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Jim Cramer's Action Alerts PLUS

Update on 5 Key Holdings

By Jim Cramer and Jack Mohr | 2017-01-18 15:29:05.0
Stocks in Focus: ADBE, AGN, TJX, DHR, C

As we head into the back end of today’s session, markets have fluctuated around the flatline as investors weigh the impacts of lower oil prices, rising rates, a stronger dollar (rebounding from yesterday’s selloff), the upcoming earnings season, and continued uncertainty regarding the incoming administration ahead of the inauguration at the end of this week. Specifically for today, investors are also awaiting commentary from Janet Yellen, who will be speaking starting at 3pm EST to discuss the goals of monetary policy. Markets will be keying in for any clue into the pace for interest rate hikes throughout the remainder of the year.

Taking a step back, we recognize that much of the uncertainty underlying the subdued trading relies on the timing and specific agenda for President-elect Trump’s desired policy changes (e.g. tax reform, infrastructure spending, deregulation, new trade agreements, etc.). Importantly, investors are likely waiting for further clarity on these policies before jumping into any further rally following the quick upswing immediately following the election results.

Given that the fundamentals can often get lost during these periods of uncertainty, we wanted to take the time to highlight some key developments for AAP holdings in today’s trading. In an attempt to sift through the ever-evolving macro backdrop for the markets, we aim to provide members with as much information on our companies as possible so that we can distinguish the stories we like for the long-term.

Adobe (ADBE:Nasdaq):

ADBE shares are trading higher today, outperforming the market following the company’s announcement that its board of directors has approved a $2.5 billion stock repurchase plan through FY19. The new plan replenishes the existing $2 billion plan that is scheduled to be completed shortly 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 that 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 2-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, which you can read about here . 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, see our analysis on the TubeMogul acquisition here .

Allergan (AGN:NYSE):

AGN shares are also trading higher and outperforming the market in today’s flat session, rebounding off of yesterday’s decline and the broader biopharma weakness that has lingered since Trump’s press conference last week where the PEOTUS’s commentary on healthcare competition struck a cautious tone for investors. Today, investors are showing belief in Allergan’s underappreciated pipeline, which we have often touted in recent months.

The company announced yesterday, 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 of its co-primary and secondary endpoints. The positive results were similar to the initial study reported in March of last year – 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 3-4 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 JP Morgan 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 at a depressed ~13x 2017 consensus EPS and several organic and inorganic growth opportunities ahead.

TJ Maxx (TJX:NYSE):

TJX shares are trading lower today, dropping after an initially strong open to start the day. The stock is being hampered by disappointing sales results at Target (TGT:NYSE) and the resulting souring of sentiment across the retail space. TGT also lowered its guidance for the upcoming quarterly report.

We want to take this time to 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 (COST:Nasdaq), which we have also explained as a special story given the growth from the membership card benefits and its membership-based business model, which can navigate through retail downturns). Please refer to our recent note on Costco and TJX here : that discusses our view on these AAP holdings versus the broader retail landscape. We also highlight our recent deep-dive on TJX here , which explains how TJX’s business model allows it to benefit from its 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 brick-and-mortars into a single basket. Over the long-term, we expect TJX’s business model to help the company emerge from the flames.

Danaher (DHR:NYSE):

DHR shares are trading higher today following our purchase of the stock yesterday, where we doubled our stake in our newest addition to the portfolio. See the alert here . The upswing today is due in large part to analysts at Deutsche Bank, who initiated with a Buy on DHR and a $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.

Citigroup (C:NYSE):

Citi shares have turned lower following the company’s earnings call late this morning. You can read our detailed reaction to the earnings report here . While we noted we would not be surprised to see weakness in today’s trading, the sharper turn lower following the call is likely due to management’s somewhat uninspiring outlook (on initial view) for the year. Importantly, the conservative outlook does not include any further rate hikes for 2017, whereas the market is currently pricing in anywhere between 2-3 hikes for the year.

We expect that 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.

Looking ahead, with the bank set to earn above $5 per share in FY17 (potentially higher as management continues to decrease the share count) and tangible book value at above $64, we see more upside for shares, but would await a pullback into the mid-to-lower $50s before adding back to our highly-weighted position.

Regards,

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

DISCLOSURE: At the time of publication, Action Alerts PLUS was long XXX.

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Markets

Chart of I:DJI
DOW 19,706.01 -98.71 -0.50%
S&P 500 2,261.33 -10.56 -0.46%
NASDAQ 5,536.1040 -19.55 -0.35%

Action Alerts PLUS Holdings

Holdings 1

Stocks we would buy right now

Symbol % Portfolio
Weighting
Industry
AAPL 0.037546473716592484 Consumer Durables
ADBE 0.03147258031691956 Computer Software & Services
AEP 0.02396326262394811 Utilities
AGN 0.045091095625688284 Drugs
APA 0.03794954612127112 Energy
ARNC 0.03546027376442109 Industrial
DHR 0.012296424051631028 Industrial
FB 0.04882156171302054 Internet
GE 0.02799054422279168 Industrial
GOOGL 0.04735201893566685 Internet
HPE 0.017399661879703106 Telecomm
MMP 0.00852464858898534 Energy
NWL 0.03171183044894318 Consumer Durables
NXPI 0.024344991851381472 Electronics
PEP 0.03913298322515772 Food & Beverage
TJX 0.04470802766849939 Retail
Holdings 2

Stocks we would buy on a pullback

Symbol % Portfolio
Weighting
Industry
C 0.03783919653999404 Banking
CMCSA 0.02772318076590198 Media
COST 0.025073260838388612 Retail
CSCO 0.03780381582502652 Computer Hardware
DOW 0.03211870867106967 Chemicals
KHC 0.026857213861183407 Food & Beverage
PNRA 0.024498754526159242 Leisure
SBUX 0.03869598358353185 Leisure
SLB 0.0333343709126429 Energy
WBA 0.03195739173552856 Retail
WFC 0.039716286904351986 Banking
Holdings 3

Stocks we would sell on strength

Symbol % Portfolio
Weighting
Industry
OXY 0.007883205788979579 Energy