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Jim Cramer's Action Alerts PLUS

Weekly Roundup

By Jim Cramer and Jack Mohr | 2017-01-20 17:06:48.0

Markets were roughly flat this week as investors focused all eyes on Friday's inauguration. Heading into the event, investors clearly took the opportunity to book profits from the recent rally, highlighting a heightened feeling of uncertainty surrounding the new administration. That being said, a rebound on Friday is indicative of the optimism and "animal spirits" that drove the surge higher in the major indices following the election results.

While no investor can claim to have a crystal ball, expectations for an improving economy, coupled with the injection of infrastructure spending and pro-business policies, has contributed to a more sanguine outlook for the markets moving forward. The lingering questions remain how, when and what the new policies will actually be when they are officially signed into action.

For this week, Treasury yields trended higher following last week's decline. The dollar was volatile versus the euro due to contradicting commentary from Donald Trump earlier in the week as well as a decision from the European Central Bank (ECB) to maintain its stimulus program (see more below). Gold was slightly lower in the risk- off environment. Lastly, oil prices trended lower at the beginning of the week but managed to rebound to close out the week on growing optimism regarding the OPEC production cuts.

Fourth-quarter equivalent earnings are under way and have been relatively positive versus expectations thus far, with 68% of companies in the small sample reporting a positive EPS surprise. Within the portfolio, Citigroup, Schlumberger and General Electric reported earnings this week.

Citigroup (C:NYSE) reported a bottom-line beat with its fourth-quarter results, posting EPS of $1.14 vs. consensus of $1.12. Fourth-quarter revenues of $17 billion (down 9% year over year, or down 7% in constant currency) fell slightly short of consensus expectations of $17.3 billion. The miss on the top line versus consensus can be largely attributed to a heavier-than-expected currency headwind. Importantly, the decline in revenue year over year is expected as the bank continues to wind down its previously volatile Citi Holdings division (down 79% for the quarter), which contains non-core assets and used to experience multibillion-dollar losses in a single quarter. Citicorp (the bank's core growth franchises), however, delivered 8% growth in constant currency (6% increase including FX headwinds) on the top line. Citicorp's solid results were driven by an 11% increase in the Institutional Clients Group revenues and a 2% increase in Global Consumer Banking. Further on business activity, highlights for the quarter included: 15% growth year over year in branded cards -- mostly thanks to the Costco (COST:Nasdaq) portfolio, whose potential we have often referred to when discussing the retailer for the portfolio -- 6% year-over-year growth (ex-fx) in Citicorp loans, 5% year-over-year growth (ex-fx) in Citicorp deposits, and 5% revenue growth (ex-fx) in international consumer banking with strength in Latin America and Asia. In addition, markets and securities services revenues increased 24% year over year due to "increased client activity and strong trading performance."

Schlumberger (SLB:NYSE) reported an in-line quarter, with adjusted fourth-quarter earnings per share of 27 cents matching consensus estimates and fourth-quarter revenue of $7.1 billion narrowly beating consensus. Notably, although the pressures of the oil downturn continue to weigh on business activity, SLB was able to generate sequential accelerations on both the top and bottom lines. Full-year revenue decreased by 22% year over year, even including three quarters of contribution from the Cameron integration, highlighting the negative impacts of declining oil market activity throughout the year. Digging deeper into the results, the company continued its strong cash generation, leading to $1.1 billion in free cash flow (FCF). Over the last two years throughout the downturn, SLB has generated $7.5 billion in FCF, which is more than the rest of its competitors combined. North American revenues were up 4% sequentially, with the lower 48 states posting double-digit sequential gains, driven by both activity and pricing recovery. Overall production revenue of $2.18 billion (up 5% sequentially and led by North America and Middle East) slightly beat out consensus estimates of $2.13 billion. Cameron revenues for the quarter were flat, a better result than expectations for a near-double-digit decline, driven by OneSubsea and solid orders. Management repurchased 1.5 million shares in the quarter for a total of $116 million and approved a quarterly dividend of $0.50 a share ($2 on an annual basis).

General Electric (GE:NYSE) reported an in-line fourth quarter, with revenues of $33.1 billion falling slightly short of consensus and adjusted EPS of 46 cents falling right in line with consensus. Importantly, the company backed its fiscal 2017 EPS guidance view of $1.60-$1.70, which brackets consensus of $1.66. Digging deeper into the results, overall organic growth was down 1% with total industrial segment sales of $31.2 billion, which slightly missed consensus expectations. Weakness was largely seen in oil and gas, a trend that has become expected. Management noted on the call that they expect the first half of 2017 to remain challenging in the oil and gas markets, a somewhat consistent view with Schlumberger's continued belief for a back- half of 2017 recovery. Oil and gas revenues were down 22% year over year. Within the quarter, aviation (revenues up 7% year over year) was a bright spot, proving to be better than consensus expectations. Although the power-segment sales were up 20% year over year, this figure actually missed consensus expectations.

On the economic front, the week kicked off strong with one of the broadest measures of inflation -- the consumer price index (CPI) -- pushing above 2% for the first time in over two years. The Labor Department reported on Wednesday that the CPI rose 0.3% in December, building off the 0.2% advance in November. Importantly, the year-over- year gain was 2.1%, marking the largest rise since June 2014. The monthly and yearly gains were both in line with expectations. Key increases for the month included a 9.1% gain for gasoline, 7.8% for utilities, 4.7% for medical supplies, 3.9% for medical services, 3.6% for housing, 2.8% for transportation services and 2.7% for education.

The core CPI, which strips out food and energy costs for their volatility, rose 0.2% in December, bringing the index to a 2.2% gain for the 12 months through the end of the year. Recent strength in the CPI and other inflation measures gave the Fed enough confidence to raise interest rates in December on the back of the belief that inflation is moving toward the committee's 2% target. Fed Chair Janet Yellen confirmed this view later on Wednesday in a speech, noting that "inflation is moving toward our goal." Further, Yellen reiterated that any unwarranted delays in policy changes "could risk a nasty surprise down the road -- either too much inflation, financial instability or both." The FOMC will be closely watching the data so that they can make the appropriate changes in enough time to allow the economy to adjust, while of course taking into account the uncertainty of the incoming administration.

