Markets traded higher as the busiest week of earnings for the season helped overshadow some weakness in oil prices, sluggish economic data and uncertainty surrounding a potential government shutdown. The Nasdaq surged to all-time highs as its components, such as Alphabet (GOOGL) and Amazon (AMZN) , continued to prove the growth prospects embedded in their respective business models.
As for key items throughout the week, a welcomed result in the first round of the French presidential elections (you can read our note here) as well as a strong start to earnings sent equities surging higher in the first two trading sessions. In the middle of the week, the Trump administration announced initial details for its tax reform overhaul, which was initially met with a muted reaction, but stocks ultimately sold off to close the day on Wednesday as investors digested the potential roads ahead (more below).
Looking to next week, earnings will continue to be the driving force, as the leader of them all -- Apple (AAPL) -- reports earnings on Tuesday.
For this week, Treasury yields traded up and down, ultimately ending roughly even from where they started. The dollar was slightly weaker against the euro as expectations for the union have steadied recently following the first round of the French presidential elections. Gold was mostly lower as investors continued to bet on equities. Lastly, oil started lower for the week and leveled out before the bottom fell out on Thursday (more below). Prices rebounded slightly to close out the week.
First-quarter earnings are in full swing and have been relatively positive versus expectations, with 75.4% of companies reporting a positive EPS surprise. In the portfolio, Arconic, PepsiCo, Dow Chemical, Southwest, Comcast, Alphabet, Starbucks and Western Digital reported earnings this week.
Arconic (ARNC) reported strong first-quarter results after the closing bell, blowing away expectations on the bottom line and just edging past consensus on the top line. Revenues of $3.06 billion rose 4.5% year over year and beat consensus of $3 billion. On the bottom line, EPS of $0.33 came in 9 cents ahead of consensus expectations. The company delivered net cost savings of 1.9% of revenues (adding $61 million to the bottom line), significantly decreasing SG&A expenses (by roughly 18%) and R&D expenses (by roughly 28%) quarter over quarter. SG&A expenses, excluding the separation charges and proxy contest, were 5.6% of sales, well below industry benchmarks (S&P 500 Industrials 12%; S&P 500 A&D 10%). By segment, Engineered Products & Solutions (EP&S) revenues were up 2% on flat EBITDA year over year as strong volume growth was offset by unfavorable mix (commercial transportation down 11%) and price. Within Global Rolled Products (GRP), revenues were 43% higher in auto but were partially offset by continued destocking in the aerospace industry (impacting volumes in one of Arconic's main businesses). In Transportation and Construction Solutions (TCS), revenues were up a total of 5% year over year and EBITDA was up 13%, driven by strong cost savings.
PepsiCo (PEP) reported a top- and bottom-line beat with its first-quarter results. Revenue of $12.05 billion came in slightly above consensus of $11.98 billion and EPS of $0.94 edged out consensus by roughly $0.03.The bottom-line beat was largely driven by a lower-than-expected tax rate, explaining why some investors may view the quarter as being of lesser quality. Organic growth was up 2.1% for the quarter, which is lower than the full-year outlook of a 3% rise, but it was affected largely by the Easter holiday shift.
Dow Chemical (DOW) delivered another solid quarter, beating on the top and bottom lines by delivering growth in virtually all areas and segments and record-high operating EBITDA (+20% year over year). DOW reported revenues of $13.23 billion (up 23.6% year over year), walloping consensus of $12.46 billion, and EPS of $1.04, roughly $0.06 better than consensus. Part of the increase in sales year over year reflected the addition of Dow Corning's silicone business; without that acquisition, revenues still rose an impressive 11% year over year. DOW has now delivered an astounding 18 straight quarters (4.5 years) of year-over-year operating earnings growth and margin expansion (thanks in part to the completion of the two-year cost synergy program of the Dow Corning integration in just 10 months). Even more impressive, volumes have grown for 14 straight quarters in what has been a challenged global economic environment.
Southwest Airlines (LUV) reported a softer-than-expected first quarter, with revenues of $4.88 billion missing consensus of $4.92 billion, and earnings per share of $0.61 failing to meet consensus of $0.63. Total unit revenues (equal to RASM) decreased 2.8% in the quarter, falling in line with the company's guidance for a 2%-3% decline (recall that this was the result of a downward revision midquarter; initial expectations were for flat to down 1%). Overall passenger revenue increased 0.6% in the quarter, but this was largely due to a 4.1% rise in capacity as passenger unit revenues declined 3.3% for the quarter.
