The market rally continued this week, pushing the major indices again toward record highs as investors jumped back into equities following a lull that was dominated by perceived risks. This week, even some of the recently embattled sectors, such as tech, participated in the move higher. Sentiment appears to have reached new highs as optimism regarding an improving macro and shifting pro-business policies have made business prospects incrementally more attractive.
With earnings season largely in the rear-view, any positive news is exacerbated, over-analyzed and extrapolated, helping to contribute toward widespread gains. Adding to the bullishness, a recent recovery in oil prices, thanks to OPEC's recent production-cut agreement, has sent a spark throughout the energy sector. Next week's summit between OPEC member countries and non-OPEC members to discuss coordinated production cuts (more below) is the first major hurdle for crude prices since the initial agreement. The implications of the meeting's outcome could have a widespread impact on the market.
For this week, Treasury yields pushed higher again, although the bond selloff has noticeably slowed; the dollar was volatile vs. the euro and ultimately ended flat after strengthening following the European Central Bank's decision to extend its stimulus program (more below); gold moved lower again as investors largely fled safe- haven assets; and oil prices were more subdued this week as investors weighed the potential outcomes from the OPEC deal.
Third-quarter equivalent earnings have virtually wound down and were relatively strong compared with expectations, as 72.5% of companies have surprised to the upside vs. estimates. Within the portfolio, Costco (COST) reported earnings.
After the closing bell on Wednesday, Costco reported fiscal-first-quarter earnings that, while slightly missing on the headline numbers, offered fuel for optimism moving forward. The results fell slightly short of expectations, with revenue of $28.1 billion (including membership fees, up 3.2% year over year) missing consensus estimates for $28.3 billion, and earnings per share of $1.17 (after a $0.07 non- recurring legal settlement was removed) coming in $0.02 below consensus. For the quarter, total same-store sales ("comps") increased 1%, aided by a 1% jump in the U.S., a 4% move in Canada and flat sales in other international regions. Core comps, which exclude gas and foreign exchange impacts, showed slightly better trends, with the total company comps coming in 2% higher for the quarter. Core comps were higher by 1% in the U.S., 5% in Canada and 3% in other international regions. These all fell roughly in line with expectations given the information released in previous sales reports. Regardless of the headline miss, encouraging commentary on the conference call regarding the new Costco Anywhere Visa Card, improving core gross margins, membership growth, efforts to address convenience gaps and potential slowing deflation all helped paint a more optimistic future heading into next year. We discuss these factors in further detail in the stocks portion below.
Moving on to the economic backdrop, macro data were slightly light in this first full week of December, following last week's flurry of reports that included the nonfarm payrolls release and a revised GDP estimate.
On Tuesday, the Labor Department reported that nonfarm business productivity grew at a seasonally adjusted 3.1% pace in the third quarter, slightly lower than expectations for a 3.3% jump and matching the prior estimate. The figure, which is a measure of the goods and services produced per hour worked, was the largest gain in the past two years. Importantly, increasing productivity tends to lead to higher efficiencies and profits for corporations, who can then allow the benefits to trickle down toward higher wages. The strong third-quarter performance shows the potential for a reversal of recent trends given that productivity had declined for the three consecutive quarters prior. Even so, overall productivity was only flat compared to the prior year.
Underlying the headline figure, the government revised unit labor costs upward, indicating that firms paid more than previously expected to compensate workers for their output. These costs grew 0.7% in the quarter, more than the initial estimate of a 0.3% gain and higher than expectations for a 0.2% increase. Consistent rising hourly wages could be another factor reassuring the Fed heading into its policy meeting next week, when the FOMC is largely expected to increase benchmark interest rates. While this data were strong in terms of wages and add to the positive personal income data from October, optimism is slightly tempered by last week's jobs report, which showed hourly wage declines in November. Productivity will likely have to continue to show growth, boosting year-over-year performance, in order to justify further acceleration in wage increases. From 1947 to 2015, productivity grew an average 2.2% a year, so the flat reading over the past year has raised concerns. With the economy seemingly improving, however, we look for a turnaround in the coming months.
On Thursday, the Department of Labor reported that initial jobless claims for the week ending Dec. 3 were 258,000, a decrease of 10,000 claims from the prior week and 3,000 claims higher than expectations. The reversal downward is a positive sign following the prior two weeks' reports, which showed an increase of 35,000 claims, with last week's report marking the highest level for claims in five months. That being said, we do note that claims tend to be volatile during this period as the model backing the report does not fully account for changes in timing of holidays and the holiday season itself can impact filings. Claims have remained below 300,000 -- the threshold typically used to categorize a healthy jobs market -- for an astounding 92 straight weeks, the longest streak since 1970. The four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) rose 1,000 to 252,500 last week. Persistently low claims continue to imply broad strength in the labor market, providing the Federal Reserve with fuel heading into its policy meeting next week.
Also on Thursday, ECB President Mario Draghi announced the central bank would extend its stimulus program by nine months but at a reduced volume. While investors initially took this to be a hawkish tone, which led to a subsequent decline in stocks, Draghi's rhetoric during his press commentary appeared to assure markets that this move was in fact not a tapering by any means. Draghi confirmed, "tapering has not been discussed today (Thursday) … The presence of the ECB on the markets will be there for a long time." The nine-month extension of the program was longer than the six additional months many investors had expected, offsetting the decrease in the magnitude of the monthly purchases. 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.