From a higher level, the Fed tracks an inflation measure (core PCE index) that is running below the core CPI. Inflation continues to be a closely tracked figure for the Fed, as the other major indicator -- the labor market -- has proven to be more than healthy over the long term. Subdued inflation has been an item of concern in recent years as the failure of firms to command higher prices could potentially indicate a weakening economy lacking enough demand or income growth. This fear has been abating in recent months, however, thanks to more encouraging data, specifically on energy prices. The Fed now expects three quarter-point rate hikes throughout this year, although the committee remains dependent on the data, which, for the time being, appear to support a stronger economy.

On Thursday, the strong data continued as the Department of Labor reported that initial jobless claims for the week ending Jan. 14 were 234,000, a decrease of 15,000 claims from the prior week's revised numbers and 20,000 claims lower than expectations. The decline is unsurprising given the strength in the labor market to which we have become accustomed over the past couple of years. The overall trend remains strong with claims having remained below 300,000 -- the threshold typically used to categorize a healthy jobs market -- for an astounding 98 straight weeks, the longest streak since 1970. Claims have remained under 275,000 since the middle of November. The four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) fell a whopping 10,250 to 246,750 last week, marking the lowest level since 1973. The figure supports Yellen's comments from her speech when she indicated that the economy continues to move toward full employment, and can thus support further increases to the benchmark interest rate.

Also on Thursday, the Commerce Department reported that housing starts jumped 11.35% in December to a seasonally adjusted rate of 1.23 million, above expectations for a rate of 1.2 million, or a 10.1% increase. Housing starts have reached their highest level since 2007. Building permits, which are an indication of future demand, were slightly disappointing, however, down 0.2% in December to 1.21 million versus expectations for 1.24 million.

Housing data tend to be volatile month to month due to the variety of factors that can impact purchases and construction. The positive movement in December's data, for instance, follows a drop in activity in November, when starts fell a revised 16.5% due in large part to a massive drop in construction of multifamily buildings. In December, multifamily construction rebounded 53.9%.

For all of 2016, housing starts hit an estimated 1.17 million units, roughly a 5% gain over 2015 and the strongest year since 2007. The advance was mostly in single- family homes, which were up 9.3%, whereas construction on buildings with five or more units dropped 3.1%. That being said, single-family construction activity remains well below historically normal levels following the recession. The drop in multifamily home construction throughout 2016 is largely reflective of the rise of starts in that area in recent years.

In order for the housing recovery to gain more steam, new single-family home construction will have to continue to show acceleration given that home prices have already surpassed previous highs, apartment rents have risen more than 25% in the last six years, and multifamily starts look to have peaked. For single-family homes to show strength, the labor market must continue to be strong, pushing wages higher, and the younger generation must move from rental properties to homeownership.

Also on Thursday, from a global perspective, ECB President Mario Draghi announced the central bank would maintain its current stimulus program, which was extended in December by nine months but at a reduced volume. Importantly, Draghi's comments confirmed the bank is not nearing an end to the stimulus program, boosting government support for the markets for many months ahead. The ECB continues to believe that underlying inflation pressures remain subdued and it wants to see a sustained trend of support, one that is "self-sustained … even when the extraordinary monetary policy will not be there." The dovish tone continues to indicate that the bank will do what is necessary, for however long is necessary, in order to support economic growth in the region. As of now, Draghi confirmed the bank has not yet discussed a reduction in the planned stimulus, although he acknowledged that he believes that day will come.

On the commodity front, oil prices trended lower from last week largely due to a selloff on Wednesday. Even so, the commodity remains range-bound at $50 to $55 a barrel, where it has traded since the end of November following the initial rally heading into the OPEC's decision to implement production cuts.

On that note, prices rose to kick off the week on Tuesday as Saudi oil minister Khalid al-Falih told reporters that the oil market would rebalance by the end of the first half of the year, contradicting many beliefs that the market would remain oversupplied until the end of this year. The minister touted the impact of the additional cuts from non-OPEC producers, claiming that these nations will work hard to avoid a slump in prices in order to reach a sustainable balance in the market. Aiding the bulls, the dollar also fell to a one-month low (at the time), making the commodity less expensive for foreign buyers and boosting demand.

The trade flipped on Wednesday, however, when the dollar came roaring back and reports of rising U.S. shale production injected worries that OPEC production cuts may in fact not be enough to re-balance the market. According to the Energy Information Administration (EIA), the domestic shale production will increase 4.75 million barrels per day in February, adding to the upwardly revised 4.71 million barrel per day increase in January (up from a forecast of 4.54 million). Although OPEC countries appear to be cooperating with the production cuts, according to the latest monthly oil report from the cartel, much of the decline in production was due to disruptions in countries like Nigeria, and the group also seemed to indicate that more cuts than expected may be required to decrease the oversupply. Commentary surrounding this growing U.S. shale production is enough to add to the concern and give pause in the oil trade.

In what was a wild week in terms of perception surrounding the oil market balance, prices saw some strength into the end of the week, following the selloff on Wednesday, after the International Energy Agency's monthly report suggested that the oversupply is easing. The agency did highlight outside production from countries like the U.S., however, as a potential roadblock to completely re-balancing supply and demand. Even so, the vote of confidence for the planned production cuts was enough to support prices and encourage some bulls to re-enter the trade after the recent decline. This positive sentiment was balanced by the EIA's domestic inventory report, which showed crude levels up 2.3 million barrels in the week ended Jan. 13 compared with expectations of just a 100,000-barrel increase.

If we learned anything this week, there simply appears to be no consensus regarding the re-balancing of the oil market -- in terms of how long this will take or if it will even occur. That is not a bad thing, though, as it leaves space for either side to persuade the other to join along with their viewpoint. What is clear is that uncertainty will remain as many investors continue to doubt the commitment of producers to the planned production cuts. Even for those who are bullish, rising production in the U.S. could derail any further rallies. We appear to be in a sweet spot for prices, for now, as the current range seemingly accounts appropriately for the downside risks (e.g., issues with OPEC cooperation, rising dollar, additional U.S. production, etc.) while maintaining the levels resulting from the initial rally following the production-cut agreements.

Within the portfolio this week, we added to Danaher, our newest position, while we trimmed our Walgreens stake. We also added to Apache (APA:NYSE) as we looked to lower our cost basis.

We continue to look for opportunities to scale into our Danaher (DHR:NYSE) position and believe the story has a long runway for growth, powered by margin expansion, capital deployment and top-line growth opportunities.

