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Jim Cramer's Action Alerts PLUS

French Outcome Accents Market Rally

By Jim Cramer and the AAP Team | 2017-04-24 16:04:06.0
Stocks in Focus: ARNC, GOOGL, WDC

Markets traded sharply higher today, with equities posting their largest gains since the S&P 500 reached an all-time high back on March 1. You can review our note from that day here. Today, investors are breathing a sigh of relief as the first round of the French elections over the weekend seemed to cooperate with general expectations. 

The European Union's favored candidate, Emmanuel Macron, won the first round with 23.9% of the vote (according to an official tally of 97% of votes) ahead of far-right candidate Marine Le Pen, with 21.4%. The results set up a faceoff between the two candidates in the final round on May 7. Importantly, the first round knocks off the candidate from the far-left political party, Jean-Luc Melenchon, leaving Le Pen as the only extremist to take on centrist Emmanuel Macron. 

Had both extremist sides made it to the runoff (i.e., the final round), a flight to quality out of Europe would have been warranted as investors dealt with uncertainty from a potential election of either candidate looking to challenge the status quo. With Macron commanding the top spot in the first round and receiving backing from defeated candidates, including conservative François Fillon and Socialist Benoit Hamon, investors are free to return to a risk-on appetite, taking advantage of the stagnant trading in the broader markets leading up to last weekend's election. If nothing else, hedge funds that had been looking to short the major indices in order to profit off the potential of an extreme result out of Round 1 now have to unwind their bets, causing upward pressure on stocks. 

As we mentioned in Friday's Weekly Roundup, while major political events like this can cause volatility and panic in the near term, both before and after, we cannot and should not ignore the strong performances of U.S. corporations, many of whom have already reported encouraging numbers for the year thus far and even more robust outlooks looking ahead. We were not necessarily buyers on today's rally given the huge one-day move, but we believe this type of reaction is supportive of our view to continue to find the companies you like, with strong fundamentals, so you are ready to buy on broader selloffs that may not be truly indicative of systemic risk for our companies. 

With that said, see below for some portfolio-specific updates: 

Arconic (ARNC)  

Arconic today postponed its 2017 annual shareholder meeting (previously scheduled for May 16) as the board is engaged in ongoing discussions with Elliott Management regarding a potential settlement to the proxy battle. We have spoken to the battle several times in recent weeks, but you can read our most recent update here. Recall that we trimmed our position last week after the stock rallied following news that CEO Klaus Kleinfeld would be stepping down. 

According to today's press release, Arconic has been engaged in extensive discussions with Elliott Management over the last two weeks in an effort to resolve the pending proxy contest. The Arconic board believes a settlement could benefit all shareholders by putting an end to the distraction and offering a seamless leadership transition for the company. The board is willing to select two of Elliott's director nominees to join the board as part of the settlement. Current leadership at Arconic has "reviewed the qualifications of Elliott's nominees and, if these nominees confirm by Wednesday, April 26, 2017, that they are willing to be interviewed by Arconic and to be nominated by the Arconic board, the board will promptly appoint the two nominees that it believes will be most additive to the board and will nominate them for election at the annual meeting." 

While the willingness of the board to reach a settlement demonstrates some sort of progress, Arconic notes that these discussions have not yet produced any agreement as "Elliott has repeatedly demanded an ever-expanding litany of settlement terms." We are not surprised that Elliott is not easily backing down as the activists have a long history of playing the long game, focusing on their desired outcome no matter how long it takes to achieve. It is tough to know for sure how these discussions are progressing or what the board is thinking, but it could indicate that current leadership at Arconic recognizes that the tide may have perhaps turned with the ousting of Kleinfeld. Elliott may see this weakness as an opportunity. 

This is a new, ongoing development and we will continue to keep members updated with any further news. For now, the company has not scheduled a new date or time for the shareholders meeting, although it is expected to occur at some date later in May. As we have mentioned in our recent commentary, we believe our current weighting in ARNC is appropriate to capture any further upside yet protect the portfolio from any further disarray, especially given that the preoccupied company is set to report earnings tomorrow afternoon. 

Alphabet (GOOGL)  

GOOGL shares traded at all-time highs today as the Nasdaq led the market higher. The stock has moved steadily higher since the initial panic regarding the advertising controversy settled and investors took advantage of the buying opportunity. You can read our initial reaction to the controversy here, where we told members looking to build a position in GOOGL to buy the dip. We posted later updates here and here

In the end, we believe the rally in the name is indicative of our belief that you can never bet against this company. GOOGL is set to report earnings later this week -- while a rally into a quarterly report can tend to lend itself to some caution or profit-taking following the report, we believe the long-term prospects for this technology leader are as bright as ever. 

