfolio, we heard from Apache Corp.  (APA) on Thursday before the opening bell.

We also got a number of international macroeconomic readings, including the German Producer Price Index (+2.1% vs. +1.9% expected), U.K. GDP (+0.4% vs. +0.5% forecast), Japanese Consumer Price Index (+1.4% vs. +1.3% forecast), German 4Q GDP (+0.6%, matching the +0.6% expected) and Eurozone CPI (+1.3% against 1.3% forecast). Check out the "Key Global Economic Readings" section below for details.

Apache Earnings

Apache Corp. reported better-than-expected fourth-quarter 2017 results. Revenues of $1.586 billion came in slightly ahead of expectations of $1.538 billion and adjusted earnings per share of $0.33 topped expectations of $0.21. Total adjusted production was 362,000 barrels of oil equivalent (BOE) per day.

By region, production in North America was 222,199 BOE/d with 176,969 BOE/d coming from the Permian Basin. In the North Sea, production was 58,138 BOE/d, In Egypt, product was 159,864 BOE/d. Looking at 2018 guidance, management expects U.S. production of between 245 and 255 MBOE per day, with an Oil/NGLs/Natural Gas mix of 39%/22%/39%. The company also expects 2018 international adjusted production of between 203 and 214 MBOE per day with an Oil/NGLs/Natural Gas mix of 70%/1%/29%. We note that the light total-production guidance and the high mix of natural gas in the United States caused weakness after earnings.

Economy

On the economic front, the National Association of Realtors (NAR) reported on Tuesday that existing home sales fell 3.2% in January to a seasonally adjusted 5.38 million annual rate. That missed expectations of 0.8% advance, while the NAR downwardly revised December's sales to 5.56 million units from the 5.57 million previously reported.

With January's lower results, existing home sales are down 4.8% annually -- the largest 12-month decline since August 2014, when sales dropped 5.5% from the same period one year earlier. Digging deeper into the report, month-over-month sales decreased across all major regions, falling 1.4% in the Northeast, 6.0% in the Midwest, 1.3% in the South and 5.0% in the West.

Sales were also down across all major regions on an annual basis, falling 7.6% in the Northeast, 3.8% in the Midwest, 1.7% in the South and 9.5% in the West. Lastly, median Decembers prices were $269,100 (+6.8% YoY) in the Northeast, $188,000 (+8.7% YoY) in the Midwest, $208,200 (+4.3% YoY) in the South and $362,600 (+8.8% YoY) in the West. For ou full analysis, click here.

On Thursday, the U.S. Labor Department reported 222,000 initial jobless claims in the week ended Feb. 17. That's a decrease of 7,000 claims from the previous week's revised 229,000 (originally reported at 230,000). It's also 8,000 claims less than the 230,000 than analysts expected. Claims-taking procedures in the Virgin Islands and Puerto Rico have yet to return to normal. Additionally, because of President's Day, claims were estimated in six states.

Importantly, the four-week moving average of claims (used to offset volatility in the weekly numbers) fell to 226,000, down 2,250 from last week's revised 228,250 (originally reported at 228,500). The low layoff rate reflects a strengthening labor market, as claims have remained below 300,000 -- the threshold typically used to categorize a healthy jobs market -- for an incredible 155 consecutive weeks. That's the longest streak since 1970. For the official weekly release, see here.

Oil

It was a relatively slow news week for oil as prices grinded higher, rallying Thursday on a positive U.S. Energy Information Administration report that showed a bigger-than-expected crude drawdown. The EIA said U.S. crude inventories fell by 1.6 million barrels in the week ending Feb.16 -- a significant drawdown given analyst expectations of a 1.8-million-barrel increase.

Driving the decline was a 1.59 million barrel per day (bpd) reduction in net imports (imports minus exports). Those fell to 4.98 billion bpd, the lowest level of since tracking began in 2001. The lower net imports stemmed from an 867,000 bpd reduction in imports and a 722,000 bpd climb in exports. U.S. production was relatively unchanged from the week prior, falling 1,000 bpd to 10.27 million bpd. Recall that this will be a record level of production should it be confirmed by monthly figures.

Further aiding oil's rise was the dollar's decline. Recall that a weaker dollar makes oil cheaper to foreign buyers paying in other currencies.

Lastly, we remind members that on the international front, global oil prices continue to draw support from efforts of Russia and the Organization of Petroleum Exporting Countries to reduce output by 1.8 million bpd throughout 2018's remainder. Speaking to these efforts, current OPEC President Suhail al-Mazroui (who's also the United Arab Emirates energy minister) stated this week that "I think the pace is excellent, the deal is working and we're very happy with it -- but the job is not yet complete." Such continued commitment to curbing production will be key to supporting oil prices, as U.S. production threatens to offset international cutback effort. We will continue to monitor compliance by individual OPEC member countries.

Stocks

We initiated a position in Amazon (AMZN) for the portfolio this week. Although we'd held off for fear of becoming too heavily weighted in the FANGs, we believe Amazon's story has gotten so much better in recent months that we simply couldn't ignore it. This view was bolstered when Walmart (WMT) released earnings this week that showed an e-commerce slowdown, illustrating just how hard it is to compete on Amazon's turf. Retail aside, we'd also remind members that Amazon is the reigning king in the public cloud space thanks to Amazon Web Services. The company is also constantly adding new revenue sources like online advertising, and most recently, online sales of over-the-counter drugs. For more on our view, see here.

In addition to initiating Amazon, we increased our exposure to Broadcom (AVGO) , as it's now looking more likely that Broadcom will walk away way from its pursuit of Qualcomm (QCOM) following the latter's increased bid for NXP Semiconductors (NXPI) .

We also bolstered our position in Goldman Sachs (GS) , as we believe the bank will be a primary beneficiary of market volatility's return. As we noted in our trade alert: "Goldman Sachs' trading revenue should greatly improve this quarter (and likely this year) as many trading sessions in 2018 have featured wide ranges in the major indices. This is the exact environment Goldman needs to generate huge trading profits, and we expect them to be capitalizing on these opportunities. Additionally, the rising-interest-rate environment should increase Goldman's net interest margin, or the spread between what the bank charges on loans and pays to borrow."