As for Walgreens (WBA:Nasdaq), we simply wanted to lessen our exposure to the name, whose trading continues to be governed by expectations for the timing of the closure of the Rite Aid (RAD) merger. Many reports calling for an impending approval in the past have proven to be illegitimate, so we took advantage of an up day in the name in order to leave more room to add back to the position should the review process continue to drag out, thereby causing the stock to falter.

Moving onto the broader market, as we mentioned, fourth-quarter earnings have kicked off better than expected. Total fourth-quarter earnings growth is up 10.6% year over year; of the 34 non-financials that reported, earnings growth is 5.8% versus expectations for an overall 4.4% increase throughout the season. Revenues are up 3.8% vs. expectations throughout the season for a 3.72% increase; 68% of companies beat EPS expectations, 20% missed the mark and 12% were in line with consensus. On a year- over-year comparison basis, 88% have beaten the prior year's EPS results, 12% have come up short and none has been virtually in line. Materials and information tech have had the strongest performance vs. estimates thus far, while industrials and consumer staples have posted the worst results in the S&P 500.

Next week, 100 companies in the S&P 500 will report earnings. Within the portfolio, Comcast (CMCSA:Nasdaq), Dow Chemical (DOW:NYSE), Starbucks (SBUX:Nasdaq) and Alphabet (GOOGL:Nasdaq) will report. Other key earnings reports for the market include: Haliburton (HAL), McDonald's (MCD), Yahoo! (YHOO), Zions Bancorp (ZION), 3M (MMM), AK Steel (AKS), Alibaba (BABA), DR Horton (DHI), DuPont (DD), Fifth Third (FITB), Lockheed Martin (LMT), Kimberly Clark (KMB), Philips (PHG), Travelers (TRV), Verizon (VZ), Alcoa (AA), Canadian National Rail (CNI), Discover Financial (DFS), Seagate Tech (STX), Stryker (SYK), Texas Instruments (TXN), Abbott Labs (ABT), Boeing (BA), Freeport-McMoRan (FCX), Grainger (GWW), Hess (HES), Illinois Tool (ITW), McCormick (MKC), Norfolk Southern (NSC), Novartis (NVS), Progressive (PGR), State Street (STT), United Tech (UTX), Wipro (WIT), AT&T (T), eBay (EBAY), Ethan Allen (ETH), F5 Networks (FFIV), Lam Research (LRCX), McKesson (MCK), Qualcomm (QCOM), Western Digital (WDC), Alliance Data (ADS), Baker Hughes (BHI), Biogen (BIIB), Blackstone (BX), Bristol- Myers (BMY), Caterpillar (CAT), Celgene (CELG), Dover (DOV), Ericsson (ERIC), Ford (F), HHGregg (HGG), JetBlue Airways (JBLU), Raytheon (RTN), Stanley Black & Decker (SWK), Flex (FLEX), Intel (INTC), Juniper (JNPR), Microsoft (MSFT), PayPal (PYPL), VMWare (VMW), AbbVie (ABBV), American Airlines (AAL), Chevron (CVX), General Dynamics (GD) and Honeywell (HON).

Economic Data (*all times ET)


Monday (1/23)

Tuesday (1/24)

Markit Manufacturing PMI (9:45): 54.0 expected

Existing Home Sales (10:00): 5.54 million expected

Richmond Fed Manufacturing Index (10:00):

Wednesday (1/25)

Mortgage Applications (7:00):

FHFA House Price Index MoM (9:00): 0.3% expected

Thursday (1/26)

Initial Jobless Claims (8:30):

Continuing Claims (8:30):

Wholesale Inventories MoM (8:30):

Chicago Fed Nat Activity Index (8:30):

Markit US Services PMI (9:45):

Markit US Composite PMI (9:45):

Bloomberg Consumer Comfort (9:45):

New Home Sales (10:00): 588k expected

Leading Index (10:00): 0.5% expected

Friday (1/27)

GDP Annualized QoQ (8:30): 2.1% expected

Personal Consumption (8:30): 2.5% expected

Core PCE QoQ (8:30):

Durable Goods Orders (8:30): 3.0% expected

U of Mich Sentiment (10:00): 98.0 expected


Monday (1/23)

Eurozone Consumer Confidence (10:00):

Japan Nikkei PMI Manufacturing (19:30):

Tuesday (1/24)

Germany Markit BME Manufacturing PMI (3:30):

Germany Markit Services PMI (3:30):

Germany Markit Composite PMI (3:30):

Eurozone Markit Manufacturing PMI (4:00):

Eurozone Markit Services PMI (4:00):

Eurozone Markit Composite PMI (4:00):

UK PSNB ex Banking Groups (4:30): 7.2 billion expected

Japan Trade Balance (18:50): 358.0 billion yen

Wednesday (1/25)

Germany IFO Business Climate (4:00):

Germany IFO Expectations (4:00):

Germany IFO Current Assessment (4:00):

Thursday (1/26)

Germany GFK Consumer Confidence (2:00):

UK GDP QoQ (4:30): 0.5% expected

UK GDP YoY (4:30): 2.1% expected

Japan National CPI YoY (18:30): 0.2% expected

Japan National CPI Ex Food and Energy YoY (18:30): -0.1% expected

Japan Tokyo CPI YoY (18:30): 0.0% expected

Friday (1/27)

Eurozone Money Supply YoY (4:00):

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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.


Apple (AAPL:Nasdaq; $120.00; 820 shares; 3.78%; Sector: Technology): Shares outperformed the market this week, building on the momentum the stock has garnered in recent months as investors prepare for more business-friendly policies (e.g., repatriation) and the new iPhone toward the end of the year. We responded to a Forum question on AAPL this week and want to re-circle our commentary for all of our members in case the response went overlooked. As a reminder, you can access the Forum here. The response to the specific question on Apple can be viewed here. As for Apple, the bottom line is that the company continues to be the most recognizable brand in the world, it owns the smartphone market (with expanding options in China and India), it holds massive amounts of cash (yes, most overseas) and, perhaps most importantly, has a Services business that is growing at an explosive rate and will continue to be a major growth driver moving forward. In the end, we continue to view Apple as having the innovative abilities and the scale, management team and cash available to continue to be a leader in the market. That is not to say the stock will avoid the peaks and valleys as sentiment wavers, but momentum appears to be behind the name for now, especially with the 10th-anniversary iPhone coming down the pipeline toward the end of the year. We reiterate our $130 target, but see additional upside and will be revisiting our price target post-earnings.