On the commodity front, oil prices proved to be more subdued this week following last week's prolific 15% rally on news of a production agreement among OPEC member countries. The dramatic price spike last week appeared to be a bit exaggerated as an initial move on faith -- given that OPEC has been difficult to trust in the past and there is not yet any proof the limits will be enforced -- and investors seemingly spent the majority of this week assessing the veracity of the agreement and digesting the implications. You can read our analysis of OPEC's first production-cut agreement since 2008 here and here.
This week, investors approached the oil trade in a more cautious fashion given the uncertainty surrounding this weekend's OPEC gathering, created to finalize details of coordinated production cuts. While the production deal reached last week was an enormous catalyst for oil, this meeting will be the first major hurdle that will help determine whether the agreement can in fact be trusted and executed. Based on commentary from OPEC officials last week, the deal is contingent on key non-OPEC producers also agreeing to cut 600,000 barrels per day.
Invitations to the meeting were extended to 14 non-OPEC oil producers, including: Azerbaijan, Bahrain, Bolivia, Brunei, Colombia, Russia, Mexico, Turkmenistan, Oman, Trinidad and Tobago, Egypt, the Republic of Congo, Kazakhstan and Uzbekistan. Russia remains a key player for the broader agreement as it claims to be on board with trimming its production by 300,000 barrels per day over time.
Mohammed Barkindo, secretary-general of OPEC, noted he was "very confident" that non- OPEC members would agree on the cut, but investors are wary to take the cartel at its word. At the meeting on Saturday, OPEC is expected to persuade participating countries not only to agree to specific cuts but also to allow production to be monitored by an outside committee, which will include three OPEC members and two non- OPEC members. Such a committee would add to the reliability of the stated production cuts and leave fewer investors questioning the veracity of the agreement. Regardless of the outcome, the meeting promises to be the key driver for prices through next week. Trouble at the meeting could poke a hole in the recent oil surge, while a definitive agreement could fuel another leg of the rally.
Also pressuring the trade this week were bearish inventory reports from the American Petroleum Institute and Energy Information Administration, both of which showed inventory declines that were outweighed by significant increases in stockpiles at the Cushing, Okla., delivery point for U.S. crude. These fears were offset slightly, however, by data for Chinese oil imports, which rebounded strongly in November, with preliminary data showing a 16% monthly uptick and the third-highest monthly total for 2016.
Despite the extreme bullishness (coupled with forced short-covering) following OPEC's announcement last week, the crude oil trade remains on fragile footing with investors well aware of the persistent supply glut, OPEC's historic unreliability and the potential for U.S. shale production to surge amid rising prices. A confirmed agreement between OPEC and non-OPEC countries would serve as a boost to sentiment, making OPEC appear to be "all in" and "for real" in terms of executing on their promised cuts, but investors are smart to remain skeptical for now, especially following the unimpeded price rally last week.
Within the portfolio, we had a busy week of purchases, initiating a position in Magellan Midstream Partners and adding to our American Electric Power (twice) and Kraft-Heinz positions. We trimmed Occidental Petroleum (OXY) into strength on Friday. We also upgraded AEP to One from Two.
On Magellan (MMP), we believe the partnership is poised to succeed in a pipeline-friendly environment that adds further fuel for its near-5% dividend yield, low-risk profile and solid growth project outlook in the near to medium terms.
As for American Electric Power (AEP) and Kraft-Heinz (KHC), while the stories are distinct, we believe the broader selloff in utilities and staples is overdone, with interest rates nearing peak levels. We believe the dividend yields of both companies have room to grow and see each management team being able to differentiate their respective businesses moving forward.
Moving on to the broader market, as we mentioned, third-quarter earnings were strong and largely better than expected, proving to be positive compared to estimates. Total third-quarter earnings growth was up 2.9%; of the 436 non-financials that reported, earnings growth is 1.2% vs. expectations for an overall 3.3% increase throughout the season. Revenues are up 2.2% vs. expectations throughout the season for a 2.26% increase; 72.5% of companies beat EPS expectations, 20.7% missed the mark and 6.8% were in line with consensus. On a year-over-year comparison basis, 69.7% have beaten the prior year's EPS results, 27.3% have come up short and 3% have been virtually in line. Information technology, consumer staples and financials had the strongest performance vs. estimates, whereas materials and telecom posted the worst results in the S&P 500.
Next week, two companies in the S&P 500 will report earnings. Within the portfolio, Adobe (ADBE) will report. Key reports for the broader market include: ABM Industries (ABM), Nordson (NDSN), Joy Global (JOY), Pier 1 Imports (PIR), Sanderson Farms (SAFM), Jabil Circuit (JBL) and Oracle (ORCL).