We trimmed several names this week to fund the above purchases. We reduced our stake Alphabet (GOOGL) and Facebook (FB) with the mindset that while we felt we had to add Amazon, we wanted to keep our FANG exposure in line. Additionally, these positions (especially Facebook) had become a bit too heavily weighted for our liking -- and with the removal of cash coming up due for our charitable contribution, their weightings will only increase.

We also significantly trimmed our exposure to Allergan (AGN) , Apache (APA) and General Electric (GE) . We halved these positions (and cut even more than half with Allergan) as we're committed to keeping our troubled names on a short leash. We don't want them to become a stain on what we believe is an otherwise strong and diverse portfolio. There are simply better opportunities elsewhere in the market.

Lastly, we decided to close out our position in NXP Semiconductors following an increased tender offer of $127.50 per share for the company from Qualcomm. We see the new offer as much more in line with what we believe is NXP's fair value.

Moving on to the broader market, fourth-quarter earnings are underway and have so far been positive, with 73.7% of S&P 500 companies reporting positive earnings-per-share surprises. Thus far, fourth-quarter earnings have grown roughly 16.3% year over year, beating analyst expectations of a 15.89% growth rate for earnings season as a whole. Of the 376 non-financials that have reported so far, earnings were up 16.6%.

Revenues are also up 7.9% so far, surpassing expectations of a 7.59% increase for earnings season as a whole. Some 73.7% of companies beat EPS expectations, while 17.5% missed the mark and 8.8% were in line with consensus.

On a year-over-year basis, 80.73% beat the prior year's EPS results, while 16.33% came up short and 2.49% were virtually in line. Materials, Financials and Information Technology have had the strongest performance vs. estimates, whereas Telecom, Utilities and Real Estate posted the worst results so far.

Next week, 59 S&P 500 companies will report earnings. Within the portfolio, Broadcom will report Tuesday after the bell, while Nordstrom's (JWN) will report Thursday after the bell.

Economic Data (*all times ET)

U.S.

Monday (2/26)

Chicago Fed Nat Activity Index (8:30): 0.25 expected

New Home Sales (10:00): 647,000 expected

Dallas Fed Manufacturing Activity (10:30): 30 expected

Tuesday (2/27)

Wholesale Inventories MoM (8:30)

Durable Goods Orders (8:30): -2.3% expected

Durables Ex Transportation (8:30): 0.3% expected

Cap Goods Orders Nondef Ex Air (8:30)

FHFA House Price Index MoM (9:00): 0.4% expected

Richmond Fed Manufact. Index (10:00): 15 expected

Conf. Board Consumer Confidence (10:00): 125.6 expected

Wednesday (2/28)

MBA Mortgage Applications (7:00)

Personal Consumption (8:30)

GDP Annualized QoQ (8:30): 2.6% expected

GDP Price Index (8:30): 2.4% expected

Core PCE QoQ (8:30)

Chicago Purchasing Manager (9:45): 64 expected

Pending Home Sales MoM (10:00): 0.5% expected

Thursday (3/1)

Personal Income (8:30): 0.2% expected

Personal Spending (8:30): 0.2% expected

Initial Jobless Claims (8:30)

Continuing Claims (8:30)

Bloomberg Consumer Comfort (9:45)

Markit US Manufacturing PMI (9:45)

Construction Spending MoM (10:00): 0.2% expected

ISM Manufacturing (10:00): 58.6 expected

ISM Prices Paid (10:00)

Friday (3/2)

International

Monday (2/26)

Tuesday (2/27)

Eurozone Agg M3 Money Supply YoY (4:00)

Eurozone Agg Consumer Confidence (5:00)

Germany CPI MoM (8:00)

Germany CPI YoY (8:00)

Germany CPI EU Harmonized MoM (8:00)

Germany CPI EU Harmonized YoY (8:00)

Japan Retail Sales MoM (18:50)

Japan Retail Trade YoY (18:50)

Japan Industrial Production MoM (18:50)

Japan Industrial Production YoY (18:50)

China Manufacturing PMI (20:00): 51.2 expected

Wednesday (2/28)

Japan Housing Starts YoY (00:00)

Germany GfK Consumer Confidence (2:00)

Germany Unemployment Change (000's) (3:55)

Germany Unemployment Claims Rate SA (3:55)

Eurozone Agg CPI Core YoY (5:00)

Eurozone Agg CPI Estimate YoY (5:00)

Japan Capital Spending YoY (18:50)

Japan Nikkei Japan PMI Mfg (20:30)

China Caixin China PMI Mfg (20:45): 51.3 expected

Thursday (3/1)

Japan Vehicle Sales YoY (00:00)

Germany Markit/BME Germany Manufacturing PMI (3:55)

Eurozone Agg Markit Eurozone Manufacturing PMI (4:00)

UK Mortgage Approvals (4:30)

UK Markit UK PMI Manufacturing SA (4:30)

Eurozone Agg Unemployment Rate (5:00)

Japan Job-To-Applicant Ratio (18:30)

Japan Jobless Rate (18:30)

Japan Tokyo CPI YoY (18:30): 1.5% expected

Japan Tokyo CPI Ex-Fresh Food YoY (18:30): 0.8% expected

Japan Monetary Base YoY (18:50)

Friday (3/2)

UK Markit/CIPS UK Construction PMI (4:30)

New folks, welcome aboard! You're reading the Weekly Roundup of the charitable trust that Jim talks about regularly on Mad Money and in his new bestseller, Get Rich Carefully. Jim put $3 million of his own money into this charitable trust so that you, the subscriber, can learn how he and the Action Alerts PLUS staff make decisions about a diversified portfolio and make money. You'll see every position in every stock, and we'll send you alerts BEFORE every trade. And best of all, all profits go to charity -- we've donated $1.8 million to date.

To learn more about how we construct and trade the portfolio, click on Getting Started in the dropdown menu of the Help link above.

We also want to be sure you're not confused about the terminology that Jim uses on his Mad Money television show: When you hear Jim refer to the charitable trust, he is talking about the trust that holds the Action Alerts PLUS portfolio. The gains from Action Alerts PLUS go to charity after the close of each trading year.