Adobe (ADBE:Nasdaq; $110.71; 750 shares; 3.19%; Sector: Technology): Shares outperformed the market this week as the company announced a new share repurchase plan through the end of fiscal 2019. The company's board of directors approved a $2.5 billion stock repurchase plan, which replenishes the existing $2 billion plan that is scheduled to be completed in fiscal 2017. This larger buyback plan will focus on offsetting employee stock-based compensation, which has a dilutive impact to earnings by increasing the denominator in earnings per share (EPS). Importantly, the move by management can also be viewed as an indicator that the company continues to believe its stock is undervalued compared to the true worth of the business, a view we would agree with considering our $125 price target. Given that management has the discretion to make purchases either on the open market or through structured repurchased programs over the two-plus-year period, investors can have increased confidence that the company will opportunistically repurchase shares on broader selloffs. Overall, ADBE shares have been a beneficiary of the outperformance for the Nasdaq since the beginning of the year, with investors focusing on growth tech that had underperformed the post-election rally. We remind members of the importance of conviction, which can illuminate opportunities in names that you like for the long term, despite short-term selloffs that can seem, at the time, impossible to endure. Such conviction drove our purchase of ADBE under $100 at the beginning of December. We continue to like ADBE for the long term and believe its leadership across the digital marketing cloud will continue to drive explosive top- and bottom-line growth. For our most recent update on ADBE, read our analysis on the TubeMogul acquisition here. ADBE remains a core holding and we reiterate our $125 target.

American Electric Power (AEP:NYSE; $62.91; 1,000 shares; 2.42%; Sector: Utilities): Shares traded slightly lower this week as Treasury yields rebounded, rendering AEP's dividend and "proxy-bond" status relatively less attractive. We continue to like AEP for diversification purposes in the portfolio and would be buyers around/under $60, although we believe shares are attractive for their 3.75% dividend yield at these levels and for the prospects of a growing dividend moving forward. We reiterate our $68 target.

Allergan (AGN:NYSE; $214.34; 550 shares; 4.53%; Sector: Health Care): Shares were somewhat volatile this week, vacillating between the negative and positive. Overall, we continue to believe investors show a growing belief in Allergan's still- underappreciated pipeline. The company announced this week, in coordination with its partner Gedeon Richter, that its Venus II Phase III clinical trial evaluating the efficacy and safety of ulipristal acetate (the drug is called Esmya) in women with abnormal bleeding due to uterine fibroids met all its co-primary and secondary end points. The positive results were similar to the initial study reported last March -- both were statistically significant across the various endpoints. Importantly, Esmya is now the only oral therapy for uterine fibroids to successfully complete two U.S. pivotal studies. Without delving too deep into the detail of the study, physicians interviewed by analysts from Cowen indicated that, based on clinical data, "Esmya appears to stop uterine bleeding in three to four days in about 50%-60% of patients." This is a significant improvement from the 21 days, on average, for patients on Lupron -- the only commercially available option for uterine fibroids -- to achieve absence of uterine bleeding. The side effects of Esmya are also reported to be less severe than those of Lupron. We believe this provides Esmya with the capability to capture some or all of Lupron's estimated $250 million in sales, which would increase with Esmya's expanded usability. Importantly, AGN management has indicated (at the recent JPMorgan Healthcare Conference) that Esmya is one of the company's "6 Stars" (i.e., blockbuster pipeline opportunities), which are all expected to have more than $1 billion in peak sales potential (out years). This adds to recent launches Vraylar, Viberzi and Kybella, all of which are in line to contribute to top-line branded product growth this year, accelerating into the future. All in, the future remains bright for AGN with the stock trading approximately at a depressed 13x 2017 consensus EPS and several organic and inorganic growth opportunities ahead. We reiterate our $270 target, but we likely will not be purchasing more shares at these levels given the high weighting of the stock in the portfolio. That being said, we believe the stock remains attractive at these levels, although we remain aware of the lingering uncertainty surrounding the political and regulatory environment.

Apache (APA:NYSE; $61.81; 1,700 shares; 4.03%; Sector: Energy): Shares slightly underperformed the broader market this week as weaker oil prices at the beginning of the week and a propensity for investors to take profits on recent winners both weighed on the stock. We purchased additional shares this week, continuing to lower our cost basis. We like this name for the long term given its ability to lean out its business during the downturn, thereby setting up the company well to outperform in the long term. More importantly, we believe the production growth opportunities through Alpine High, combined with prospects for higher oil prices, remain underappreciated by the market. We reiterate our $77 target.

Arconic (ARNC:NYSE; $21.29; 4,400 shares; 3.60%; Sector: Metals & Mining): Shares traded higher this week as investors get ready for the improving prospects for the economy moving forward. We continue to like the company for its leadership in aerospace and across several other industrial end markets. We believe shares offer more upside as the company looks to pay down debt from a sale of its 18% stake in Alcoa (AA), a move that can be executed now that we are 60 days post the split. We reiterate our $24 target.

Danaher (DHR:NYSE; $80.53; 400 shares; 1.24%; Sector: Life Sciences): Shares traded slightly lower this week, allowing us the opportunity to add to the name and lower our cost basis. We initiated a position last week, bringing the name out of the bullpen. We had preferred to wait for the name to drop back below $80 -- we had put Danaher in the bullpen prior to the New Year -- but we wanted to take advantage of a slight down day to initiate a small position with the intent to scale further into the name on any further weakness. In fact, we believe the thesis is becoming more well-known across the market, as evidenced by a recent initiation on the name from analysts at Deutsche Bank, who rated DHR a Buy with an $88 price target. While we do not typically rehash analyst notes, we appreciate that the note sheds light on our thesis -- highlighting the margin expansion, capital deployment and top-line growth opportunities -- for a wide audience. We will continue to look for opportunities to add to the name, ideally below our cost basis as we look to scale into the position for the long term. We reiterate our $94 target.