Economic Data (*all times ET)
Monthly Budget Statement (14:00):
Export Prices MoM (8:30): -0.2% expected
Import Prices MoM (8:30): 0.0% expected
Mortgage Applications (7:00):
PPI MoM (8:30): 0.1% expected
Core PPI MoM (8:30): 0.2% expected
Retail Sales MoM (8:30): 0.5% expected
Industrial Production MoM (9:15): -0.1% expected
FOMC Interest Rate Decision (14:00):
Initial Jobless Claims (8:30):
Continuing Claims (8:30):
CPI MoM (8:30): 0.2% expected
Core CPI MoM (8:30): 0.2% expected
Bloomberg Consumer Comfort (9:45):
Markit Manufacturing PMI (9:45):
Building Permits (8:30): 1237k expected
Housing Starts (8:30): 1235k expected International
China Industrial Production YoY (21:00):
China Retail Sales YoY (21:00):
Germany CPI YoY (2:00): 0.8% expected
UK CPI YoY (4:30):
UK CPI Core YoY (4:30):
Eurozone ZEW Economic Sentiment (5:00):
Eurozone Employment Change (5:00):
Germany ZEW Current Conditions (5:00):
Japan Tertiary Industry Index MoM (23:30):
Japan Industrial Production (23:30):
UK Claimant Count Change (4:30):
UK Unemployment Rate (4:30):
Eurozone Industrial Production (5:00):
Japan Nikkei Manufacturing PMI (19:30):
Germany Markit Manufacturing PMI (3:30):
Germany Markit Services PMI (3:30):
Eurozone Markit Manufacturing PMI (4:00):
Eurozone Markit Services PMI (4:00):
UK Retail Sales (4:30):
UK BoE Interest Rate Decision (7:00):
Eurozone CPI (5:00):
Eurozone Core CPI (5:00):
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 Jack Mohr 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.
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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; $113.95; 820 shares; 3.61%; Sector: Technology): Shares traded higher this week yet slightly underperformed the market. The week started on a sour note as a research note from UBS sell-side research indicated potentially weak sales in China, one of Apple's most important regions for sales. The report didn't do any favors for Apple, whose shares have largely sat on the sidelines during the broader market rally as investor sentiment on tech has wavered and AAPL has likely been an easy target to be used as a source of funds. The lingering concern of a potential trade war with China under the new American administration has also hampered the stock's potential. Regardless, we noted in last week's roundup that the new administration should be a net positive for Apple and we reiterate our view to hold, not trade, the stock. Aiding our positive long-term thesis, Apple noted this week that it has 20 million paid subscribers on Apple Music less than 18 months after the launch of the service and that 35% of U.S. retailers now support Apple Pay, with Gap (GPS) being added next year. Both reports demonstrate the power of Apple's massive installed base, which underpins the long-term growth outlook for the Services business. We reiterate our $130 price target.
Adobe (ADBE:Nasdaq; $104.31; 750 shares; 3.02%; Sector: Technology): Shares rebounded nicely this week after dropping below the $100 threshold last week as the throwaway tech trade appeared to reach a peak. We bought shares on the selloff and have enjoyed a nice gain since the purchase. We recently added the name to our core holdings list shortly after initiating a position. We believe the company's 25-year history navigating the technology landscape and 75% revenues recurring with 20% to 30% annualized sales/earnings growth trajectory, along with the company's embedded leadership position across digital marketing in content creation and automation, differentiate Adobe from competitors and set the stage for long-term success. Click here for our recent initiation report. We reiterate our $125 target and believe shares offer an attractive opportunity given the roughly flat performance over the last three months.
American Electric Power (AEP:NYSE; $60.99; 1,000 shares; 2.36%; Sector: Utilities): Shares traded higher this week as investors took advantage of the recent selloff in utilities to buy into this quality name. We upgraded the name to One this week as we bulked up our position twice. We believe the 4%-plus dividend is compelling, especially given the company's recent shift toward focusing on its regulated business, a move that will make it one of the faster-growing large-cap utilities over the long term. AEP also stands to benefit under the Trump administration given the likelihood for more favorable (less restrictive) coal policies. These will free up cash flow for AEP to focus not only on its capital plan but also to fund further dividend boosts (this expectation was further supported with Trump's appointment of Scott Pruitt to head the EPA). We believe the market has discounted AEP's core growth and its capability to develop into a dividend growth story. Bottom line: Markets are grouping utilities together into a larger batch, valuing all as placeholders for bond-equivalent investments and ignoring the company- specific drivers. We believe this provides us with an opportunity to scale into AEP, which is best of breed. We reiterate our $68 target, which we raised this week.
Allergan (AGN:NYSE; $192.25; 550 shares; 4.08%; Sector: Health Care): Shares traded roughly in line with the market this week, despite pharma remaining out of favor for most of the week. The stock rebounded on Friday, however, following some bullish analyst commentary and a rotation back into pharma with investors looking to pick at the lows. As we have said in recent weeks (read our recent analysis here, here and here), we recognize the stock sits in a waiting period, lacking any positive catalysts until the next earnings release and guidance update. As such, we would not be surprised to see the stock hit $180 before rebounding, although we are incrementally more positive on the name in the short term (we remain confident long term) following CEO Brent Saunders' recent purchase of $1 million worth of AGN shares (which we discuss in the first Allergan link above). Simply put, the market currently focuses solely on any negatives surrounding the company given the feeling of distrust established among the investor base following a year filled with concerns at every turn. Adding to the pressure was Donald Trump's tweet this week aimed at attacking high drug prices. Saunders has been a leader in innovation and internal drug-pricing regulation, but the market groups together all biotechs as guilty by association. We look toward 2017, when both Allergan and Teva (TEVA) will provide their outlooks for the year. AGN's stock appears priced for the worst, but with expectations appropriately managed lower, we see opportunity for the company to surprise given strength in core brands (attractive aesthetics, Botox, central nervous system and gastrointestinal franchises that have been steadily growing by double digits) and an underappreciated and diversified growth pipeline led by recent approvals (Viberzi, Vraylar and Kybella) and 70+ mid- to late-stage programs. We reiterate, however, that until Allergan can regain investor trust via continued execution and a solid outlook for next year, trading will likely remain subdued. As we have said, this is not an investment for the faint of heart -- we would advise anyone with cash needs in the next eight to 12 months, as well as those with a low- to even mid-risk tolerance, to avoid investing in the name, but we do believe shares remain inefficiently priced by the markets for the time being. We reiterate our $270 target.