Here's the quick guide to the rating system, too: 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.

Ones

Abbott Laboratories (ABT) ; $59.71; 800 shares; 1.63%; Sector: Healthcare -- Abbott moved lower during the holiday-shortened week, although there was no news from the company that influenced trading. Our thesis for the name relates to management's execution in integrating its two most recent acquisitions (St. Jude's Medical and Alere), as well as to new and exciting U.S. product launches. These include the FreeStyle Libre continuous glucose monitor and the Alinty system. We believe the recent acquisitions' strength have helped Abbott become a leader in medical devices and point-of-care diagnostics. Combined with Abbott's newly launched products, we think that'll help the company achieve its guidance of 6% to 7% organic sales growth, with another year of double-digit EPS expansion. We reiterate our $65 price target

Amazon (AMZN) ; $1,500; 75 shares; 3.85%; Sector: Information Technology -- Amazon climbed higher this week and outperformed the broader market. We finally jumped in on Amazon and initiated a position Tuesday morning because we believe that the company's story has gotten so great that the stock's premium is justified, and we think it can go higher. What's changed is that the company now has three fast-growing, fully fledged revenue streams: Retail, Amazon Web Services and Advertising. Amazon is the leading player in retail e-commerce through its Amazon.com flagship site. This business has great customer appeal because Amazon Prime subscribers (an additional subscription-revenue stream) get products at competitive prices shipped to them fast and conveniently. Amazon's cloud-computing business, Amazon Web Services, has the most market-share in the cloud, which is an area that is undergoing strong, secular growth. Amazon is committed to developing ways to enhance their cloud's capabilities, and revenue is on a $20 billion run-rate. Advertising revenue is smaller than the powerhouse businesses of Retail and AWS, but growing faster. Lastly, the company's "Other" revenues category (which includes Advertising and co-branded credit-card agreements) grew 62% year over year to $1.735 billion. We think strength in this high-margin business can continue, as it's a function of the company's dominant retail business. We reiterate our $1,700 price target.

Apple (AAPL) ; $170.50; 700 shares; 4.2%; Sector: Technology -- Shares pushed higher this week, outperforming the overall market. Our longer-term thesis on Apple continues to be heavily based on the company's rapidly growing Services segment, which brings with it a transparent, recurring revenue stream at higher margins than the overall business and can be subscribed to through nearly every Apple device on the market. It is for this reason that we place more value on the fact that in the most recent quarter, Apple reported a record installed base across all devices and are less so concerned that iPhone X sales missed analyst expectations (which were too high in our opinion thanks to the ongoing "supercycle" narrative, but were still able to drive up the average sale price). Furthermore, with Apple actively investing in original video content (adding to the Services offering) and the HomePod making its way on to the scene (an obvious outlet for Apple Music subscriptions), we believe growth here could accelerate, or at the very least continue at its approximately 18% YoY pace, going forward and perhaps lead to a higher trading multiple as it becomes a larger portion of overall revenue. We reiterate our $190 target.

Broadcom (AVGO) ; $253.71; 250 shares; 2.17%; Sector: Electronics -- Shares pushed higher this week on news that Qualcomm was raising its offer for NXPI and as a result causing Broadcom to revise its takeover bid for Qualcomm lower, increasing investor sentiment that the deal will not go through (removing an overhang that has held shares back in recent weeks). That said, we believe that Broadcom shares are in a win-win position to benefit for either direction the deal takes. We continue to like Broadcom, as the company stands to benefit from the long-term trend of increasing data demand and the nearer-term pending upgrade of wireless networks to the 5G standard. On the data-demand front, Broadcom stands to benefit from its 5G WiFi solutions, which allow for high speed WiFi in highly populated areas without service interruption. Furthermore, with more consumers streaming more high-quality, data-intensive content than ever before, Broadcom stands to benefit from its last-mile solutions, which address bottleneck issues in the delivery of Internet from service providers to end users. As for the pending wireless-network upgrade, Broadcom stands to gain from this inevitable effort, as the company develops chips that mobile devices will need to take advantage of higher speeds. We also note that Broadcom develops many other chips found in mobile devices (recall, the company develops eight chips found in the iPhone X). As mobile devices become more popular worldwide (especially as companies push into emerging markets), the need for Broadcom-developed chips will grow along with the demand for these devices. We reiterate our $290 target.

Comcast (CMCSA) ; $39.50; 2,000 shares; 2.7%; Sector: Consumer Discretionary -- Shares continue to see resistance at roughly the $40 level and trended slightly lower this week/ However, we still like Comcast for several reasons, including strong free cash flow, a diverse business model and significant exposure to the benefits of U.S. tax reform. Business diversity is an especially crucial factor, as Comcast's broadband business has effectively served to offset the decline in video subscriptions being seen industrywide (although Comcast's X1 platform has proved itself to be more resilient, thanks to the integration of OTT offerings such as Netflix and YouTube). Furthermore, Comcast's Xfinity wireless and other offering have helped the company increase average revenue per user (ARPU) by bundling offerings. This potentially entices would-be "cord cutters" to retain their video subscriptions, as consumers can bundle in other services for minimal additional costs. As for tax reform, we can't overstate its importance to Comcast. The company's effective tax rate is expected to fall to roughly 24%-26% from about 35% previously and be almost immediately accretive to earnings per share. This makes Comcast one of the best financial-engineering stories out there, and we reiterate our $45 target.

Danaher (DHR) ; $99.33; 1,000 shares; 3.4%; Sector: Life Sciences -- Shares of Danaher climbed higher this week and outperformed the broader market. On Wednesday, Chief Financial Officer Daniel Comas spoke at a conference where much of the conversation centered on Danaher's maligned Dental business. Recall that the Dental unit (and more specifically the distribution side) limited the company's organic sales growth figures in 2017, though terrific strength in Life Sciences, Diagnostics and Environmental and Applied Solutions overcame these challenges in the second half. Comas said that he expects Dental to be around flat from where it was over the last few quarters, but expects low-single-digit growth in 2018's second half. Other takeaways were that he expects no slowdown in top-line trends, and that the company remains on track for 50-75 basis point margin expansion in 2018. Long term, we think Danaher can continue to post strong numbers because of its past acquisitions that are now integrated in the company's results and have improved from implementation of the Danaher Business System. We also expect the company to participate in M&A this year in some capacity, and this could further move the stock's needle. We reiterate our $104 price target.