Comcast (CMCSA) reported another strong quarter, delivering a top- and bottom-line beat and highlighting the power of its diversified business model. The company reported first-quarter revenues of $20.5 billion (up 9% year over year), which beat consensus of $20.12 billion, and EPS of $0.53, which squashed consensus of $0.44. As for the business segments, cable communications revenue came in roughly in line as strength in subscriber additions was offset by weaker advertising and business revenue, which increased 13.6% year over year but slightly missed consensus. Moving on to NBC Universal, revenues of $7.87 billion came in better than consensus of $7.45 billion. Cable revenues and film revenues both beat consensus expectations while parks revenues came in roughly in line (but up a strong 9% year over year).
Alphabet (GOOGL) reported revenues of $24.75 billion (up 22% year over year or 24% in constant currency), beating consensus expectations by roughly $500 million, and EPS of $7.73, which walloped consensus of $7.40. Google properties' (formerly labeled "websites"; in other words, the core business) revenues grew 21% year over year to $17.4 billion, beating consensus estimates of $17 billion and accelerating year-over-year growth compared to the prior quarter. Google ad revenue rose 19% year over year to $21.4 billion, also accelerating year-over-year growth compared to the prior quarter. Google Other revenue, which includes Pixel sales, Cloud services and Google Play, grew 49% to $3.1 billion, also beating consensus estimates. The Other Bets reporting segment, which covers businesses such as Waymo, Google Fiber, Nest and Verily, had an $855 million operating loss (up from $774 million in the year-ago quarter) on revenue of $244 million (up from $165 million in the year-ago quarter), matching consensus.
Starbucks (SBUX) delivered EPS of $0.45, matching consensus, and revenues of $5.3 billion, missing consensus of $5.4 billion. Digging deeper into the quarter, global comparable store sales increased 3% year over year, lower than consensus of 3.6%. The China Asia Pacific (CAP) region delivered +3% same-store sales growth as well, slightly missing consensus. That being said, China comp store sales increased 7% in the quarter, driven by a 6% increase in transactions. U.S. comps were only +3% year over year, missing that coveted +5% mark eyed by investors.
Western Digital (WDC) delivered a top- and bottom-line beat with its fiscal-third-quarter results. Revenues of $4.65 billion (up 64.7% year over year, reflecting the SanDisk acquisition) beat consensus of $4.57 billion and EPS of $2.39 smashed consensus of $2.14. The strong results were driven by strength in the NAND business despite slight HDD weakness. The ongoing NAND supply shortage helped drive ex-HDD revenues of $2.2 billion, beating consensus expectations for only $1.9 billion. HDD revenues of $2.5 billion came in slightly under expectations, but this was largely expected following Seagate's (STX) weaker results and continued weakness in the enterprise business. Importantly, units were the culprit of the miss (mostly in enterprise and notebooks) while average selling prices were in line, an indication that WDC could maintain pricing power.
On the economic front, earnings largely took the excitement out of the macro data, but we still received some important data points to help inform our view of the domestic economy moving forward.
On Tuesday, the Commerce Department reported that new home sales rose to an annually adjusted rate of 621,000, blowing past estimates of 583,000 and reaching the highest levels since July 2016 (second-highest since 2008). The 5.8% month-over-month increase was a welcomed surprise compared to expectations for a slight decline, although we note that February's figures were revised slightly downward. New home sales are now up 15.6% since March 2016 and have increased for the third straight month. Importantly, the strong March number builds off last week's existing home sales report, which showed a 4.4% jump to a 10-year high.
Digging a bit deeper, new home sales rose 25.8% in the Northeast on a month-over-month basis, followed by a 16.7% rise in the West and a 1.6% rise in the South. The Midwest was the only region to show a decline month over month of 4.5%. The median sales price of new homes sold in March was $315,000 (up 1.2% year over year) and the average price was $388,200. At the end of March, for-sale inventory sat at a seasonally adjusted 268,000, representing about a 5.2-month supply given current sales rates. Recall that tight supply (six months is viewed as balanced) has been a lingering issue in the housing market as prices have continued to rise, although new home sales have benefited somewhat compared to existing home sales, where the supply is relatively tighter.
