On Wednesday’s members-only webinar/conference call, we unveiled an exclusive new feature to the Action Alerts PLUS portfolio: the creation of four indices that group each of our current 26 positions into one of four distinct investment styles: Value, Growth, Blend and Income. We created each index using a strategic variety of metrics and plan to update it on a bi-weekly basis.

For a graphical illustration of each of the four indices, please select the following link: https://www.thestreet.com/tsc/pdfs/AAP_Indices_03-23- 16.pdf

Value Index

The AAP Value Index includes stocks that we view as undervalued relative to their long-term fundamentals. For the purposes of our index, a "Value" stock must be trading at a meaningful discount to the S&P 500 average, which currently trades at 17x forward price-to-earnings (P/E) and 20x forward price-to-cash flow (P/CF). Value investing assumes that the market does not always operate efficiently and therefore offers select opportunities where a stock’s current price does not align with its future performance. Investors are essentially betting that this inefficiency gives them an opportunity to buy certain stocks at a bargain. It is important to distinguish between value traps and value opportunities: value traps involve situations where a stock is trading at a low multiple for a good reason (i.e., its business is deteriorating, therefore its earnings are expected to decline), whereas value opportunities involve situations where a stock’s low valuation is a result of transitory factors which do not have any impact on the business in the long run.

Apple (AAPL) and Cisco Systems (CSCO) are our top-two “Value” picks. Both are trading at substantial discounts to the S&P 500 on a P/E basis (-30%/-33%) and a P/CF basis (-45%/-50%). We view these discounts as unwarranted.

For Apple, the stock has dropped nearly $30 in nine months as a result of temporary weakness in iPhone sales (mostly related to the December and March quarters). We consider this a temporary distraction, rather than a reflection of any structural crack in the business model. In fact, we believe the market is discounting the company’s expanding ecosystem, with a $30 billion/year services business, new product categories (i.e. Watch), partnerships (HealthKit, HomeKit, CarPlay) and future opportunities (TV and autos), providing Apple with a path towards double-digit annual sales growth and 15-20% annual EPS growth long term.

Turning to Cisco, we believe the company is being valued as a mature, "old-tech" business despite its burgeoning cloud presence, which should lead to outsized earnings growth over the long-term. Its powerful capital allocation program -- marked by a 3.75% dividend yield and massive buyback program -- pay investors as they sit back and witness the market re-rate shares to the upside.

Growth Index

Growth stocks are associated with companies increasing sales and profits at very high rates. While growth stocks typically trade at high multiples, growth investors are paying for the company’s future, not current, earnings stream. As such, growth stocks typically require a long- term investment horizon and can be risky in the near-term given their steep valuations.

Our four favorite growth stocks are Facebook (FB), Starbucks (SBUX:NASDAQ), Alphabet (GOOGL) and Visa (V).

Facebook is the most powerful and iconic social media platform in the world, boasting over 1.5 billion users on its main platform alone. The company has been a leader in the shift to mobile, has a sprawling product ecosystem (Instagram boasts over 400 million monthly active users (MAUs), WhatsApp nearly 1 billion and Messenger over 700 million). Meanwhile, we like its earnings algorithm; its cost of sales is declining while average revenue per user is growing at breakneck speed.

Starbucks, in our view, is a technology company disguised as a retailer. It is an innovator and visionary; its mobile order and pay initiative was first to market and is driving traffic and customer loyalty while accelerating throughput. We view the company’s massive international growth opportunity -- particularly in China -- as yet another lever of long-term growth. We also appreciate the scarcity value of its double-digit sales growth and approximate 20% long-term annual earnings growth trajectory and view its management, spearheaded by CEO Howard Schultz, as among the best in the world.

Alphabet’s dominant search business has grown beyond desktop and broken into mobile and video. The company boasts seven distinct businesses with over 1 billion users each -- Search, Android, Maps, Chrome, YouTube, Google Play and Gmail. It is quietly ramping its cloud business, which we expect to add another layer of growth in the out years. We appreciate the company’s high free cash flow (FCF) generation, strong core margins and recently implemented financial discipline.