DowDuPont (DWDP) ; $73.26; 1,375 shares; 3.45%; Sector: Chemicals -- DowDuPont finished the week higher and outperformed the broader market despite a quiet news week for the company. Much of investors' focus remains on the ongoing integration of Dow Chemical and DuPont, which is central to our thesis as well. We also believe that DowDuPont's sum of the parts is worth more than its whole, and that management will unlock this value by realizing synergies between Dow and DuPont even as it plans to break the company into three pieces. Management last quarter increased its synergy target by $300 million, taking the total goal to $3.3 billion. The company also accelerated its breakup timeline by roughly four to six months. Management said it expects a Materials Science spinoff by March 31, 2019. It also intends to complete the Agriculture and Specialty Products spinoffs by June 1, 2019. The improved cost synergies and faster-than-expected spinoffs confirm our view that CEO Ed Breen is a value creator and breakup artist. We expect DWDP can continue to climb higher from this catalyst, and we reiterate our $85 price target

Eli Lilly (LLY) ; $78.75; 1,000 shares; 2.69%; Sector: Healthcare -- Eli Lilly ended the week slightly lower. Of importance this week, Novo Nordisk unveiled Phase 3 data for oral semaglutide on Thursday. We monitor this drug's data results tightly because it represents competition in the diabetes market to Eli Lilly's Trulicity, which is an injectable GLP-1. The analyst community viewed the semaglutide data positively, but we note that the drug hasn't launched in the market yet, so it's not an immediate threat. Additionally, Morgan Stanley analysts said Thursday that "we would expect few existing weekly injectable GLP-1 patients to switch to daily oral." If this holds true, it's critical that Trulicity continues its rapid adoption pace. If it can get a large patient basis, the switching rate might diminish and semaglutide's threat will relate more to new patients. Looking ahead, the next catalysts we're waiting for are reports on the strength in Lilly's new product launches, along with FDA action on baricitinib and management's strategic update on the Elanco animal-health business. We reiterate our $93 price target.

iShares MSCI Eurozone ETF (EZU) ; $44.44; 1,000 shares; 1.52%; Sector: Europe -- Shares moved lower this week, underperforming relative to the S&P 500. The main update regarding our EZU position this week came in the form of the Eurozone consumer price index (CPI), which was in line with expectations at 1.3% Core CPI was also in line with consensus at 1.0% We believe the in-line results indicate the economic expansion in the region remains intact. As a result, we continue to like the EZU as a means of gaining passive exposure to the European markets and euro currency. Recall, we selected the EZU over other European ETFs because it has minimal exposure to the UK a region we decided was best to avoid given remaining uncertainty surrounding Brexit. Furthermore, we prefer the EZU to its counterpart the HEZU as it is unhedged, providing us with currency exposure, something we desire as we believe the euro has more room to appreciate relative to the dollar. Given that this is an ETF encompassing over 200 companies, we will not have a price target.

Facebook (FB) ; $183.29; 725 shares; 4.55%; Sector: Technology -- Shares pushed higher this week outperforming the broader market. We continue to view Facebook as one of the strongest names in tech due to its online ad dominance and significant investments to increase video content (via the "Watch" tab), protect platform integrity (by investing in security) and expand into new areas such as virtual reality (VR) thanks to the past acquisition of Oculus. While ad dominance is certainly the company's bread and butter currently, we believe the push into original content and VR will keep the platform relevant for the long-haul and allow it to increase revenue diversity. Additionally, while many of monetization opportunities have largely been addressed on the core platform, we note that Instagram and Whatsapp are two major platforms (Instagram potentially being the core Facebook platform's biggest competitor) with significant untapped monetization potential that we believe can become significant avenues of topline growth. We reiterate our $220 target.

Goldman Sachs (GS) ; $266.77; 150 shares; 1.37%; Sector: Financials --

Shares trended lower this week, a move we believe to be counterintuitive given the return of market volatility. As noted previously, we continue to view Goldman Sachs as a play on volatility as we believe the return of market unpredictability and higher interest rates will revitalize the company's Fixed Income, Currency and Commodity (FICC) trading revenues, a subsegment that was hamstrung by the lack of volatility throughout 2017, declining 50% year over year in the fourth quarter of last year. Outside of the return of volatility, we note that, along with others in the financial industry, Goldman Sachs stands to benefit from the rising rate environment and increased central bank activity expected both domestically and abroad as the Fed seeks to unwind its balance sheet and raise short-term rates, a move expected to be echoed by foreign central banks as well, including the European Central Bank (ECB). We reiterate our $285 target.

Honeywell  (HON) ; $155.12; 650 shares; 3.45%; Sector: Industrials -- Shares of Honeywell finished slightly higher and outperformed the market. On Wednesday, Rajeev Gautam, President and CEO of Honeywell's Performance Materials and Technologies segment, and Vimal Kapur, president of Honeywell's Process Solutions, spoke at Citi's Global Industrials Conference. During the conference, the two Honeywell execs laid out the strengths of the segment and how success in High Growth Regions has driven the business. Looking ahead, the company will host its annual investor conference next Wednesday. We expect management will reiterate guidance and provide updates to the company's 2018 capital deployment plan. Because Honeywell is breaking up the company by the end of 2018, we believe management will be active in the M&A front through either a bolt-on acquisition or core market addition in order to boost the foundation of the new company. We reiterate our $175 price target

Illinois Tool Works (ITW) ; $163.96; 550 shares; 3.09%; Sector: Industrials -- Shares trended higher this week as CFO Michael Larsen spoke at the Citi Global Industrials Conference. There, the noted that the company has become open to a segment acquisition in 2019,2020 that would increase the company's business model from seven segments to perhaps eight or nine. We continue to like ITW as management has successfully implemented the 80/20 business model which has aided in streamlining operations and expanding margins companywide while keeping the business diverse enough to weather weakness in any one or two sectors, as was the case in the most recent quarter. Looking ahead, we believe the intense commitment to this operating model will allow management to successfully navigate phase two of their strategic framework, growing the company organically and via bolt-on acquisitions, while ensuring the management doesn't over extend themselves and hamper core operations. Lastly, we continue to like ITW as a core holding as the industrial sector remains in favor, standing to benefit from increased infrastructure spend, and earnings at Illinois Tool Works are backed by free cash flow (106% of net income as of the last quarterly release), i.e. are of higher quality than earnings backed by accruals on the balance sheet. It is this strong free cash flow that has allowed the company to accelerate intentions of raising its dividend payout to 50% of free cash flow. We reiterate our $185 target.