Arconic (ARNC:NYSE; $21.80; 4,400 shares; 3.71%; Sector: Metals & Mining): Shares traded sharply higher this week, regaining strength following last week's slight cool-down from a recent rally. The stock remains volatile, however, as a solid investor base continues to build and the market takes advantage of the trading opportunity as a result. The company continues to lack a dedicated sell-side analyst community following the split from Alcoa (AA), leaving some investors confused on how to truly evaluate the company's fundamentals. Regardless, we take a look at the long term and expect the company to benefit under the new administration as a leading industrial player across six end markets. Importantly, we remind subscribers that Arconic has roughly an 18% stake in the broken-off Alcoa company, an ownership that can be sold 60 days after the official split (which was Nov. 1). With Alcoa shares surging, a sale of this stake or a portion of it would provide Arconic with a nice influx of cash to pay down short-term debt, which, along with long-term liabilities, has been one of the major concerning factors involving the investment. We also note that Elliott Management raised their stake in Arconic this week to 11% from 10%. While this doesn't lead to anything definitive, their influence is certainly worth monitoring and is widely recognized. We are raising our price target to $24 to reflect improving sentiment toward the name (helping to capture a portion of the peak multiples we had estimated) and the additional value of the Alcoa stake given the latter's strong rally. We also continue to monitor our upside case, which values shares at $30 on peak multiples. We believe shares could command these under the improving macro and rotation of funds currently fueling the market rally.
Facebook (FB:Nasdaq; $119.68; 1,000 shares; 4.62%; Sector: Technology): Shares rebounded this week after the stock was targeted as a source of funds to fuel the market rotation into cyclicals. The company recently announced a buyback plan set to begin in the first quarter of next year (read our analysis here). Should the stock remain subdued through that time period, we believe the company would be executing at accretive levels given Facebook's long-term growth prospects. The business remains healthy and we expect continued innovation in the core platform to drive momentum in ad sales in an increasingly shifting marketing landscape, with more and more dollars being allocated toward Internet and social media. In addition, the company has many levers to pull through its ancillary platforms, such as WhatsApp, Instagram, Messenger and Oculus. The ecosystem's installed base appears to grow with every passing day and Facebook's focus on user experience should continue to support that trend. We reiterate our $160 target.
General Electric (GE:NYSE; $31.78; 2,350; 2.88%; Sector: Industrials): The stock underperformed the market this week. The company hosted an investor day along with Baker Hughes (BHI), representing the new combined company with GE's oil and gas division. You can read our analysis of the initial announcement here. While this meeting didn't provide any additional financial details, GE spent a large portion outlining the strategic rationale for combining its oil division with BHI. As we described in our initial note, the Baker Hughes merger provides GE Oil & Gas with far greater opportunities for accelerated growth of GE Digital's energy data analytics, expanding Predix, which is one of the key drivers for our long-term thesis. The company noted that the merger is designed to transform GE's O&G away from dependence on capital spending and toward the highly profitable aftermarket long-term services and data analytics. As the industry becomes more technologically integrated, the combined company is poised to be one of the leading services players. The combination of BHI's high-quality OFS product with GE's digital capabilities promises to be a major driver for a step-change in efficiency in an industry that has lagged others. We reiterate our $35 target and note that we see improving sentiment for GE as investors begin to appreciate the emergence of enhanced fundamental growth potential following a period of restructuring and refocusing its initiatives. Should oil remain stable (we will see after this weekend's OPEC/non-OPEC meeting), the deal with BHI could look even better than it does currently.
Alphabet (GOOGL:Nasdaq; $809.45; 150 shares; 4.69%; Sector: Technology): Shares nicely outperformed the market this week on little company-specific news. The stock benefited from a slight rotation back into tech now that many of the cyclicals have rallied high enough to cause investors to look for other pockets of opportunity. We want to reiterate that Google's businesses, both core and long-term initiatives, remain strong and that the recent decline was more of a reflection of shifting funds. As a reminder, although we were restricted and have built a near-full position, we viewed the recent selloff as an opportunity for members who were/are underexposed to nibble at shares. Separately, analysts at Bank of America released some positive metrics on GOOGL following a nationwide Internet coverage survey. The report indicated that "96% have used Google over the past year, with 44% (up from 33% in 4Q 2015) of users reporting an increase in their usage, and Google was the most sticky with only 4% decreasing usage." Google also improved in the channel funnel, which has been an overlooked area as the company has made some nice updates to maps and Google Flights. The survey showed that "41% use Google first when searching for hotels, up from 37% in 2Q 2016." We reiterate our $1,000 price target on GOOGL.