On Wednesday, the White House announced for the first time an outline for its tax reform overhaul. Ultimately, many questions remain unanswered, but the administration appears hell-bent on getting tax reform passed by the end of the year. Before that can happen, the details will need to be hashed out further. Tax reform, from an investment perspective, would create a wealth of opportunities for individual investors (both from a corporate perspective as companies make more money and from the individual perspective as investors themselves will have more money). But we cannot count on anything being passed given how difficult we know it can be for policies of this nature to gain approval. You can read our detailed note on the announcement here.
On Thursday, the Department of Labor reported that initial jobless claims for the week ending April 22 were 257,000, a 14,000-claim increase from the prior week's revised numbers and 12,000 claims higher than the market's expectations. Still, the overall trend remains strong and we note that data tend to be volatile around this time period due to the Easter holiday. As a reminder, the government updated jobless claims in the prior report, going back five years, as it does annually, to consider more accurate seasonal adjustments. The updates show that layoffs have remained extremely low but were a bit higher than previously reported, mostly when considering data from 2016. Claims have remained below 300,000 -- the threshold typically used to categorize a healthy jobs market -- for an astounding 85 straight weeks (compared with 112 weeks under the older seasonal-adjustment process, according to the updated data), the longest streak since 1970. The four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) fell by 500 to 242,250 last week. The consistent strength throughout the month or so is perhaps a signal that March's relatively weak jobs report was an aberration as opposed to the beginning of a new trend. We will get the final verdict next week along with the April jobs report on May 5.
Also on Thursday, the National Association of Retailers reported that pending home sales in March fell 0.8% to 111.4, dropping more than the estimated 0.5% decline. Recall that the pending home sales number represents contracts signed for existing homes for sale that will close in one to two months. The reading comes off the heels of a 5.5% increase in February. Despite the decline month over month, March was the third-strongest month for pending home sales in the past year. On a year-over-year basis, pending home sales are up 0.8%.
Partly impacting the reading for March is the lack of supply, which, as we've pointed out, continues to be an issue in the overall housing market and is causing upward pressure on the price of homes (42% of homes sold in March ended up coming off the market at prices above their original listing price). Digging a bit deeper, the South was the only region to show an increase in pending home sales for the month, up 1.2%. Leading the decline were the Northeast and Western regions, both of which fell 2.9%; the Midwest also showed a decline of 1.2%. On a year-over-year basis, the South is up 3.9% and the Northeast is up 1.8%; the Midwest is down 2.4% and the West is down 2.7%.
On Friday, the Commerce Department reported that the first reading on first-quarter GDP was 0.7%, missing consensus estimates of between 1% and 1.2%. This comes on the heels of 2.1% in the fourth quarter of 2016. Recall that GDP is our gauge for economic growth. We note that the first quarter is seasonally the weakest quarter for growth, but the sluggish performance this year marks the slowest quarterly growth in three years.
Weighing down the index was consumer spending (the largest component of GDP), which rose a disappointing 0.3% in the first quarter, after rising 3.5% in last year's fourth quarter. This marks the lowest levels since 2009 thanks to weak auto sales and a lower spend on energy due to less heating requirements due to the unseasonably warm weather in recent months. Consumer spending is a key metric given that it represents roughly two-thirds of our economic output. Trade numbers showed that exports rose 5.8%, while imports rose 4.1% -- exports add to GDP while imports detract from it.
As we've mentioned, the Commerce Department releases quarterly GDP numbers three times as new data are evaluated, allowing for a more accurate reading each time. The next reading will be released on May 26.
On the commodity front, oil prices trended lower for the week despite a relief rally in the middle of the week ahead of and immediately after the closely watched stockpile data. Crude had declined for six straight sessions before the slight uptick.
The Energy Information Administration (EIA) reported on Wednesday that U.S. commercial crude inventories fell by 3.6 million barrels to a total of 528.7 million barrels in the week through April 21, a steeper drop than the expected draw of roughly 1.8 million barrels (bullish for crude). That being said, product inventory data were bearish as gasoline surged 3.4 million barrels, outpacing the 500,000-barrel expected increase. Distillates also grew by 2.7 million barrels, defying the 1-million-barrel projected draw. Other products rose 4.1 million barrels. This data were not the focus initially following the report, but the bears ultimately highlighted these weaker spots on Thursday when crude broke down on the confluence of several factors, including a strong dollar and a restart of production in Libya. For more on oil this week, we encourage members to read our detailed analysis here.
Within the portfolio this week, we initiated a position in Nucor (NUE) following our members-only call. We also added to our Schlumberger (SLB) position while trimming our SBUX position ahead of earnings and our Walgreens (WBA) and TJ Maxx (TJX) positions in order to build some extra cash to fund another NUE purchase. We also downgraded Western Digital to Two after the strong earnings report and the resulting rally in shares on Friday.