JPMorgan Chase & Co. (JPM) ; $117.31; 200 shares; 0.8%; Sector: Financials -- Shares pushed higher this week, outperforming the overall market. We continue to like JPMorgan as the bank's global presence allows it to take advantage of the global economic expansion and lend to companies that may seek to now do their borrowing abroad, where writing off debt interest payments against taxable income may be more attractive following US tax reform. Furthermore, with rates on the rise, we believe the bank's net interest margin (the spread between what a bank pays for funds and what it charges for loans) will continue to expand. Lastly, with the Fed's annual "stress test" guided to be harder this year with, "severely adverse" scenarios, we believe the banks "fortress" like balance sheet to be as crucial as ever. We reiterate our $120 target.

Microsoft Corp. (MSFT) ; $94.06; 1,100 shares; 3.54%; Sector: Technology -- Shares pushed higher this week as tech led this week's market wide grind higher. While there are numerous things to like about Microsoft, including video game exposure (Xbox), autonomous driving (thanks to the past Mobileye acquisition), the shift of offerings from one-time sales to a subscription model, past acquisition of LinkedIn (a platform that continues to show momentum) and repatriation, our main reason for investing in MSFT is Azure. We believe Microsoft's Azure cloud to be the number one threat to the current dominating force in the public cloud space, Amazon's AWS. And while Amazon benefits from first mover advantage, Microsoft's edge comes from its history as the go to server platform for company data centers before cloud computing began to go mainstream. Furthermore, while the endgame of many companies is likely to house all (or at least most) data in the cloud, this goal will take time (potentially decades) before being realize; in the meantime, most companies will opt for a hybrid solution, housing some data in the cloud and some on local stores. From the hybrid angle, Microsoft is likely in the best position to meet company needs due to its in-house legacy relationships with companies, preventing it from needing to partner with on-premise providers to support hybrid-cloud initiatives, something Amazon (and competitor Google) will likely require in order to fulfill individual company needs. We believe that as Azure continues to gain public cloud market share shares will grind higher. We reiterate our $100 target.

Nordstrom (JWN) ; $53.56; 1,500 shares; 2.75%; Sector: Consumer Discretionary -- Shares pushed higher this week, rallying Friday on news of renewed privatization speculation. Nordstrom remains our favorite way to play brick and mortar retail as we believe the return of inflation (specifically wage inflation) will result in more consumers going out to spend their additional discretionary income, which along with a rise in wages, received a bump thanks to tax reform for many Americans. Furthermore, with the global economy continuing to expand we would not be surprised to see an uptick in international travel and believe the company's soon to open location in New York City could become a new "go to" location for tourists looking to do some shopping, similar to the Macy's Herald Square location. As for discount shoppers, we believe Nordstrom Rack serves to fulfill these needs. Lastly, as noted above, shares rallied in late trading Friday, on news that, as we suspected could be the case, the Nordstrom family is again looking into taking the company private, potentially even before the company reports earnings next week according to sources. As a result of the late-in-the-week development, we're raising our target to $60 per share as we believe that should an offer materialize, it will be done at a premium in order expedite the process and meet the family's rumored goal of achieving its mission before next week's earnings release. Furthermore, should an offer not materialize, we believe that the attempt signals that those with significant information on the company (the Nordstrom family) believe the current price to undervalue the company and thus gives us increased conviction in our raised target price.

PepsiCo (PEP) ; $109.68; 500 shares; 1.88%; Sector: Consumer Staples -- Shares trended lower this week as consumer staples lagged the overall market. We continue to like PepsiCo as the company's strong Frito-Lay division has effectively managed to offset weakness in the North American Beverage segment, i.e. management's effort to diversify offerings to include snacks (including healthier options) has paid off. We believe as beverages begin to rebound in 2018, due to management correcting past mistakes and general stabilization industry-wide, shares will again push higher. Compounding the recovery in beverages we note that as we work through 2018, PEP also stands to benefit from easier year over year growth comparisons due to the lackluster beverage performance in 2017. Lastly, we note that from a higher, portfolio management perspective, it is always good to include a reliable, relatively less volatile, consumer staple such as PEP for times of increased market volatility. Bolstering that view is the company's new capital return program that featured a 15% dividend increase and $15 billion buyback plan. We reiterate our $130 target.

Raytheon (RTN) ; $218.24; 300 shares; 2.24%; Sector: Industrials -- Shares were relatively flat this week on little news. We continue to like Raytheon as defense spending, both domestically and internationally is on the rise and Raytheon can meet the demand thanks to, in addition to other offerings, its Patriot Air and Missile Defense system. Additionally, with NATO members seeing increased pressure to meet their 2% of GDP spend, we believe Raytheon will be a primary beneficiary of the additional spending as many countries have yet to meet the spending requirement. In addition to increased worldwide defense spending, we also note that Raytheon stands to benefit from tax reform as its effective tax rate is expected to drop to around 19% in 2018, from roughly 36% previously. We reiterate our $232 target.