Hewlett Packard Enterprise (HPE:NYSE; $24.51; 1,000 shares; 0.95%; Sector: Tech hardware): Shares pushed higher this week, moving to new 52-week highs on little news. We are itching to add to this position and do believe shares are attractive, but will likely wait for a pullback as we do not want to chase the 8% rally in just the last couple of weeks. We are maintaining our One rating given our long-term bullishness and ample optionality that this management team has created for the company. We recently raised our price target to $27 -- you can read the note here. This name remains at the top of our list to buy should we be given slightly more favorable levels.
Kraft Heinz (KHC:Nasdaq: $83.78; 800 shares; 2.59%; Sector: Consumer Staples): Shares traded roughly in line with the market this week, vacillating between gains and losses as investors looked for opportunities to trade in this down (but not out, in our opinion) name. As we have said in recent weeks, we believe the selloff in staples is nearing overdone levels as interest rates appear to peak. In this type of environment, we want to turn to more traditional growth and areas that have been forgotten by investors throughout the recent rally, which has been predicated on a removal of some uncertainty (via the election) and the expectation for widespread economic growth under the new administration. Kraft Heinz falls into a sweet spot, in our opinion, not only as a result of the opportunity following the recent selloff (KHC fell from $90, where we initially exited the position), but also because of its event- driven story (cost cutting and synergy capture) combined with potential for dividend boosts via earnings growth. We like the company's direction for the long term and believe investors will allow management time to innovate on the top line as the company continues to deliver on their cost-cutting initiatives. We reiterate our $90 target.
Magellan Midstream Partners (MMP:NYSE; $71.32; 300 shares; 0.83%; Sector: Energy): We initiated a position in MMP this week, bringing a low-risk name that pays a steady dividend and is set to benefit from pro-pipeline policies into the portfolio. Magellan is a diversified, U.S.-based master limited partnership (MLP) possessing a refined-products as well as marine-storage business. MMP's pipeline assets are spread across the Gulf Coast and central U.S. The partnership's refined- products pipeline system is the longest in the country and has access to a near- majority of the nation's refining capacity, serving to maintain strong demand for its services. MMP has a strong dividend yield of about 5% supported by strong underlying distributable cash flow. We also believe MMP shares have seen relatively subdued trading (compared with the E&P stocks following the oil price surge) due to increasing interest rates, but we see that movement nearing peak levels. Regardless, the safe 5% yield offers steady income for investors. Even better, MMP remains on track to grow the distribution per unit (DPU) 10% in 2016 and 8% in 2017. While MMP's approximate 5% yield may be lower than some of its peers' distribution, we view that as a validation of MMP's strong core business and ability to fully cover its commitments. As such, we see MMP as a safer investment in a space crowded with high- risk investments. MMP also operates with a tollbooth model (fixed contracts with minimum volume commitments, meaning less sensitivity to pipeline volume fluctuations that can often occur with volatility in oil prices), which offers visible near-term growth. MMP receives approximately 85% of its operating margin from fee-based operations, with this percentage expected to grow thanks to the growth projects under development. Lastly, we expect the partnership to benefit from price increases tied to higher inflation and rates, providing upside given post-election inflation. We initiated the position with an $80 price target, which blends a dividend distribution model valuation methodology (which evaluates expected distributions over the near term and out years) and about 18x P/DCF multiple on next year's expected distributable cash flow.
Newell Brands (NWL:NYSE; $45.53; 1,700 shares; 2.99%; Sector: Consumer Discretionary): Shares traded roughly flat this week as the stock missed out on the broader market rally. Investors continue to leave NWL behind, viewing the company's long-term plans as a "show me" story. Given that expected new policies from the incoming administration can directly impact the growth of several industrials, banks, materials names, energy companies, etc., NWL's longer-term nature of its investment thesis has left investors waiting for the inflection point as the company continues to work on rationalizing its portfolio and integrating Jarden. We continue to view this as short-sighted and reiterate our conviction in the management team and its plans moving forward. That being said, we recognize that the stock could potentially show another period of weakness given the lack of near-term catalysts. CEO Mike Polk presented at the CAGNY conference this week and his commentary was encouraging regarding the synergy upside from the Jarden integration as well as a soft guide for fiscal 2018 that should hit the high end of core sales growth expectations, providing upside to current Street estimates. In the near term, however, transitory factors continue to limit top-line acceleration, so we would not be surprised to see the fourth quarter remain subdued even following a soft third quarter. We expect brands to reaccelerate once the transition passes these roadblocks, offering a more optimistic view beyond the fourth quarter. We reiterate our $60 price target but note that it will take some time to reach these levels as the company works through its rationalization process, which ultimately must near completion for multiples to expand. Depending on how expectations are priced in heading into 4Q, there could be potential to see more downside, in which case we have left room to add to the position.
NXP Semiconductors (NXPI:Nasdaq; $98.33; 650 shares; 2.47%; Sector: Information Technology): Shares were roughly flat this week on little news. We are not surprised to see the stock remain subdued throughout this market rotation as investors target recent winners as sources of funds. In NXPI's case, the stock has a lack of near-term catalysts given that the company has agreed to be acquired for $110 per share by Qualcomm (QCOM). Read our recent analysis of the deal here. We also encourage members to read our commentary in last week's roundup regarding QCOM's tender offer for NXPI shares. We reiterate our $110 target.