Moving on to the broader market, as we mentioned, first-quarter earnings are in full swing and have been largely positive compared to estimates. Total first-quarter earnings growth is up roughly 11.7% year over year; of the 200 non-financials that reported, earnings growth is 9.4% versus expectations for an overall 11% increase throughout the season. Revenues are up 5.5% versus expectations throughout the season for a 7.03% increase; 75.4% of companies beat EPS expectations, 18.4% missed the mark and 6.2% were in line with consensus. On a year-over-year comparison basis, 75% beat the prior year's EPS results, 22.1% came up short and 2.9% were virtually in line. Materials, consumer discretionary and health care have had the strongest performance to kick off the year versus estimates, whereas real estate and telecom have posted the worst results in the S&P 500.
Next week, roughly 180 companies in the S&P 500 will report earnings. Within the portfolio, Apple, Magellan Midstream (MMP) , Facebook (FB) , NXP Semi (NXP) and Apache (APA) will report. Other key earnings reports for the market include: Cardinal Health (CAH), Tenneco (TEN), CNA Financial (CNA), CMS Energy (CMS), Loews Corp. (L), Tenet Health Care (THC), Community Health (CYH), Murphy USA (MUSA), Advanced Micro (AMD), Rent-A-Center (RCII), Vornado Rlty Trust (VNO), BP (BP), CVS Health (CVS), Aetna (AET), Archer-Daniels (ADM), Pfizer (PFE), Charter Comm (CHTR), Merck (MRK), Conoco Phillips (COP), NRG Energy (NRG), MasterCard (MA), Martin Marietta (MLM), Wolverine (WWW), Allstate (ALL), Gilead Sciences (GILD), Mondelez Int'l (MDLZ), Frontier Communications (FTR), First Solar (FSLR), Akamai Tech (AKAM), GoDaddy (GDDY), Weight Watchers (WTW), Match Group (MTCH), FireEye (FEYE), WebMD (WBMD), Etsy (ETSY), American States Water (AWR), Twilio (TWLO), Planet Fitness (PLNT), Humana (HUM), Bunge (BG), Sprint (S), Time Warner (TWX), CDW (CDW), Reynolds American (RAI), Spirit AeroSystems (SPR), Clorox (CLX), Yum! Brands (YUM), New York Times (NYT), Chesapeake Utilities (CPK), Manulife Financial (MFC), MetLife (MET), Prudential (PRU), American Int'l (AIG), Kraft Heinz (KHC), CenturyLink (CTL), Tesla (TSLA), American Water Works (AWK), Transocean (RIG), InterActiveCorp (IAC), Albemarle (ALB), Qorvo (QRVO), Cheesecake Factory (CAKE), Yamana Gold (AUY), Fitbit (FIT), AmerisourceBergen (ABC), Arrow Elec (ARW), Fluor (FLR), PBF Energy (PBF), Dominion (D), Kellogg (K), Viacom (VIAB), Occidental Petroleum (OXY), Leidos (LDOS), Avon Products (AVP), AMC Networks (AMC), Madison Square Garden (MSG), Dunkin Brands (DNKN), World Wrestling (WWE), Molina Healthcare (MOH), CBS (CBS), Con Edison (EC), Activision Blizzard (ATVI), Herbalife (HLF), Camping World (CWH), Arista Networks (ANAT), Apple Hospitality REIT (APLE), Zillow (ZG), LogMeIn (LOGM), Zynga (ZNGA), El Pollo Loco (LOCO), Shake Shack (SHAK), MINDBODY (MB), Universal Display (OLED), CIGNA (CI), Cognizant Tech (CTSH), TransCanada (TRP), CenterPoint (CNP), Univar (UNVR), American Axle (AXL), Moody's (MCO), Scripps (SSP) and Gibraltar Industries (ROCK).