Schlumberger (SLB) ; $66.50; 1,500 shares; 3.41%; Sector: Energy -- Shares of Schlumberger increased slightly this week, benefiting from a strong rally on Friday. The company announced this week a planned 50/50 joint venture with Subsea 7 that builds on its current relationship with the company. In a statement, Schlumberger said, "The proposed joint venture will give us the opportunity to capitalize on synergies already established and significantly improve subsea economics over the lifetime of the field." We continue to like shares because Schlumberger is the best of breed provider of oil services with the best technology. Last earnings call, management said that 2018 will be "the first year of growth in all parts of our global operations since 2014" and we think this will lead to higher share prices. We hold a lot of weight in management's commentary because they have a strong understanding of the factors that influence the oil market, and they have made accurate projections in the past. We will look for Schlumberger's business to improve as the year progresses and remind members that the first quarter will have some softness to it. We reiterate our $93 price target

Constellation Brands (STZ) ; $217.46; 375 shares; 2.79%; Sector: Consumer Staples -- Shares pulled back this week as management tempered medium-term guidance during their presentation at the 2018 Consumer Analyst Group of New York (CAGNY) conference. During the conference, management reiterated mid-term beer guidance, portraying confidence in the segment's outlook. However, offsetting the bullish commentary, management was slightly more conservative in its mid-term Wine & Spirit segment outlook (guiding for low-to-mid-single-digit growth, verse mid-single-digit growth previously), causing mid-term EPS guidance to come down to roughly 10%, verse "greater than 10%" previously. Additionally, while the benefits of tax reform were above expectations, 18%-20%, compared with around 20% previously, the upside was more than offset by management expectations of increased reinvestment rates. All in, our thesis in Constellation Brands unchanged as the adjustments were minor, and we believe management's "premiumization" strategy will continue to be effective and push shares higher long-term. While mid-term Wine & Spirit outlook was tempered a bit, we continue to believe that longer-term this will be transitory and note that management did cite positive trends in in higher-priced (above $11 per bottle) wine, noting that the subcategory is showing high-single to low-double-digit growth. We reiterate our $242 target and will continue to look for opportunities increase our stake should it aid our overall cost basis.

Waste Management (WM) ; $85.49; 1,100 shares; 3.22%; Sector: Industrials -- Shares of Waste Management increased slightly this week, relatively in-line with the broader market. There was little news this week that influenced trading as the market is still digesting the company's most recent earnings report. When the company reported last Thursday, management delivered better than expected results with strong free cash flow generation. Although challenges in recycling will continue in 2018, the rest of the company is firing on all cylinders, and we expect volumes to grow because Waste Management benefits from industrial growth. Lastly, we believe that the company's 2018 free cash flow guidance of between $1.95 billion and $2.05 billion, driven in part by the benefits of the reduction in their tax rate, can help shares climb higher. We reiterate our $94 price target.

Cimarex (XEC) ; $98.70; 675 shares; 2.28%; Sector: Energy -- Shares of Cimarex started the week lower, but pared losses Friday after the company announced a 100% increase to its quarterly dividend. Although shares have been pressured in recent weeks due to the company's soft production guidance and general industry challenges, we believe that Cimarex is a strong operator in the Permian Basin. Management has a return-based approach when drilling, meaning they drill to generate the best return and not for the sake of growth, and this has kept the company's profitability up when the industry has been challenged. This approach further demonstrates management's commitment to its shareholders and is evidenced by the dividend raise mentioned earlier. While there were concerns of the company's 2018 capital expenditure guidance, we are encouraged that oil is expected to gain share in the company's production mix because as we have learned with Apache, too much growth in natural gas means the stock will trade at a discount. We reiterate our $150 price target and note that we expect sentiment on the stock to shift positively in the second half of the year as the company's production guidance backloaded.

Twos

Activision Blizzard (ATVI) ; $72.07; 1,250 shares; 3.08%; Sector: Technology -- Shares grinded higher this week as rumors grows that the next Call of Duty (CoD) release will be the fourth installment of the franchises hottest sub-genre, Black Ops. We continue to see upside to shares of ATVI as the company is actively working to become the leader in eSports thanks to its investment in the Overwatch League. Compounding Activision's eSports exposure, a significant portion of our investment thesis, is the company's strong gaming franchises including CoD, which is expected to be releasing the Black Ops 4 edition this year (although this remains unconfirmed). If confirmed, we believe this could aid in pushing shares higher as Black Ops has been the franchises most popular sub-genre thus far and will be met with momentum following the highly successful release of CoD: World War 2. Furthermore, in the mid- to- long-term, we see additional upside as the company has expressed interest in porting Blizzard content to mobile, a move that is expected to significantly increase the company's exposure to the hotly sought after Asian market. Lastly, from a higher level, we are bullish on the video game industry overall as sales continue to shift toward digital distribution, an increasing amount in-game purchases is successfully working to increase the monetary life of titles and gaming is on the rise and more and more content consumers seek alternatives to traditional cable. We reiterate our $80 target.

Allergan (AGN) ; $162.09; 250 shares; 1.39% Sector: Healthcare -- Allergan's shares fell this week on little news. In the past week, we took action on our position by aggressively scaling down because we wanted to build up our cash position through trimming our troubled position, not our winners. This process began Wednesday morning  continued on Thursday because we cannot live in fear that management will suddenly change course and make a move to remove its narrative of a "trough earnings" year. We had hoped that they would do this through our sum-of-the-parts analysis, however that has not been the case. That said, there were rumors swirling around the market on Friday that the company was exploring a possible breakup, but we did not take much stock to this because we believe it is pure speculation. At the end of the day, the two factors holding back shares are the fact that Allergan is a drug company, a group that is not liked, and also the trough earnings year is a label that the market will not pay for. We reiterate our $242 price target, but we will likely continue to trim our position to raise cash because there are better opportunities elsewhere in the market.

Apache (APA) ; $36.13; 750 shares; 0.93%; Sector: Energy -- Shares of Apache Corp. were greatly pressured this week as the stock sold off Thursday following its fourth quarter earnings release. The headlines numbers were positive with revenue of $1.586 billion beating consensus of $1.538 billion, and adjusted earnings per share of $0.33 exceeding consensus by $0.12, however, the stock was hit due to a high natural gas mix in guidance and a tepid production forecast. These factors confirmed our decision to aggressively scale down our position Wednesday morning because the company is natural gas rich at a time when the natural gas glut is frighteningly thick, and Apache's assets are landlocked to the point that the stock will continue to trade at a discount. Fourth quarter 2017 production volumes at the Alpine High was 83% gas, and in our opinion that high mix has diminished the value of the asset. To read our thoughts on the quarter, please see our alert here. Also, we are lowering our price target to $50 due to the higher natural gas mix which the market has refused to pay for.