Western Digital (WDC)

Shares traded sharply higher today, benefiting from high expectations heading into the quarterly report (due Thursday afternoon), continued reporting on the Toshiba semiconductor sale, and the general risk-on appetite sweeping through the markets. As for the quarter, like we mentioned in our Weekly Roundup, we are expecting numbers to be mostly strong as the storage market's fundamentals have been characterized by tightening supply and high demand, driving favorable pricing for players like Western Digital. While the supply/demand dynamics cannot last forever, all indications from other companies who have reported indicate there is more steam left to power the momentum. That being said, as we mentioned with Google above, we are always cautious of rallies heading into an earnings report as expectations can sometimes exceed even the strongest of quarters, especially for a company like WDC that will have a lot riding on forward guidance and any commentary regarding the Toshiba sale. 

On the latter, there have been several conflicting reports over the past couple of weeks regarding the potential bidders for Toshiba's flash business. We discussed some of these in our WDC commentary in last week's roundup. Today, the Nikkei Asian Review (read here) reported that Western Digital is willing to help Toshiba with any bailout funding needed to combat the company's financial and strategic challenges. Such a move could give WDC an inside track to being continuously involved in Toshiba's flash business, in one way or another. As we highlighted in our roundup, other reports have KKR and the Innovation Network Corp. of Japan potentially joining with WDC to make a bid on all or some of the flash unit. Regardless, with today's risk-on activity leading the way, investors are betting on a favorable outcome for WDC, which does appear to be increasingly likely, although what that outcome exactly will be remains uncertain. 

Either way, WDC continues to have rock-solid fundamentals, which should shine through in the upcoming earnings report. That being said, we expect trading will likely remain volatile surrounding earnings and as reports regarding the Toshiba sale continue to surface.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long ARCN, GOOGL and WDC.

Members-Only Call Is Wednesday

Here's how to access the call.

04/24/17 - 02:59 PM EDT
Adding a Steel Name to the Bullpen
Stocks in Focus: NUE

As largest U.S. producer, Nucor in good position to gain.

04/24/17 - 12:00 PM EDT
Weekly Roundup
Stocks in Focus: DHR, SNA, KEY, SLB, GE, BHI, APA, ARNC, AEP, PEP, DOW, CMCSA, LUV, GOOGL, SBUX, WDC, AGN, JNJ, NVS, XEC, C, COST, VZ, FB, SNAP, HPE, FNFG, UAL, MMP, AVGO, AAPL, ADBE, CSCO, DD, NWL, NXPI, QCOM, TJX, RAD, AMZN, WFC, WBA, DXC

Earnings and hopes for a tax plan help lift the markets. Portfolio moves include exiting a utility position.

04/21/17 - 05:26 PM EDT

Markets

Chart of I:DJI
DOW 20,763.89 +216.13 1.05%
S&P 500 2,374.15 +25.46 1.08%
NASDAQ 5,983.8194 +73.2978 1.24%

Action Alerts PLUS Holdings

Holdings 1

Stocks we would buy right now

Symbol % Portfolio
Weighting
Industry
AGN 0.04758440274263794 Drugs
APA 0.03736758727871139 Energy
C 0.03797581363436269 Banking
CMCSA 0.027753521942744202 Media
DHR 0.0331151139349981 Health Services
FB 0.05310845615641935 Internet
GE 0.02535219609982918 Industrial
GOOGL 0.04813220805275486 Internet
HPE 0.013464218485246069 Telecomm
KEY 0.008803948719406424 Banking
LUV 0.020623473487840303 Transport
MMP 0.027724315395053864 Energy
SLB 0.029757821277993684 Energy
SNA 0.03679094050275027 Industrial
WDC 0.03444437693675463 Computer Hardware
XEC 0.03594431570157658 Energy
Holdings 2

Stocks we would buy on a pullback

Symbol % Portfolio
Weighting
Industry
AAPL 0.04300109222996234 Consumer Durables
ADBE 0.026683649592662482 Computer Software & Services
ARNC 0.02286872684153508 Industrial
CSCO 0.0364497715175425 Computer Hardware
DOW 0.033828301321411555 Chemicals
DXC 0.004725250683632186 Computer Software & Services
NWL 0.03329546436698594 Consumer Durables
NXPI 0.02486225626232375 Electronics
PEP 0.033388925319595024 Food & Beverage
SBUX 0.031234212263740298 Leisure
TJX 0.040183828639752284 Retail
WBA 0.02769218819259449 Retail
WFC 0.037214617985183246 Banking