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Jim Cramer's Action Alerts PLUS

Adobe, GE Challenge Market Doldrums

By Jim Cramer and the AAP Team | 2017-03-22 15:39:03.0
Stocks in Focus: ADBE, FB, GOOGL, GE

Markets are trading slightly higher in today's session, demonstrating some resilience after yesterday's selloff, which was the largest of the year and the first 1% or greater drop in the S&P 500 in over 100 days. Despite an initial move lower this morning, several beaten-down pockets have clawed back toward even as investors look to take advantage of the decline, but we do believe the action as the day has moved forward is indicative of investor willingness to buy the dip. 

Energy and financials have held their ground, with select names even trading higher, and the industrials have also showed some stability. But the broader narrative regarding the ambiguity around the timing and scale of the new administration's favorable business policies continues to control investor fears. This is why we have yet to see a big push higher after yesterday's decline. 

Technology is leading the charge to push the S&P higher today and the Nasdaq is the outperformer of the major indices. Investors remain aware and cautious of the lingering uncertainties in the market (which we discussed in our note yesterday), but appear willing to target safe areas of growth after the shocking move lower yesterday. Tech fits the bill here as these names do not need tax reform, fiscal stimulus or deregulation to succeed -- sure, they would be helped by repatriation, but on that front, there does not appear to be a sense yet that this will not come eventually. Regardless, companies like Adobe (ADBE) , Facebook (FB) and Alphabet (GOOGL) have strong earnings profiles, delivered strong quarters and can continue to perform with or without the administration's policy actions on which investors appear so focused. 

With the broader outlook out of the way, we wanted to provide members with some company-specific updates regarding the portfolio: 

Adobe 

The company is outperforming the market today, leading the tech sector higher, as management hosts its Marketing Cloud Summit. Analysts and investors alike have come away from the conference with even greater confidence in Adobe's ability to continue to drive digital transformation in the enterprise and command a greater share of customer spend. 

From a high level, management announced a new umbrella strategy, integrating their suite of products under the Adobe Experience Cloud. The Experience Cloud will include Marketing Cloud, Analytics Cloud and Advertising cloud (which includes TubeMogul -- read our analysis -- and will combine with Creative Cloud to allow customization of tailored ads). By repositioning these services under one umbrella, Adobe is unifying and optimizing the customer experience while also making it easier to cross-pollinate across various services. 

Importantly, while the announcement of the repositioning came along with the summit, Adobe has likely been operating this way internally for some time, so its sales force is ready to capitalize on the shift. Management noted that, from a go-to-market standpoint, the sales organization had already been leading with a discussion regarding a broader "digital transformation" and then focusing conversations around how Adobe's solutions can solve specific business problems through its various products and services. In addition to the repositioning, Adobe also unveiled the first round of integrated products and services under its Microsoft partnership, which will provide access to a broader suite of customers and incorporate additional capabilities for Adobe's current products. 

We believe Adobe is smartly leveraging its high-quality products and scale to spur double-digit growth for years to come. We reiterate our Two rating for now, simply as a reflection of the recent rally in the name, but still view the investment as a solid long-term growth play and core holding, hence our $150 price target, which we updated following last week's earnings. For those with no exposure, we would be long-term buyers on any pullback. 

General Electric (GE)

GE shares traded up and down today after the company announced a new set of cost-cutting initiatives following constructive conversations with activist investor Trian Partners. Recall that the company had been in the headlines in recent weeks as rumors arose that Trian was unhappy with CEO Jeff Immelt. You can read our analysis here. As we had mentioned, the far more likely outcome was that GE would work constructively with Trian given the fund's less-than-1% ownership in the company and Immelt's previous cooperation with Trian's requests. 

This morning, GE disclosed a new industrial operating profit target of $17.2 billion for 2017, consistent with its overall outlook for the year. In addition, the company is targeting to further reduce its industrial costs from a total of $24.9 billion in 2016 to $23.9 billion for 2017, down 4% year over year, with a goal of reaching $22.9 billion by 2018. The $2 billion takeout of costs is a noticeable boost from the initial $1 billion total figure outlined at the 2016 analyst meeting. Importantly, the update shows GE's commitment to structural improvements. Even better, we view these cost targets as easier to achieve than any revenue or volume targets given the uncertainties underlying several of GE's end markets. This move provides support for EPS targets moving forward. 