Facebook (FB:Nasdaq; $127.04; 1,000 shares; 4.88%; Sector: Technology): Shares traded slightly lower this week, pulling back from a recent rally toward the $130 level. Commentary around the name has been increasingly optimistic in recent weeks, especially from the sell side, a change in tone following the company's last earnings report where management noted that revenue growth would continue, but at a slower pace given tough comps. We continue to view FB as one of our favorite stocks for the long term as it further monetizes its core platform, Instagram, Messenger and WhatsApp, and as it develops other channels of revenue through innovative new products across its platforms. Given the high weighting in the portfolio, we would not purchase additional shares at these levels, and would likely recommend new members await a pullback under $120 before jumping in, but regardless, our $160 target remains in place and we see significant upside in the out years.

General Electric (GE:NYSE; $30.53; 2,350; 2.75%; Sector: Industrials): Shares traded lower this week following the company's earnings report on Friday that included weaker-than-expected industrial segment results. Importantly, when evaluating GE, it is important to discuss perspective. Given the sheer size and amount of businesses in which GE operates, investors across many different landscapes analyze the company from a multitude of angles. While growth in many of the businesses admittedly remains challenged, we continue to look toward the future, which will be powered by GE's digital initiatives -- namely, its Predix software system, the platform that is pioneering the industrial Internet of Things. The digital transformation of industrial businesses begins with GE. On that note, Predix was chosen by Fortune 100 energy company Exelon in the fourth quarter to lead the company's digital transformation efforts, a testament to the platform's capabilities. In addition, Predix-powered and software orders were up 36% for the quarter. The platform now has 427 partners, up from 219 at the end of the third quarter, and supports more than 22,000 developers. We understand that Predix is a long-term bet, but given that management has provided a bridge to 2018 EPS of $2 (read more here), which has been a key point of contention among bears and bulls, we believe the stock has enough to continue to move higher, supported by the 3%-plus dividend, as we wait for Predix to take full shape. Importantly, management expressed more optimism on the U.S. economy (and U.S. orders were up 23%), which is expected to continue to improve under the new administration's policies, and noted that they remain on track to achieve their goals in 2017. While we recognize that the stock would likely perform better in a risk-off environment given its defensibility and 10-plus quarters of order backlog (which somewhat shelter the company from economic uncertainty), we continue to like the name for its transformation story and capital optionality. In addition, given the lingering uncertainty regarding the political and macro-economic backdrop, we value GE's defensibility in the short term for diversification purposes, adding to our optimism for the long term. We reiterate our $35 target.

Alphabet (GOOGL:Nasdaq; $828.17; 150 shares; 4.77%; Sector: Technology): Shares traded slightly lower this week, like Facebook, pulling back from a recent rally. Given the current weighting of GOOGL in the portfolio (roughly 4.75%) and low basis (we are up roughly 43% on the name), we likely would not add to the position unless there was a meaningful pullback into the lower $700s, or if there was an opportunity where we felt we could trim the position on a rally (to capture gains and rationalize the size of the position), a move that would open up more availability to add to the position on lower levels. In general, we do not like to have a position with over 5% weighting as that can be too much reliance on one stock. That being said, we remain confident in the long term (hence our $1,000 price target) and believe current levels are attractive for new investors, although we would likely advise waiting for a pullback under $800 given the recent rally in tech. Google has several growth levers to pull (seven platforms with over 1 billion users each) -- with main growth drivers being YouTube, Google Cloud and potentially Waymo (the corporation's new autonomous-car division). The management team are visionaries and the addition of Ruth Porat as CFO has brought in a level of financial discipline that has appeased the Wall Street community, allowing additional room for smart investments moving forward. We reiterate our $1,000 price target on GOOGL.

Hewlett Packard Enterprise (HPE:NYSE; $22.88; 2,000 shares; 1.76%; Sector: Tech hardware): Shares traded lower this week despite the company announcing an acquisition that, while small, can be a game-changer for future growth. HPE will be acquiring SimpliVity -- a hyperconverged infrastructure company -- for $650 million in an all-cash transaction expected to close in the fiscal second quarter of 2017. The acquisition is expected to be accretive to the bottom line in the first full year following the close. Hyperconverged infrastructure packages components of servers, networking equipment and storage into one system that is cheaper and more efficient than a traditional server and network infrastructure. What does this mean? Well, instead of monitoring multiple products across several product racks, a company can converge these solutions into one type of product that can be easily managed from one central locale. Hyperconverged systems unify, consolidate and protect a company's data library and processes. Essentially, the promise of hyperconverged infrastructure solutions is that they unite the ease-of-use, responsiveness and scalability of the public cloud with the security and control of a private cloud. Importantly, HPE estimated the hyperconverged market to be roughly $2.4 billion in 2016, with expectations for growth at a CAGR of 25%, to nearly $6 billion by 2020. Hyperconvergence provides some of the highest-growth, highest-margin opportunities in the IT infrastructure space, fitting perfectly with HPE RemainCo's (i.e., the company left following its impending spin-mergers) strategic rationale to be the leader in the growing hybrid IT industry, with this acquisition specifically building upon HPE's software-defined infrastructure and private-cloud capabilities. SimpliVity specifically focuses on solutions to address data-center consolidation, data protection, disaster recovery, cloud computing and technology refreshes. The company serves roughly 1,300 customers across 40 countries and generated roughly $100 million in revenue in the past year. In the end, the combination of the two companies will create the industry's only complete "built for enterprise" hyperconverged infrastructure offering and will accelerate the performance of the combined division by leveraging HPE's go-to-market capabilities. While HPE management will continue to find creative ways to unlock value for shareholders, the SimpliVity opportunity simply appeared too good to pass up. As we have mentioned in bulletins in recent weeks and on our members-only call last week, we are eagerly awaiting the opportunity to scale further into our HPE position, but prefer to wait for shares to move below the $22 level, although we will of course keep members updated on any moves. We reiterate our $27 target.

Magellan Midstream Partners (MMP:NYSE; $74.64; 300 shares; 0.86%; Sector: Energy): Shares again proved to be an attractive asset for investors this week, outperforming the broader market. We have been patiently waiting for MMP to drop closer to our cost basis in order to bulk up on the position, but we would not be surprised if we would have to violate our basis in order to pick up additional shares. We are eyeing below the $73 level as a point to add to the position (as long as any decline is not caused by any significant change in the story). For those who are new to the product, you can read our initiation analysis on the name. We also encourage members to read our recent Forum post here. We reiterate our $80 target for now, although we see potential upside from there. We are also maintaining our One rating for the time being as we believe the relative safety of the investment and continuous income stream from the dividend both provide reasons to own the name.