Arconic (ARNC) ; $25.13; 1,300 shares; 1.12%; Sector: Industrials -- Shares of Arconic fell this week and underperformed the broader market. Although we have heavily scaled down our position, we are inclined to hold onto shares in this turnaround story thanks to recent industry developments. Now that the company has a full-time CEO in Chip Blankenship, we expect moves are being made to improve margins. In addition, we are intrigued with Blankenship's portfolio review that will be completed by the end of 2018. This is key here because portfolio reviews are becoming prevalent across the industry, as Honeywell is splitting up its business, and now United Technologies (UTX)  is exploring a breakup. Many industrials are looking for different ways to either unlock or create value for their shareholders, and we think that Blankenship will do the same. As a possible readthrough, Arconic, Honeywell, and United Technologies all have aerospace in common, and a company looking to bolster the strength of its aero business may look at Arconic's business as a target, and this could fit Blankenship's strategy. We reiterate our $31 price target

Citigroup (C) ; $77.08; 1,050 shares; 2.77%; Sector: Financials -- Shares were relatively flat this week on little news. We continue to like Citigroup as the financials remain a top beneficiary of deregulation and the rising interest rate environment as a rise in rates will ultimately allow for an expansion of net income margins (the spread between what a bank pays in interest on items such as its deposit base and what it charges for loans). Furthermore, we value Citigroup over others for its significant international exposure, which allows it to take advantage of the economic expansion occurring overseas, an expansion that is behind the US and thus has more room to run in the current economic cycle. Compounding the international exposure, we value the company for its strong financial position as we believe it will allow the bank to successfully pass this year's fed "stress test" which has been guided to be materially more difficult than last year. We reiterate our $80 target.

DXC Technology (DXC) ; $103.98; 700 shares; 2.49%; Sector: Tech Services -- Shares pushed higher, outpacing the broader market. Boosting sentiment in the stock was strong earnings by Hewlett Packard Enterprise (HPE) , the company previously spun off DXC. We continue to see value in DXC as management makes progress on financial targets, including an updated guide on synergy to achieve $1.1 billion in cost savings (up from $1 billion originally forecast) and works to shift revenues to include a higher mix of higher margin digital services sales, which are up 13% year over year. Furthermore, we believe that the spinoff of the company's U.S. Public Sector business will create additional value for shareholders as the company will retain 86% ownership and unlock the business to trade at a higher multiple, more in line with companies in the government services industry. We reiterate our $110 target.

General Electric (GE) ; $14.49; 1,225 shares; 0.61%; Sector: Industrials -- Shares of General Electric were pressured this week, even as the company was busy presenting the company's turnaround process at several conferences. But first, on Tuesday it was reported by Reuters that the company is exploring a sale of its industrial gas engine unit. This is all part of the company's asset sale process that should make the company more sustainable and easier to manage in the future. Then, on Wednesday, GE CFO Jamie Miller said at a conference that the company has no plans to alter its majority stake in Baker Hughes (BHGE) before the lock-up period expires. We believe this is a positive sign that the company is not overly stretched for cash we previously were concerned that they would sell BHGE at a low in the market to support the turnaround process and the dividend. Miller also said this week that the company has no plans for an equity raise, and this should further bolster opinion that the company's free cash flow will be enough to support the balance sheet and fund the dividend payment. That said, it was not all bullish commentary as Miller said that she expects earnings around the low end of guidance, thus pressuring shares. After cutting our position in half on Wednesday, we are at the point where we can be flexible in this troubled stock. We think there is a possibility that analysts may bite on the fact that the company is indicating that its dividend has support and the worst may be over, however we are staying guarded to the fact that we have heard that story before. While we might see a narrative change, we likely will not stick around for it because we are in the process of cycling out our troubled names to fund better names, especially in the industrial sector because they can best take advantage of the global growth environment. We reiterate our $21 price target

Alphabet (GOOGL) ; $1,128.09; 100 shares; 3.86%; Sector: Technology -- Shares gathered steam this week as investors flocked back into the FANGs. While we recently downgraded GOOGL, as the company did not meet earnings expectations in its most recent release, and trimmed the name to provide room in the portfolio for Amazon without significantly increasing our weight in the FANG, we continue to see upside to shares as the company remains dominant in online ads, is leading the way in artificial intelligence and autonomous driving, and is actively working to increase it's hardware related revenue and presence in the public cloud space (although we note that Amazon and Microsoft are the clear leaders in this area). Similar to our view on Facebook, we believe the push to increase revenue diversity is key to the company's long-term prosperity and believe that the push to increase hardware offerings via devices such as Google Home, will be a significant factor in bringing consumers further into and keeping them in the Google ecosystem. On the autonomous driving front, we remind members that just last week, the company announced its intentions to launch a ride-hailing driverless van service, like Uber. Lastly, touching on artificial intelligence, while we believe the push here will obviously benefit Alphabet specific offerings as the Google Assistant makes its way onto more devices, we believe the advances here will also aid the company in penetrating other industries as companies across all sectors look to increase efficiencies and automate process. While we are maintaining our Two rating as we are disappointed with the company's own lack of dissatisfaction with its recent earnings results, we believe that the future is bright for shares of GOOGL, and we will upgrade shares once management shows that it wants to smash earnings estimates, not just grow them, and we reiterate our $1,300 target.

Magellan Midstream Partners (MMP) ; $65.367; 1,700 shares; 3.8%; Sector: Energy -- Shares trended lower this week as the energy sector was the biggest drag on this week's trading. While energy remains a volatile sector driven heavily by political activity and the adverse actions being taken by OPEC/Russia and US producers, the former reducing output while the latter pumps at record levels, we continue to see value in MMP due to its cash backed distribution yield and exposure to various industry trends. In addition to its the yield to being backed by cash flow it benefits from the fact that ~85% of company revenues are from more stable fee-based sources. Furthermore, Magellan has exposure to rapid U.S. production as it will benefit from increased transport demand (increasing the need for transport pipelines) and the requirement for more storage capacity, a need that the company seeks to satisfy via its investment in a marine storage facility in Pasadena, Texas. Lastly, we note that should international demand for U.S. based WTI continue (due largely to the spread between WTI and Brent), Magellan will be able to meet the needs of international buyers thanks to its investment in an Aframaxx compatible dock in Houston. However, despite our belief that shares will push higher, we are retaining our Two rating for the time being as rising interest rates will provide competition for income-oriented investors and as a result would like to see the yield push closer to the 6% level before increasing our stake. We reiterate our $89 target.