Visa benefits from secular growth into payments as consumers broadly shift away from cash. We expect future growth to come from the company’s recently secured deals with Costco (COST), USAA and Fidelity, along with continued advancement into e-commerce (as it is embedded within Apple Pay). The acquisition of Visa Europe -- set to close shortly -- should accelerate growth within that region and prove sustainable in the long term.

Blend Index

The Blend Index represents a combination of Growth and Value. Blend companies have strong long-term earnings growth prospects (typically 10%+) yet trade at relatively reasonable multiples. Investors can profit through both capital appreciation and income (via dividends and/or buybacks).

Our favorite "Blend" positions are Allergan (AGN), Panera (PNRA), Walgreens Boots Alliance (WBA) and Costco (COST).

Allergan is our top pick, as we believe its merger with Pfizer (PFE) provides a powerful long-term growth story, especially as the companies look to separate into distinct verticals post-merger. Allergan dominates the "face" market and has a monopoly with Botox, with recent acquisitions (Kythera and Oculuve) further cementing its dominance. We expect the spread between Allergan’s implied merger value and current share price to narrow as we gain more clarity into the acquisition’s approval and future synergies.

Panera is our other top pick for the year; its technological "2.0" initiative -- already a proven success -- should accelerate as more stores convert to the new system. We expect 2016 to be the inflection point in both sales and earnings, and look for the company to grow earnings at a 15-20% annual clip for at least the next five years. Its high free cash flow generation is being aggressively applied toward share buybacks, which prove further accretive to earnings.

Walgreens Boots Alliance offers a combination of growth and value; its $1.5 billion cost-cutting program should help drive major margin expansion and free cash flow generation, while its impending acquisition of Rite Aid (RAD) -- if approved -- adds an incremental $1 billion-$1.5 billion in savings while increasing the company’s competitive positioning. Prescription volumes are expected to grow within a fixed cost network environment, helping to offset reimbursement pressures, while initiatives aimed at improving performance at domestic locations (particularly at the front-end of stores) should drive traffic while lifting margins. We view the stock as patently undervalued, trading at 18x earnings despite projected nearly 15% long-term earnings growth.

Costco is in a league of its own. Its unique operating model and value proposition (wide scale, bulk offerings at lowest prices) drive best-in-class traffic and sales trends. This value proposition manages not only to draw in members (in order to enter the store, you must be a member) but retain them at an extremely high rate (90%+ renewal). We expect this fee-based recurring revenue model, which should be boosted by an expected fee hike over the coming 12 months, to drive near-15% annual earnings growth over the long term.

Income Index

Our Income Index involves companies that pay attractive dividend yields (about 3%+) supported by steady earnings streams, which allow for a high level of income payouts. These stocks offer investors relatively low-risk exposure to the markets and focus on income, rather than capital appreciation.

Our top "Income" picks are PepsiCo (PEP), Dow Chemical (DOW) and Lockheed Martin (LMT)

PepsiCo is a stable, transparent and diversified company which has significant cost-reduction initiatives ($1 billion in savings in 2016, with $5 billion targeted by 2019) and high operating efficiency (its cash conversion cycle is nearly 20x faster than the industry average). Separately, PEP’s free cash flow conversion has improved from 78% in 2010 to 11% in 2015, vs. industry average of 104%. This cash flow underlies its dividend payments and growth and makes it a safe bet amid an uncertain environment.

Dow Chemical is another income name we like long term. Its underlying trends are as strong as ever, with volumes accelerating (nine consecutive quarters of y/y growth). The company’s pending merger with DuPont (DD) is another major catalyst; once completed, it is expected to deliver over $3 billion in cost savings, with a subsequent split into three separate, segment-focused companies. The seasoned management teams on both sides give us confidence that it will continue to under-promise and over-deliver.

Finally, Lockheed Martin is a best-of-breed company within a defense sector supported by secular tailwinds. Its strong balance sheet and robust free cash flow have led to 13 consecutive years of double-digit annual dividend increases. Management has lowered its expectations for 2016, which sets it up well for a clean earnings year in 2017 and beyond

Regards, Jim Cramer, Portfolio Manager & Jack Mohr, Director of Research - Action Alerts PLUS DISCLOSURE: At the time of publication, Action Alerts PLUS was long AAPL, CSCO, FB, GOOGL, SBUX, V, AGN, PNRA, COST, PEP, DOW and LMT.