Newell Brands (NWL:NYSE; $46.08; 1,800 shares; 3.18%; Sector: Consumer Discretionary): Shares showed some weakness this week, the first sign of such since the start of the New Year, when investors began to show appreciation for the potential benefits resulting from the ongoing transformation. The company is undergoing a transition, wherein it is integrating Jarden and divesting several non- core assets in order to focus on higher-margin, higher-growth businesses. Although we recognize that near-term core sales growth will likely continue to be weighed down by cleanup initiatives across the portfolio, we have become incrementally more bullish in the short term. Following a string of positive news heading into the end of last year (read our analysis), we believe investors will look to take advantage of the depressed levels of NWL in order to jump into a name with visible growth and synergy benefits that support a long-term investment thesis. Over time, we expect greater investment, the completion of portfolio rationalization, and margin growth to lead to long-term share gains for those willing to see the strategy through to the end. We reiterate our long-term $60 target.

NXP Semiconductors (NXPI:Nasdaq; $97.80; 650 shares; 2.44%; Sector: Information Technology): Shares remained in a range-bound trading pattern, hovering around the $98 level as investors play both sides of the impending merger with Qualcomm (QCOM). We discussed the deal on our members call last week and wanted to re-circle our commentary. As a reminder, you can watch the call at the top right of this page via the video player or on the "Calls" section of the mobile app. As we mentioned on the members call, we believe the 12-point spread between where the stock is now and where it will ultimately be affords us a nice opportunity to hold on for a gain, so we want to tender to the offer, not sell in the open market. We have not purchased additional shares given the risk of the merger reaching regulatory hurdles, which could afford us the opportunity to purchase shares lower on a short-term setback. For now, we believe the Qualcomm deal, after some initial resistance from Chinese regulatory authorities -- the real reason why NXP's not higher now -- will ultimately pay out with $110 a share, and if the deal falls apart, we believe there will be others ready to pay up for the innovative asset. If not, the $2 billion breakup fee is a nice chunk of cash. Please read this Forum post for more information on the tender offer. We reiterate our $110 target.

PepsiCo (PEP:NYSE; $103.24; 1,000 shares; 3.96%; Sector: Consumer Staples): For those who are underexposed to the name, one option is a starter position at these levels and waiting for a pullback to scale into the position. We view levels under $105 as attractive in the short term, although we recognize that sentiment has wavered on the consumer-staples names. We believe the company has positioned itself well within the ever-evolving consumer landscape, offering a diversified portfolio of healthier drinks as well as a strong snacks franchise to help complement its more well-known carbonated drinks. As we mentioned last week, we view PEP as the best grower in the consumer packaged-goods space and find the stock to be a good position to hold in order to diversify a portfolio away from only tech, energy and industrial names in the current market. We also continue to like the stable 2.9% yield, which provides steady income as we wait for the company's growth initiatives to play out. We reiterate our $115 long-term target.

T.J. Maxx (TJX:NYSE; $75.49; 1,550 shares; 4.49%; Sector: Consumer Discretionary): Shares traded lower this week as retail remains out of favor with investors. This week, the stock was hampered specifically by disappointing sales results at Target (TGT). TGT also lowered its guidance for the upcoming quarterly report. We reiterate our conviction in TJX as the special story to own in retail, a space in which we otherwise have no interest (other than Costco). Please read our recent note on Costco and TJX, which discusses our view on these AAP holdings versus the broader retail landscape. We also highlight our recent deep dive on TJX , which explains how its business model allows it to benefit from peers' struggles. That being said, given our large weighting in TJX at roughly 4.5% of the portfolio, we would likely not be buyers unless there was a meaningful pullback. We believe the stock remains attractive and our $85 target still stands, but we recognize that perpetually worsening investor sentiment on the broader retail space right now will drive short-term trading in the name as the market groups all bricks-and-mortar into a single basket. Over the long term, we expect TJX's business model to help the company emerge from the flames. We reiterate our $85 target.


Citigroup (C:NYSE; $56.11; 1,750 shares; 3.77%; Sector: Financials): Shares traded lower this week amid weakness across the banking sector. The company's earnings report also failed to inspire investor confidence over and above the post- election rally. From a high level, we viewed the quarter as relatively in line, although we recognize that investor expectations were heightened heading into earnings season, especially for the financials, given the broad 20%-plus rallies across the group since the election. As a result, even despite the downward trend in C shares over the last two weeks, we were not surprised to see some weakness in trading following the report and the earnings-call commentary. Anything but a perfect print was likely to result in some profit-taking, explaining, in part, why we decided to trim our large position after the New Year. While we noted we would not be surprised to see weakness in trading, the sharper turn lower following the call was likely due to management's somewhat uninspiring outlook for the year. Importantly, the conservative outlook does not include any further rate hikes for 2017, whereas the market is pricing in two to three hikes for the year. We expect management was being conservative in their commentary, especially with the heightened uncertainty surrounding the incoming administration. We always believe it is better to under-promise and over-deliver. In addition, we remind subscribers that Citi's results cannot be viewed in a vacuum with the other banks given that it owns the largest international exposure, and is thus impacted by stronger FX headwinds, which caused slightly weaker-than-expected top-line results in the quarter. Perhaps most important in representing the bank's true worth, Citi's tangible book value increased roughly 7% year over year to $64.57, slightly below the third quarter's $64.71 level. As we mentioned on last week's members-only call, we continue to look for levels in the mid- to lower $50s (likely below $55) before upgrading the name back to One, when we would also be willing to add shares back to the position. We reiterate our $60 target for now, although we continue to see upside toward the company's tangible book value.

Comcast (CMCSA:Nasdaq; $73.57; 1,000 shares; 2.82%; Sector: Consumer Discretionary): Shares traded higher this week thanks to increased optimism regarding an improving regulatory backdrop (which we have touted in recent months) and positive commentary from several sell-side analysts. The company is set to report earnings on Thursday, where we will be looking for updates on the X1 rollout, the film and entertainment slate, the theme park business, and the outlook for the year under the new administration. For now, we are maintaining our $73 price target, but we will be reviewing following the earnings report and we see further upside, pending the forward-looking outlook, as the macro backdrop has consistently improved.