Overall, we believe management understands the criticisms in the market and is working to address these concerns while it also focuses on the broader transformation and digital ramp. Further demonstrating its commitment, GE revised its incentive structure for its management team -- 2017 bonuses will now be tied to the achievement of these new industrial operating profit and structural cost reduction targets. GE attributed these new goals to its conversations with Trian, showing that the relationship remains constructive. After the announcement, Trian publicly voiced its approval of the changes, specifically highlighting the "high-quality manner" in which GE will achieve EPS growth -- i.e., focusing on structural improvements (simplifying the organization) as opposed to one-time events, such as buybacks. 

The constructive relationship with Trian should dispel rumors, for now, of Immelt's removal, but the market will be focusing on these targets as a way to track progress further down the line. We continue to view GE as a solid income investment (offering a 3.25% yield), now with added EPS support and aspirational growth down the line from its digital business. We expect management will be diligent in its cost-cutting initiatives moving forward given the publicized criticism from investors.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long ADBE, FB, GOOGL and GE.

Adding to 2 Energy Positions
Stocks in Focus: MMP, XEC

We'll take advantage of weakness in Magellan Midstream and Cimarex to buy at attractive levels.

03/22/17 - 11:30 AM EDT
Trimming 1 Position, Adding to 2
Stocks in Focus: ARNC, LUV, SNA

Volatility opens opportunities for a reshuffle.

03/22/17 - 10:31 AM EDT
Weekly Roundup
Stocks in Focus: ADBE, APA, XEC, WDC, AAPL, AGN, CMCSA, DHR, TMO, ILMN, FTV, FB, SNAP, GE, GOOGL, PYPL, HPE, MMP, NWL, SLB, SNA, AEP, ARNC, C, CSCO, DOW, DD, PEP, QCOM, SBUX, TJX, COST, WBA, RAD, WFC, FRED

Fed's rate hike gives markets a midweek boost. In the portfolio, we trim 1 position and add to 3 others.

03/17/17 - 04:34 PM EDT

Markets

Chart of I:DJI
DOW 20,661.30 -6.71 -0.03%
S&P 500 2,348.45 +4.43 0.19%
NASDAQ 5,821.6410 +27.8160 0.48%

Action Alerts PLUS Holdings

Holdings 1

Stocks we would buy right now

Symbol % Portfolio
Weighting
Industry
AAPL 0.04305936497800069 Consumer Durables
AGN 0.04778624686680835 Drugs
APA 0.041285814208273756 Energy
CMCSA 0.027507043175063136 Media
DHR 0.01923116603837567 Health Services
FB 0.05183191356381025 Internet
GE 0.02576761628854068 Industrial
GOOGL 0.04733157118689657 Internet
HPE 0.016709191993491374 Telecomm
KEY 0.00318402936320419 Banking
LUV 0.011687522826380766 Transport
MMP 0.022798764186674897 Energy
NWL 0.033927457369717785 Consumer Durables
SLB 0.03783480908855134 Energy
SNA 0.03103825241635431 Industrial
WDC 0.03060492737065644 Computer Hardware
XEC 0.0350670242636739 Energy
Holdings 2

Stocks we would buy on a pullback

Symbol % Portfolio
Weighting
Industry
ADBE 0.025775042596093346 Computer Software & Services
AEP 0.025041509067579074 Utilities
ARNC 0.029519572521834764 Industrial
C 0.03753905639026654 Banking
CSCO 0.03798556313187039 Computer Hardware
DOW 0.034389466528337825 Chemicals
NXPI 0.024794398683764218 Electronics
PEP 0.03327579888197162 Food & Beverage
SBUX 0.029053943038282803 Leisure
TJX 0.040880337815898365 Retail
WBA 0.027747284224391777 Retail
WFC 0.03903527170443928 Banking