Economic Data (*all times ET)
ISM Manufacturing (10:00): 56.5 expected
Markit US Manufacturing PMI (9:45)
Personal Income (8:30): 0.3% expected
Personal Spending (8:30) 0.3% expected
PCE Core MoM (8:30): -0.1% expected
Construction Spending MoM (10:00): 0.4% expected
ISM Prices Paid (10:00)
MBA Mortgage Applications (7:00)
ADP Employment Change (8:15): 183k expected
Markit US Services PMI (9:45)
Markit US Composite PMI (9:45)
ISM Non-Manufacturing Composite (10:00): 56k expected
FOMC Rate Decision (Upper Bound) (14:00): 1.00% expected
Initial Jobless Claims (8:30)
Continuing Claims (8:30)
Trade Balance (8:30): -$45.2B expected
Bloomberg Consumer Comfort Index (9:45)
Durable Goods Orders (10:00)
Factory Orders (10:00): 0.6% expected
Durables Ex Transportation (10:00)
Cap Goods Orders Nondef Ex Air (10:00)
Cap Goods Ship Nondef Ex Air (10:00)
Change in Nonfarm Payrolls (8:30): 193k expected
Unemployment Rate (8:30): 4.6% expected
Change in Manufact. Payrolls (8:30): 14k expected
China Caixin PMI Mfg (21:45)
Japan Vehicle Sales YoY (1:00)
Japan Monetary Base YoY (19:50)
Japan Nikkei Japan PMI Services (20:30)
Japan Nikkei Japan PMI Composite (20:30)
China Caixin PMI Composite (21:45)
China Caixin PMI Services (21:45)
Eurozone Agg Markit Eurozone Manufacturing PMI (4:00)
Eurozone Agg Unemployment Rate (5:00)
Germany Markit/BME Germany Manufacturing PMI (3:55)
UK Markit UK PMI Manufacturing SA (4:30): 54.0 expected
Eurozone Agg GDP SA QoQ
Eurozone Agg GDP SA YoY
Germany Unemployment Change (3:55)
Germany Unemployment Claims Rate SA (3:55)
UK Markit/CIPS UK Construction PMI (4:30)
Eurozone Agg Markit Eurozone Services PMI (4:00)
Eurozone Agg Markit Eurozone Composite PMI (4:00)
Germany Markit Germany Services PMI (3:55)
Germany Markit/BME Germany Composite PMI (3:55)
UK Markit /CIPS UK Services PMI (4:30)
UK Markit /CIPS UK Composite PMI (4:30)
UK Mortgage Approvals (4:30): 67.5k expected
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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.
Allergan (AGN) ; $243.86; 550 shares; 4.87%; Sector: Health care): Shares bounced back this week after a stagnant period of trading in recent weeks. The company announced the completion of its Zeltiq acquisition on Friday -- you can read our initial reaction to that deal here. AGN has been acquiring several smaller companies over the past year or so as it continues to build its pipeline through its open science model. CEO Brent Saunders and his team have several shots on goal to add to their "six stars," which are the late-stage drugs AGN owns with $13 billion in peak sales potential. As we mentioned on our monthly members call this week, we have not liked the way AGN has traded recently, but we balance that with our belief in this company's fundamentals, especially now that expectations have been re-baselined. We will not be adding at these levels as we have a full position, but we reiterate our One rating and $270 price target.
Apache (APA) ; $48.64; 2,100 shares; 3.71%; Sector: Energy): Shares underperformed the broader market this week largely due to the fallout of oil prices toward the end of the week. In our deeper note on oil, which we also linked above, we discussed our approach to APA in the current volatile oil environment. Overall, we view current levels as attractive for those who are underweight or not exposed, but we recognize that the sentiment in the broader energy sector must improve. The company is set to report next week, and with expectations virtually taken out of the stock completely, management has an opportunity to deliver an upside surprise. That being said, we typically do not like to play a quarter, but we will be following trading in the coming days. We will be interested to hear more on Alpine High and how management believes the company is progressing with production growth in the Permian. As we mentioned on our members-only call this week, the value of Alpine High is not baked into the stock at these levels, and APA could be a takeover target if the management team does not work to move the stock higher in the short to medium term (recall the company received a bid from Anadarko in 2015 when the stock was around these levels). We reiterate our long-term $70 target and will review our expectations following the quarter.
Cimarex (XEC) ; $116.68; 825 shares; 3.49%; Sector: Energy): Shares underperformed as oil suffered through losses for most of the week. As we mentioned in our commentary this week and last, XEC is one of those efficient producers that can make money even in a lower-for-longer oil environment. The oddity of oil trading has taken all of these stocks down along with it, but we are willing to wait for the long term for XEC to show its strength -- any benefit from an extension of the OPEC production cuts would help oil prices in the immediate term and would be a boost for oil names in the energy sector. We reiterate our $150 target.