PepsiCo (PEP:NYSE; $103.57; 1,000 shares; 4.00%; Sector: Consumer Staples): Shares underperformed the market this week on little news. As we have harped on with Kraft Heinz, we believe PEP has been unfairly dragged lower as the market rotates out of staples (especially those previously viewed as yield-proxies) and toward the cyclicals given expectations of changing policies and increased spending under the new administration. Although we have built close to what we view as a full position in PEP, we do view these levels as attractive for those members who do not yet have a position. We likely would not add back to the position unless shares dropped closer to $100, although we continue to monitor daily. We like PEP for the true organic growth the company has and should continue to deliver in a space starved for innovation. In addition, the company's diversified portfolio of drinks and snacks helps protect the investment from concerns regarding any one specific category. On that note, Forbes reported this week that PEP will debut a premium-priced bottled water called Lifewtr in February in an attempt to capitalize on the strengthening trend toward healthy drink options. We appreciate the company's propensity for innovation and ability to adapt to the changing consumer marketplace. We reiterate our $115 long-term target.
T.J. Maxx (TJX:NYSE; $78.03; 1,550 shares; 4.67%; Sector: Consumer Discretionary): Shares traded roughly flat this week on little news. From a high level, we expect TJX to continue to benefit from its differentiated value proposition in a fragmented retail space, especially with improving consumer optimism and the potential for increased disposable income. The company reported earnings a couple of weeks back, helping to confirm our conviction long term. Importantly, the company delivered 5% total same-store-sales (comp) growth across its various brands, driven largely by strong traffic trends, handily beating its guidance of a 2% to 3% gain and consensus of slightly higher than a 3% increase. The strength was impressive given the tough 5% comp from the prior year. Even better, the strong traffic trends contributed to a 5% decline in inventory levels (down 2% in constant currency), demonstrating that management is continuing to offer desirable products for consumers and remaining committed to leaving room to capitalize on buying opportunities in the market. We believe CEO Ernie Herman's remarks summed up the strength perfectly: "Again this quarter, our comp-store sales growth was primarily driven by customer traffic. We are convinced that we are gaining consumer market share across all of our divisions!" As we mentioned above, the traffic trends are a testament to management's focus on providing the customer with high-quality value and relentlessness in never being content with current offerings. Herman noted that the company "remain[s] laser- focused on achieving [their] goals for 2016 and are passionate about surpassing them." We reiterate our $85 target, although likely will not be buying at these levels for the portfolio, specifically, given the large weighting of the position.
Citigroup (C:NYSE; $60.04; 2,250 shares; 5.22%; Sector: Financials): Shares outperformed the market this week despite a slight pullback on Friday. The bank names remain on fire and Citi is set to benefit from an improving macro, rising rates and potential for multiple expansion given expectations for deregulation. Citi presented this week at the Goldman Sachs Financial Services conference (along with Wells Fargo) and noted that its markets businesses are trending better than expected and ahead of competitors. C expects markets revenues to be up 20% year over year, driven by continued strength in rates and currencies and a continued recovery in spread products. Importantly, management continues to view the acquisition of the Costco credit card portfolio as a "major win" for its franchise with consumer uptake, spend and lend all exceeding expectations. In addition, the Mexico business does not appear to be a concern despite what some investors have speculated in the past. We remain positive on the bank and the group in general, but we are also wary of the quick run, explaining why we are leaving shares with a Two rating for now. We reiterate our $60 target for the time being, although we see upside toward the company's tangible book value, which was about $65 as of the last quarterly report, and we are re-evaluating our estimates and multiples expectations to determine the likelihood of reaching those levels. We reiterate our $60 target.
Comcast (CMCSA:Nasdaq; $69.45; 1,000 shares; 2.68%; Sector: Consumer Discretionary): Shares were roughly flat this week as a lack of news for the company led investors to search elsewhere for catalysts, especially given the rally higher in CMCSA last week. We encourage members to review our analysis from last week on Comcast, its current initiatives and the evolving competitive landscape. We believe CMCSA has positioned itself well to deal with competition given its diversified portfolio and expect shares to slowly command higher multiples under the shifting macro and potential for deregulation. As such, we are increasing our price target to $73 from $70, reflecting an upward re-rating from our initial sum-of-the-parts blended 8x multiple on EBITDA. We initially assigned a 7.5x EV/EBITDA multiple on the cable business, but we see this valuation expanding, toward and/or above 8x, with deregulation and as the business continues to prove the value proposition of its technologically integrated X1 solution. In addition, we believe the diversified portfolio of NBCUniversal, which includes several worldwide theme parks, should perform well under the improving macro that is expected to put more disposable income (via tax cuts) into consumers' pockets.