Nucor (NUE) ; $66.94; 600 shares; 1.37%; Sector: Industrials -- Shares of Nucor fell this week and underperformed compared to the broader market. The market appears to be processing the recommendations made by Commerce Secretary Wilbur Ross last Friday when he suggested imposing tariffs or quotas on foreign steel producers. Ross' recommendations came in response to the Section 232 investigation that looked at foreign steel imports as a matter of national security. This all relates to Nucor because the company's earnings have been greatly pressured by foreign producers "dumping" steel into the U.S., thus lowering prices and production of the domestic market. Should the Trump Administration adhere to Ross' recommendations, and impose tariffs and/or quotas, we expect steel producers could then increase production and improve industry prices. This would be a big win for Nucor, who is the largest steel producer in the U.S., and the improved industry fundamentals combined with strong performance in the industrial sector will likely send shares higher. We reiterate our $75 price target.

Nvidia (NVDA) ; $245.93; 150 shares; 1.26%; Sector: Technology -- Shares were finished the week slightly higher after pulling back following the stock reaching a new all-time high at just above $251/share on Tuesday. We continue to value Nvidia for its exposure to three significant secular industry trends including autonomous driving, gaming and adoption of the cloud. Additionally, while we do not place much weight on it in our investment thesis, we also note the Nvidia has been a beneficiary of the rise in demand for cryptocurrency mining chips. Touching on these three trends, we note that the two trends that our most relevant today are the adoption of the cloud as companies require Nvidia GPUs to process the massive amounts of information stored in company data centers, and gaming as Nvidia graphics cards are required to render the graphics of the most cutting-edge games without issue. Gaming trend is also being aided by the emergence of e-sports, which is helping to push the once niche market even more mainstream. Beyond these trends, we believe that as upgrade cycles on these two fronts wane (a normal pattern as hardware upgrades usually do not take place on a year to year basis due to the significant amount of time and money required for an upgrade), the autonomous driving trend will accelerate and pick up the slack as more companies push for level 5 (the highest level) autonomous driving and vehicles are fast becoming the new age computer, containing more semiconductor chips than ever before (a major reason we were so confident that Qualcomm would raise its bid on NXPI, rather than walk away). It is for these reasons we continue to see Nvidia as the present and future of computing and reiterate our $250 target.

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long ARNC, AAPL, ABT, AGN, AMZN, APA, ATVI, AVGO, C, CMCSA, DHR, DWDP, DXC, EZU, FB, GE, GOOGL, GS, HON, ITW, JPM, JWN, LLY, MMP, MSFT, NUE, RTN, JWN, NUE, NVDA, PEP, RTN, SLB, STZ, WM and XEC.

Nordstrom Family Reportedly to Submit Offer on the Company
Stocks in Focus: JWN

We are raising our price target to reflect an additional premium the family would have to place on the shares to take the company private.

02/23/18 - 03:25 PM EST
Thoughts as We Look as the Market
Stocks in Focus: NXPI, AMZN, FB, GOOGL, AGN, APA, GE, AVGO, GS

As we reflect on the flurry of trades we executed, we feel great about the re-balancing and re-positioning we have done.

02/23/18 - 12:40 PM EST
Thoughts and Explanations on Apache and Allergan
Stocks in Focus: APA, AGN, PFE, NXPI

Here's what happened in the past and what we are accomplishing now.

02/22/18 - 05:39 PM EST
Weekly Roundup
Stocks in Focus: APA, AMZN, WMT, QCOM, AVGO, NXPI, GS, FB, GOOGL, AGN, GE, ABT, AAPL, CMCSA, DHR, DWDP, LLY, EZU, HON, ITW, JPM, MSFT, JWN, PEP, RTN, SLB, STZ, WM, XEC, ATVI, ARNC, C, UTX, DXC, HPE, MMP, NUE, NVDA

We added one FANG name and trimmed others as markets remained volatility.

02/23/18 - 08:47 PM EST

Markets

Chart of I:DJI
DOW 25,309.99 +347.51 1.39%
S&P 500 2,747.30 +43.34 1.60%
NASDAQ 7,337.3905 +127.3049 1.77%

Action Alerts PLUS Holdings

Holdings 1

Stocks we would buy right now

Symbol % Portfolio
Weighting
Industry
AAPL 0.04270807847761167 Telecommunications Equipment
AVGO 0.022050196561975693 Semiconductors
CMCSA 0.027463884409697367 Cable/Satellite TV
DHR 0.03453148909386379 Medical Specialties
DWDP 0.03501905995316253 Chemicals: Major Diversified
EZU 0.015440612988059602
FB 0.046196773996882746 Internet Software/Services
ITW 0.03134985023161632 Industrial Machinery
JPM 0.008156426025573666 Financial Conglomerates
JWN 0.027929727512342867 Apparel/Footwear Retail
MSFT 0.035969345118148706 Packaged Software
PEP 0.019064802797820298 Beverages: Non-Alcoholic
RTN 0.022760954937616533 Aerospace & Defense
WM 0.03269210412662697 Environmental Services
XEC 0.023160919482089405 Oil & Gas Production
Holdings 2

Stocks we would buy on a pullback

Symbol % Portfolio
Weighting
Industry
AGN 0.014087408303695717 Pharmaceuticals: Generic
APA 0.009420286174579424 Oil & Gas Production
ARNC 0.011357185313675989 Aluminum
ATVI 0.03131838843998242 Recreational Products
C 0.028136228111575276 Financial Conglomerates
DXC 0.025303623932205477 Data Processing Services
GE 0.006170769800547224 Industrial Conglomerates
GOOGL 0.03921738400472848 Internet Software/Services
MMP 0.03862743195607967 Oil & Gas Pipelines
NUE 0.013962777891532722 Steel
NVDA 0.01282441726495609 Semiconductors