Citigroup (C) ; $59.12; 1,750 shares; 3.75%; Sector: Financials): Shares traded higher this week thanks to a surge on Monday following the favorable French presidential election result. Recall that we upgraded C following the company's earnings report (see the upgrade recap here) as we continue to believe C will close the valuation gap to both its peers and its own tangible book value. We reiterate our $66 target.
Comcast (CMCSA) ; $39.19; 2,000 shares; 2.84%; Sector: Consumer Discretionary): Shares enjoyed a nice rally this week, above and beyond that of the broader markets, as the industry gained a boost from the FCC's announcement of its intent to roll back net neutrality. More importantly, the stock rallied higher on Thursday following the company's strong earnings report, where Comcast saw broad-based growth across its various divisions, with notable strength in NBC Universal and broadband adds (within the Cable Communications division). You can read our deeper analysis here. We raised the price target on CMCSA to $45 following the quarter.
Danaher (DHR) ; $83.33; 1,100 shares; 3.33%; Sector: Life Sciences): Shares traded higher this week thanks to the broad-based gains for the major indices. That being said, strong results from peer Thermo Fisher (TMO) likely helped the stock as well, especially following DHR's decline last week after its own earnings report. We purchased additional shares on the pullback last week and continue to view shares as attractive. As we mentioned on our members-only call this week, "Expectations are low, and we like to take advantage of that. Not to mention, the company has taken costs out of the dental business and is investing in areas of growth for the future. We deliberately kept the position small hoping to get a price break like we had last week. Now is not the time to run away given Danaher's amazing long-term record, now is the time to embrace it. [We] actually want the stock to go down more so we can buy more." We like this industrial because it has less cyclicality and more life sciences, and dental is one of those businesses that will not be going away, as management noted acceleration coming in the back half of the year. We reiterate our $94 target.
Facebook (FB) ; $150.25; 1,000 shares; 5.45%; Sector: Technology): Shares traded higher this week as the Nasdaq continued to push toward all-time highs thanks to solid earnings from many of the major tech companies. FB is scheduled to report next week, when the company will provide an update on the core business and subsidiary apps (Messenger, Instagram, WhatsApp). On Instagram, the company announced this week that user growth continues to accelerate -- Instagram now has more than 700 million monthly active users, with the latest 100 million added in just four months (quickest rate in Instagram history). Much of the acceleration can be attributed to recent product updates, like the adoption of many of its rival's (Snapchat) features. You can read our note comparing FB to SNAP here. We would not be surprised to hear analysts ask about SNAP competition on the earnings conference call, but we have noted many times in the past that FB's massive scale, experience and execution capabilities far outweigh what SNAP can currently offer. We note that FB has tended to sell off immediately following earnings in the past, as expectations can often rise to unachievable levels prior to the report. In addition, FB is facing very tough compares throughout this year and has mentioned on recent calls that revenue growth will not be able to match that of recent years (although it will still be very strong). This commentary initially caused pullbacks following recent quarters, but these ultimately proved to be buying opportunities. Assuming no fundamental changes in the business, we would view a pullback after this quarter (if we get one) as just another one of those opportunities. We will be back with our analysis following the report. We reiterate our $160 price target, which we will review after the print.
General Electric (GE) ; $28.99; 2,350; 2.47%; Sector: Industrials): Shares continued to remain range-bound around the $30 level. The company reported a mixed quarter last week, showing strong order growth and continued momentum in digital, but this was balanced by weaker free cash flow, a win for the bears. You can review our analysis here. While the quarter offered a more positive outlook, the bears are ultimately winning the fight for now as GE has to prove it can deliver. As we mentioned on our members call this week, we foresee a potential challenge to the leadership of CEO Jeff Immelt this time around as investors are getting fed up with the status quo. That and the 3% yield are why we stay for now with our current weighting and why we have kept this name a One for those who are looking for income and willing to wait out the restructuring. We reiterate our $35 target.
Alphabet (GOOGL) ; $924.52; 150 shares; 5.03%; Sector: Technology): Shares traded higher this week, rallying into its earnings report and delivering yet again when the print hit the tape. The company beat on the top and bottom lines and quelled those fears heading into the quarter regarding potential revenue headwinds due to the advertising controversy surrounding YouTube and other Google properties. Management noted strong momentum in mobile and YouTube, both of which are expected to be the long-term drivers for the overall company. In addition, the Cloud business delivered some big enterprise wins, further validation for investment in what has become another key long-term driver for Alphabet. You can read our deeper earnings analysis here. We raised our price target to $1,100 following the results.