Costco Wholesale (COST:Nasdaq; $159.70; 400 shares; 2.47%; Sector: Consumer Staples): Shares finally showed some momentum this week following the company's earnings report, which, although missing on the headline figures, showed promising underlying trends. Management noted on the call that more than 85% of the accounts transferred over from American Express (AXP) to Citigroup (C) have been activated and it now has 1 million members that have been approved for the new credit card. Given the card's compelling member rewards profile (explained in the link above), in addition to Visa's (V) broader consumer reach, we expect member spend benefits to continue to drive upside as the program builds on the momentum in the months ahead. Revenue share opportunities are also bountiful as members begin to utilize the card more frequently outside of Costco stores. On deflation, while the pressures have yet to bottom and the two-year trend is still troublesome, management indicated that it sees these headwinds abating over the next three to six months. Deflation has been a major hit to the company's results (and the performance of other food retailers), so any signal of a turnaround is going to bring in buyers for the stock. Management noted, "given that the last few months have been a little more deflationary, the view is that it's another few months of that. But [we] all believe it's going to come back the other way." As we mentioned last week, management indicated accelerating trends following the election, providing hope for more momentum heading into the end of the year. Importantly, underlying comp trends have the potential to show increased strength in coming months with core compares poised to ease (average of about 3% over the next 12 months vs. around 6% over the last 12 months) and the credit card transition smoothing out. In addition, the company expects the large tobacco headwinds to anniversary this coming spring, boosting top-line momentum. This all adds to the bullishness building following this week's conference call. We are also encouraged by management's new focus on building convenience capabilities and its e- commerce business. With the "denial stage" now in the rear-view mirror, the company is sure to benefit both from quick fixes (e.g., search capabilities) and long-term efforts (e.g., deeper distribution capabilities, greater assortment, etc.). These changes should help battle pressures from Amazon (AMZN) and other retailers that are ahead of Costco in terms of an e-commerce experience. With deflationary pressures expected to abate as we move through 2017, the major headwind will be removed, allowing the business to benefit from the many underlying initiatives promising to boost traffic and sales. Add in the potential for a significant tax cut (Costco pays a roughly 34%-35% tax rate) and a membership fee increase in the U.S. (management even indicated a higher likelihood for this given recent softer comps), and we see many reasons for our cautious optimism to become less cautious. We reiterate our $175 long-term target and believe the company has many levers to pull in order to move shares toward this level.
Cisco Systems (CSCO:Nasdaq; $30.06; 3,300 shares; 3.83%; Sector: Technology): Shares traded higher this week but failed to participate in the more expansive rally in its sector as investors continue to evaluate the company's recent earnings report and forward outlook (read our reaction here). The fact is that Cisco's large, diversified portfolio has become somewhat of a burden given that it can impact the speed to which the efforts to transform the business model can impact the company. As such, we have tempered our optimism as the company now has to show consistent, quarter-to-quarter delivery on its targets in order to command an upward re-rating. That being said, this tempered optimism is partly offset by the potential for the company to repatriate some or all of its $60 billion cash balance offshore. No one knows for sure if new policies will in fact be enacted to allow this type of move to occur, but the simple potential is enough to get investors speculating. This large sum of cash could be used for an almost endless list of opportunities, including more acquisitions to boost security and services (recurring revenue) or dividend/buyback plans. We reiterate our Two rating and $33 price target.
Dow Chemical (DOW:NYSE; $57.71; 1,475 shares; 3.29%; Sector: Chemicals): Shares outperformed the market this week, benefiting from the continued market rotation. Investors continue to await a decision from a regulatory perspective on the impending merger with DuPont (DD). On that note, DuPont CEO Ed Breen said in a Reuters interview this week that he does not believe President-elect Donald Trump will have any impact on the planned merger. He went so far as to say, "We're very far down the road," indicating that the approval process could be nearing a close. Importantly, Breen also noted that recent populist movements are unlikely to slow Europe's economic growth, a bullish sign for Dow's and DuPont's business. While we are certainly careful to take Breen at his word on the merger approval talk given that he clearly has a vested interest in the outcome, we do view it as an incrementally positive sign. However, we recognize the uncertainty that remains given the new administration and shifting global policies. We reiterate our $60 price target.
Panera Bread (PNRA:Nasdaq; $213.58; 300 shares; 2.48%; Sector: Consumer Discretionary): Shares underperformed the market on little company-specific news, but the stock pulled back from its recent rally from the high $180s. While we remain confident in the business long term for management's focus on technology initiatives that are revamping stores and boosting same-store sales. The company's other innovative sales plans (e.g., delivery and catering) also help diversify the business model, but we recognize the recent run and do not want to be too greedy in adding to the position at these levels. That being said, this week's announcement of Andy Puzder as Trump's nominee for Labor chief could help abate one of the major investing headwinds across the restaurant space -- rising wages. Regardless of political views, we invest based on the facts we are given, and Puzder is known to be a proponent for cutting back industry regulations and is against minimum-wage increases. While those policies may or may not be ideal for the labor force, depending on your views, a scale-back of wage-increase expectations would help the bottom line of many restaurants. We would await a pullback before adding to our PNRA position and we are more inclined to trim on strength when not restricted. We reiterate our $235 target.
Schlumberger (SLB:NYSE; $84.78; 1,000 shares; 3.28%; Sector: Energy): Shares underperformed the market as the company provided an update to its fourth-quarter outlook. The stock cooled off after last week's strong rally on the backs of the surge in oil prices following OPEC's production-cut agreement. We downgraded shares to Two last week after the rally in shares and maintained our $85 price target as we wanted to wait for the market to digest the OPEC deal and its implications. We maintain this view, for now, heading into this weekend's OPEC/non-OPEC meeting, which promises to be a driver for crude prices next week. Specifically for SLB, the company noted that its fourth-quarter earnings would be in-line with the third quarter, which would be slightly below current Street consensus expectations. This shouldn't be a surprise given that management has been clear in its advice that the market wouldn't turn until the middle of next year. We still expect SLB to continue to outperform the broader service group in the challenging oil environment given its superior market position, leading technology portfolio and management's financial execution, but recognize that the broader energy macro remains the key short-term driver for now. We reiterate our $85 target and will be re-evaluating next week as we follow oil trading.