Costco Wholesale (COST:Nasdaq; $164.24; 400 shares; 2.52%; Sector: Consumer Staples): Shares traded higher this week on little news. The continued upswing for the stock is representative of the improving sentiment on the name on the view that food deflation is abating and the membership model will reign king in a difficult environment for retail. In addition, the benefits from the membership credit card, which we have been high on since the middle of last year, are beginning to illuminate and should continue to build momentum moving forward. This view was backed by Citi's quarterly results announced this week that demonstrated strong performance in the card business. We reiterate our $175 target and would upgrade the name to One on any pullback under $160 while we would consider violating our basis in order to increase our stake in the position.

Cisco Systems (CSCO:Nasdaq; $30.10; 3,300 shares; 3.81%; Sector: Technology): Shares were roughly flat this week on little news as investors await the next earnings report for a sign that the transition to software and security (higher growth, higher margin, more visible) was not held back any further by weakness in the legacy business. HPE's acquisition of SimpliVity this week could put some pressure on CSCO to defend its position in the hyperconverged market, with Nutanix noted as a potential target, although we are not speculating that anything would happen in that realm. Cisco's product HyperFlex has only seen mixed success thus far and will likely face increased competition as a result of the HPE deal. In addition, Cisco's partnership with SimpliVity could be eliminated. That being said, we remain cautiously optimistic on shares for the broader shift toward software and security, bringing recurring revenues and increased visibility for shareholders. We reiterate our Two rating, however, as we recognize that the sheer size of CSCO's legacy business has a slowing impact on the transition. We reiterate our $33 price target.

Dow Chemical (DOW:NYSE; $57.38; 1,475 shares; 3.25%; Sector: Chemicals): Shares traded lower this week as investors reacted to the recent statement of objections sent to Dow and DuPont (DD) from the European Commission regarding the pending merger of the two companies. As we have mentioned in recent weeks, the concerns of the EC hinge on continued prospects for innovation and research in the agricultural industry. Both companies have noted that they are making continued progress with the regulators toward remedies that would help appease these concerns, but no decision has been made yet. The EU has until the end of February to rule on the merger, so investors will be closely watching the progress. We reiterate our $60 price target for now, although we see more potential upside should the deal be passed.

Kraft Heinz (KHC:Nasdaq: $88.95; 800 shares; 2.73%; Sector: Consumer Staples): Shares traded higher this week as investors continue to show appreciation for the company's cost-saving methods and zero-based budgeting initiatives implemented by 3G Capital. The success of 3G Capital has investors wondering whether KHC is poised to make another deal, especially under the seemingly improving macro backdrop under the new administration. We re-initiated on the name late in 2016 following the extreme selloff in consumer staples and dividend-focused names that was caused by the risk-on sentiment injected into the markets after the election results. The stock has come back strongly since, with investors showing continued belief in the self-help story of KHC, which also has longer-term plans for top-line growth. An additional deal from 3G could add icing to the cake, but we do not want to speculate on rumors. We reiterate our $90 target.

Panera Bread (PNRA:Nasdaq; $216.65; 300 shares; 2.50%; Sector: Consumer Discretionary): Shares traded higher this week as the stock received additional backing from the sell-side community when Goldman upgraded shares to a Buy. The stock has received several "top-pick" nominations in recent weeks, and for good reason. The company is poised for double-digit earnings growth and continued same-store-sales acceleration thanks to Panera 2.0. Looking ahead, however, delivery and catering appear to be the next big growth drivers. Analysts at Goldman focused much of their bullish commentary on the potential for delivery, agreeing with a thesis we laid out last year. As we mentioned in February 2016 following the company's earnings report, "Finally, we would be remiss not to mention upside related to the company's delivery business, which -- albeit in the early stages -- appears poised to emerge as a powerful earnings and comp contributor over the long term. Management indicated that the rollout of delivery capabilities in test markets has been remarkably successful, pointing to a sales growth trajectory far steeper and longer than sales growth in its retail business. The team noted that the delivery business perfectly leverages the company's existing tech capabilities, rendering start-up and transition costs nearly de minimis. While others may view it as a modest play, management sees it as a mass-market opportunity defined by high growth, high margins and high operational leverage. It's a prime example of the company's ability to find ways to optimize existing infrastructure and identify new sales channels." We reiterate our $235 target and would likely look to upgrade the stock on a pullback below $110.

Schlumberger (SLB:NYSE; $86.49; 1,000 shares; 3.32%; Sector: Energy): Shares underperformed this week following the company's earnings report on Friday. We want to reiterate the importance of Schlumberger's commentary regarding the state of the oil markets along with its quarterly reports. While the numbers are, of course, an important piece of the pie, investors tend to use the conference call and any information divulged within the press release as canon when evaluating the prospects for the energy sector moving forward. Schlumberger and its management team are typically perceived by the markets as the industry leaders, owning the most in-depth knowledge on the progress of the energy sector and the outlook moving forward. That said, management specifically noted, "We maintain our constructive view of the oil markets, as the tightening of the supply and demand balance continued in the fourth quarter. … This trend was further strengthened by the December OPEC and non-OPEC agreements to cut production, which should, with a certain lag, accelerate inventory draws, support a further increase in oil prices, and lead to increased E&P investments." Without lessening the importance of each factor, the last piece is key as SLB makes its money by serving exploration-and-production (E&P) companies. Last quarter, management noted visibility into 2017 E&P spending remained "limited," so the slight change in tone is encouraging for the markets. The company continued, "E&P spending surveys currently indicate that 2017 (North America) E&P investments will increase by around 30%, led by the Permian Basin, which should lead to both higher activity and a long-overdue recovery in service industry pricing." While we do not want to get ahead of ourselves -- and management isn't predicting a V-shaped recovery, noting that they expect a "third successive year of underinvestment" internationally -- we do sense a perspective of increased confidence. That being said, we were not surprised to see the downturn following the results on a near-term focus given that SLB is tied more closely to the international markets than some of its peers and considering management's belief that "the recovery in international markets (will) start off more slowly." With the outlook improving as we move beyond 2016, we are raising our price target to $93 to reflect 26x consensus EPS estimates - - the blend of which we view as conservative -- for 2018 as we expect the international cycle to offer early-cycle returns opportunities (and SLB is most levered with more than 70% of revenues from international) once the recovery gains steam. We are maintaining our Two rating for now, although we would look to upgrade on any pullback into the low $80s.