Hewlett Packard Enterprise (HPE) ; $18.63; 2,000 shares; 1.35%; Sector: Tech hardware): Shares continued to push higher this week, continuing their upward trend that began in the middle of March (accounting for the spin-merge that created DXC). As we mentioned on the members call this week, we are more inclined to double down on this position rather than bolt, but we are waiting for a slight cool-down in shares. We have kept our One rating as we continue to believe the parts are worth more than the whole and that shares are therefore attractive for those willing to wait out CEO Meg Whitman's plans. We like the cash the company will own following the next spin-merge with Micro Focus and we believe the execution issues from the prior quarter are in the past. We keep this one light for now as any broader market selloff would provide a buying opportunity. We reiterate our $21 target.
KeyCorp (KEY) ; $18.24; 1,300 shares; 0.86%; Sector: Financials): Shares traded lower this week, underperforming the overall market after reporting a stellar quarter last week. As we reported last week, the bank beat on both the top and bottom lines and increased guidance for net interest income, thanks to expectations for additional rate hikes throughout the rest of the year. Investment banking was the real standout as the segment had a record-breaking first quarter, even more exciting considering that momentum in this segment typically builds throughout the year. We also learned that the company's integration of First Niagara is paying off better than expected as management increased guidance on expense save to $450 million by early 2018 (from $400 million). In addition to the expense save, management noted that they see plenty of room to run before hitting their goal of $300 million in revenue synergies. We will continue to keep an eye out for any weakness that may allow us to bulk up on shares closer to our cost basis, as we have unfortunately been forced to violate our basis due to the bank's recent rally (something we do not do lightly). We reiterate our $21 price target, which we updated on the back of the earnings report. We continue to view shares as attractive yet would look for broader-based weakness for opportunities to buy.
Southwest Airlines (LUV) ; $56.22; 1,000 shares; 2.04%; Sector: Industrials): Shares underperformed the broader market this week, rallying into the company's earnings report Thursday morning only to give back the gains following the print. While LUV's results were slightly softer than expected, guidance for the coming quarter actually came in better than the Street had been modeling. As the company's conference call was not until midday on Thursday, the initial reaction to the report was more severe than warranted, especially as investors extrapolated some of the issues facing other airlines (e.g., rising pay for American Airlines). In our earnings analysis, which you can read here, we noted that we would be buyers on the weakness. We followed up on that recommendation when we purchased additional shares of Nucor, noting that while we were restricted, we would be buying on the pullback in early trading (you can see our commentary toward the bottom of the Alert here). The stock steadily climbed higher once the conference call began and management guided for less than 4% capacity growth in the first half of 2018, better than what some were thinking would be closer to or above 5%. We reiterate our $63 target on LUV.
Magellan Midstream Partners (MMP) ; $74.30; 1,000 shares; 2.70%; Sector: Energy): Shares traded lower this week on little news, but the stock was impacted by lower oil prices and lower demand for higher-yielding names. MMP reports next week, when we will be looking for an update on ongoing growth initiatives and any update on distribution expectations moving forward. We continue to view shares as attractive and we reiterate our $89 target.
Nucor (NUE) ; $61.33; 1,000 shares; 2.22%; Sector: Industrials): We initiated a position in NUE this week following our decision to place the company in the bullpen on Monday. You can read our detailed analysis of the company from earlier in the week here. We added to the company again later in the week, taking advantage of a down day for the name to lower our basis. In the end, we believe NUE can benefit immensely under the Trump administration, but more importantly, the company has the ability to transcend any hiccups in the economy (if we see a macro slowdown) and still beat estimates. The company also offers a solid 2.5% dividend yield and has a history of doling out special dividends when times are good. We also encourage members to re-watch our members-only call (click on the Videos link at left), where we discuss our outlook and investment thesis for NUE. We reiterate our $75 target.
Schlumberger (SLB) ; $72.59; 1,200 shares; 3.16%; Sector: Energy): Shares continued their decline this week, a move that began as oil moved lower and continued following the company's earnings report last week. We added to the position slightly this week as we believe the selloff undervalues SLB. You can read our trade Alert from earlier in the week (which includes technical analysis) here. You can review our earnings analysis from the prior week here. We reiterate our $93 target.