Starbucks (SBUX:Nasdaq; $58.75; 1,750 shares; 3.97%; Sector: Consumer Discretionary): SBUX performed roughly in line with the market this week as the company hosted its biennial analyst event to discuss the five-year outlook and management transitions. Recall that the company announced last week that CEO Howard Schultz would be stepping down from the position, with COO Howard Johnson taking over the job. Schultz will remain with the company as executive chairman and will focus on building out the portfolio of premium brands, especially the roaster concept. Schultz is known for being a visionary and we think the new role suits him well, although he will of course be missed as CEO. You can read our analysis of the management change here. At the analyst day, management reiterated their long-term growth algorithm, which includes 10% revenue growth, 15%-20% EPS growth, and mid- single-digit comp growth. The company appeared to indicate that fiscal 2016 was a year required to lay the groundwork for future growth as a Rewards shift (read our bulletin on the move here), focus on broadening and deepening the pipeline, and the launch of Mobile Order & Pay caused some disruptions in comps growth. However, management is optimistic that more predictable and consistent sales growth is on the horizon. Ultimately, the company is supported by a robust pipeline, ambitious growth targets in China (which will eventually be a larger market than the U.S.), and focused improvements on through-put. We recognize that there are some challenges next 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. We reiterate our $65 long-term price target on SBUX.
Visa (V:NYSE; $79.14; 475 shares; 1.45%; Sector: Information Technology): Shares rebounded this week following the pullback over the last month or so. We recently trimmed more than half of the position as we laid out key risks the company faces as it looks ahead to next year. While we continue to see upside given the secular shift toward credit card transactions and away from cash (and there is still a long runway on that front) and the Visa Europe integration, we believe the risks outlined in the link above currently outweigh the positive thesis. Our inclination is to trim more or exit outright should shares cross the $80 threshold. We will be sure to keep members updated on any further actions. For now, we reiterate our $84 target.
Walgreens Boots Alliance (WBA:Nasdaq; $86.39; 1,150 shares; 3.84%; Sector: Health Care): Shares underperformed the market a week after we downgraded the name to Two. As we have consistently mentioned in recent months, the stock has traded virtually solely on rumors regarding the Rite Aid (RAD) merger. Shares climbed higher last week as reports seemed to indicate the merger was nearing approval, but with a lack of any further news to add to the fire this week, trading in the name was relatively subdued. We continue to like the fundamentals of the company as management pushes for margin expansion and increased traffic through front-end/branded products, but we recognize the ability for the stock to take a hit on any negative news surrounding the merger review process. We reiterate our $90 target and Two rating.
Wells Fargo (WFC:NYSE; $57.14; 1,900 shares; 4.19%; Sector: Financials): Shares continued to chug higher this week as the banks remained at the top of investors' buy list. Earlier in the week, we profiled WFC's presentation at the Goldman Financial Services Conference. At the conference, new CEO and President Tim Sloan reiterated Wells' commitment to remediation steps following the scandal, including: 1) improved oversight (e.g., third-party reviews of sales practices); 2) a revamped incentive compensation structure; and 3) an ongoing review of any deeper cracks and weaknesses within Wells' culture. Importantly, Sloan does not expect any significant incremental costs to accompany these additional controls, and thus, he confirmed the bank's commitment to its efficiency ratio guidance of 55%-59%. That being said, as expected, he did note that total branch interactions and account openings/applications are down in October (given brand damage). As for the business itself, Sloan noted strong loan performance, with growth up 8% year over year, demonstrating the bank's central positioning as a lender to U.S. consumers. Management expects the bank to continue to perform well in this area, especially in mortgages, where it continues to be a leader. All in all, we are encouraged by Wells' commentary but note that we remain cautious regarding the bank's ongoing review of its sales-practices scandal. Although these brand-equity challenges may remain in the near term, the bank is still set to benefit from the expected changes under the new administration and the improving macro. We reiterate our $55 target for now and are leaning toward trimming the name on any measured move higher from here, although we were restricted this week. Given the propensity for risk in the name due to the recent scandals, we want to be careful not to let the position grow too large. That being said, we do expect the bank's fundamentals to improve noticeably in the new and improved macro (although this upcoming quarter is likely to be weak) and see upside toward the $60 level given the potential for shares to regain their premium valuation (the stock continues to trade at or below the valuations of its peers).
Occidental Petroleum (OXY:NYSE; $70.58; 500 shares; 1.36%; Sector: Energy): Shares showed weakness this weak as oil prices settled into a waiting period ahead of this weekend's OPEC/non-OPEC meeting. We remain focused on following Apache's (APA) trading for an opportunity to bring the position out of the bullpen and into the portfolio. Although we thought this week may have been an opportunity, the stock quickly rebounded from a 3% drop earlier in the week. We continue to look for levels in the lower $60s as a striking price. Our inclination also remains to trim and/or sell OXY, but we believe we may get more favorable levels given the strong dividend yield (4.3%), which provides support at lower levels, and the potential for higher oil prices to boost the impact of recent Permian investments. The uncertainty heading into this weekend's OPEC meeting, however, makes it impossible to predict the near- term direction of oil prices. We trimmed OXY around $72 last week and followed the move with a trim on Friday in order to de-risk the portfolio from, in our opinion, an untrustworthy management team -- we believe these moves have afforded us room to hold on for higher prices.