Starbucks (SBUX:Nasdaq; $57.66; 1,750 shares; 3.87%; Sector: Consumer Discretionary): Shares traded roughly flat this week as investors balanced cautious optimism regarding next week's quarterly report with declining sentiment across the restaurant and retail spaces. For the quarter, investors will be looking for continued same-store-sales growth in the Americas, with consensus at +4%, although a return to +5% moving forward is likely required for shares to break out. We will be looking for continued progress in mobile order & pay as well as for strength in the China region (with positive forward-looking commentary). We will also be listening for commentary on the CEO transition and any updates on the build-out of the roastery business, which is Howard Schultz's long-term initiative. We recognize that there are some challenges this year regarding wage pressure and a need to return to improved domestic same-store-sales growth, but we are cautiously optimistic that the company can deliver on its initiatives, which are supported by a robust pipeline, growth prospects in China (which will eventually be a larger market than the U.S.), and focused improvements on through-put. We reiterate our $65 long-term price target on SBUX.

Walgreens Boots Alliance (WBA:Nasdaq; $81.72; 1,000 shares; 3.14%; Sector: Health Care): Shares traded roughly in line with the market this week, lacking any decisive support due to an absence of any update on the Rite Aid (RAD) merger. Consistent with our commentary last week, we trimmed our WBA position in order to lessen our exposure to the name, which has been stuck in a range-bound trading pattern as investors await a decision on the impending merger. Last week, the New York Post reported the deal was nearing approval (our commentary is included in the Alert linked above), but we have seen similar reports over the past year that have proven to be unreliable. We discussed our view on the news in depth during last week's members-only call -- you can watch the replay on the video player at the top right of this page or on TheStreet Premium mobile app. We simply wanted to take some off the table on the upswing earlier in the week above $84 in order to both protect from a further drawn-out merger review process and also make room for additional shares should there be a meaningful pullback below $80. The move proved to be a smart one as the stock dropped on Friday on a Bloomberg report indicating that the FTC was not satisfied with the current agreement between the two companies or with Fred's (FRED:Nasdaq) as a viable buyer for Rite Aid stores. We will continue to follow any news developments on the WBA front and keep members updated accordingly. We maintain our $90 target and would be buyers under $80, a level that is reflective of the deal not gaining approval but does not represent the value from the capital optionality toward buybacks and other M&A should the deal fall through.

Wells Fargo (WFC:NYSE; $55.07; 1,900 shares; 4.02%; Sector: Financials): Shares traded lower this week amid broader weakness across the banking group at the beginning of the week. The company reported a messy quarter last week, weighing on the stock as investors took profits from the recent rally. Although Wells has clearly fallen out of favor in consumers' minds, the bottom line from the quarter was that investors are willing to look past the messiness of the numbers and the recent fake- accounts scandal and focus on the strong net interest margin and the even-better outlook for financials moving forward. Commentary from Bank of America (BAC) management on their recent conference call, noting expectations for "net interest income to increase in 2017," only reaffirms the positive expectations across the group. Wells must continue to work to rebuild its brand, but the macro backdrop is on its side (not to mention the still relatively cheap valuations in the banking sector on a P/E basis) and investors continue to bet that we have only seen the beginning of the renaissance for the financials. We reiterate our $55 target for now.


Occidental Petroleum (OXY:NYSE; $68.59; 300 shares; 0.79%; Sector: Energy): Shares traded roughly flat this week as oil prices shifted between losses and gains. Our view on the name remains the same -- we would prefer to exit on any prolonged strength, especially after building full positions in APA, MMP and SLB, with MMP, of course, having the most room to do so. We have lost faith in the new management team and prefer to allocate the capital toward better-quality energy names.


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

DISCLOSURE: At the time of publication, Action Alerts PLUS was long AAPL, ADBE, AEP, AGN, APA, ARNC, DHR, FB, GE, GOOGL, HPE, MMP, NWL, NXPI, PEP, TJX, C, CMCSA, COST, CSCO, DOW, KHC, PNRA, SLB, SBUX, WBA, WFC and OXY.

Report on Merger Weighs on Walgreens
Stocks in Focus: WBA

FTC isn't satisfied with Rite Aid deal?

01/20/17 - 11:16 AM EST
General Electric: Steady as She Goes
Stocks in Focus: GE

GE's fourth-quarter earnings were in line with expectations, and we continue to like the name long term for its transformation story.

01/20/17 - 10:26 AM EST
Drilling Down on Schlumberger Results
Stocks in Focus: SLB

Its fourth quarter was in line with estimates and we're raising our price target on the name.

01/20/17 - 09:10 AM EST
Weekly Roundup

Inauguration draws markets' focus: What happens next? In the portfolio, we add to 2 positions and trim a third.

01/20/17 - 05:06 PM EST


Chart of I:DJI
DOW 19,827.25 +94.85 0.48%
S&P 500 2,271.31 +7.62 0.34%
NASDAQ 5,555.3340 +15.2530 0.28%

Action Alerts PLUS Holdings

Holdings 1

Stocks we would buy right now

Symbol % Portfolio
AAPL 0.037785601982988394 Consumer Durables
ADBE 0.0318844816732976 Computer Software & Services
AEP 0.02415744126778252 Utilities
AGN 0.045268610375696676 Drugs
APA 0.04034957011754544 Energy
ARNC 0.03597158588778883 Industrial
DHR 0.012369408649146567 Industrial
FB 0.048783362560150874 Internet
GE 0.027550273445838352 Industrial
GOOGL 0.047702594503432165 Internet
HPE 0.017571840922170213 Telecomm
MMP 0.008598528451250774 Energy
NWL 0.03185049767151412 Consumer Durables
NXPI 0.02441088128108305 Electronics
PEP 0.03964416208052563 Food & Beverage
TJX 0.04493165035801301 Retail
Holdings 2

Stocks we would buy on a pullback

Symbol % Portfolio
C 0.03770592197880679 Banking
CMCSA 0.028250881482606263 Media
COST 0.025227265323926888 Retail
CSCO 0.03814272200173005 Computer Hardware
DOW 0.03250003370560177 Chemicals
KHC 0.027325441434039168 Food & Beverage
PNRA 0.02495808130980011 Leisure
SBUX 0.03874752203346996 Leisure
SLB 0.03321216174297425 Energy
WBA 0.03138048164684768 Retail
WFC 0.04017907410859781 Banking
Holdings 3

Stocks we would sell on strength

Symbol % Portfolio
OXY 0.007901568414674312 Energy