Snap-On (SNA) ; $167.53; 575 shares; 3.49%; Sector: Industrials): Shares were pressured this week after the stock rallied following the company's strong earnings report toward the end of last week. While partially due to short-term traders booking profits, the decline was mostly due to a report from a boutique research/news firm, The Capitol Forum, which noted that SNA franchisees fail more often than shareholders realize. This report fits with the short thesis that had built leading into this past earnings report regarding credit and delinquency issues within the financing business. We have no reason to believe this report is representative of the total population as of yet, but we will continue to monitor the situation. The company's earnings last week that included strong credit performance would refute these claims. We continue to view SNA shares as attractive and we reiterate our $200 target.
Apple (AAPL) ; $143.65; 820 shares; 4.27%; Sector: Technology): Shares traded slightly higher this week but underperformed the market. Investors are largely on the sidelines in this name leading up to the highly anticipated quarterly report expected to be released on Tuesday. We remind members that we downgraded the name a couple of weeks back when the stock was roughly at the $144 level as we became wary of the nearly 25% rally in the name year to date. The move was not reflective of the company's fundamentals, but simply a recognition that expectations may have gotten too high too fast. We will be focusing on the all-important guidance numbers for the rest of the year, especially as the sell side has almost unanimously called for a coming supercycle, a term that can be dangerous. We reiterate our $150 target, which we will review following the report. We continue to view AAPL as one of, if not the strongest global brand, offering a product and Services ecosystem that entices consumers to stick around, and we reiterate our view to "hold, not trade" the stock. Assuming no fundamental changes to the business, any prolonged pullback following the report (should we get any) will likely be a buying opportunity for those who are unexposed.
Adobe (ADBE) ; $133.74; 550 shares; 2.67%; Sector: Technology): Shares traded slightly higher this week on little news, performing in line with the overall market. As we've mentioned, Adobe is in a league of its own with very little competition. As evidenced by GOOGL's monster earnings beat on Thursday, online (think: digital) marketing is becoming increasingly crucial to a company's success. GOOGL may be the way in which companies target and place advertisements, but ADBE provides the tools needed to create those advertisements. In addition, ADBE's analytics software provides feedback on which advertisements are most effective, allowing companies to better target their ad dollars. We maintain our Two rating, reflecting the nearly 30% run the stock has seen since the beginning of the year, and would be buyers on any significant pullback (think 3%-5% ideally). We reiterate our $150 target.
Arconic (ARNC) ; $27.33; 2,400 shares; 2.38%; Sector: Industrials): Shares traded higher this week following the company's strong earnings report, where management demonstrated a focus effort on cost cutting and improving operational performance. Earlier in the week, the board noted that it would suspend its upcoming May shareholders meeting to some point later in the month as there were discussions with Elliott Management regarding a possible settlement regarding the ongoing proxy fight. You can read our note here. Later in the week, the better-than-expected quarter validated the rally in shares since the beginning of the year when Elliott Management first announced it would be challenging former CEO Klaus Kleinfeld. You can read our earnings analysis here. We reiterate our $31 target but note that we are planning to hold onto shares for now as we believe the current weighting is reflective of the risk/reward dynamic for this name.
Cisco Systems (CSCO) ; $34.07; 3,000 shares; 3.71%; Sector: Technology): Shares rallied higher this week as the Nasdaq charged toward record highs. The stock also received a boost from an upgrade to Outperform from Underperform from analysts at Credit Suisse, who have been behind on Cisco's shift to software and security but no longer can ignore the revenue growth and operating leverage offered by the transformation. We continue to like CSCO for the long term and view any levels in the $32-$33 level or below as attractive for those who are underweight. The company will report earnings in the middle of May, when we will get a better idea of whether company continued the momentum from the most recent quarter. We reiterate our $35 target, but see longer-term upside should there be cash repatriation and as legacy businesses become less prominent.
Dow Chemical (DOW) ; $62.80; 1,475 shares; 3.36%; Sector: Chemicals): Shares traded higher this week after receiving a boost from DuPont's (DD) strong earnings earlier in the week and pulling back slightly following its own strong earnings report. Even though the stock declined on Thursday after the company's quarterly results were announced, we view the move as mostly profit-taking as the stock had rallied into the print. In addition, some items regarding investment and weakness in Agriculture were enough to entice short-term traders to book gains on a name up more than 11% for the year (at the time). That being said, the strong results for stand-alone DOW support the upside for this company once officially merged with DuPont later this year. You can read our earnings analysis here. We reiterate our $70 target.
DXC Technology (DXC) ; $75.34; 171 shares; 0.47%; Sector: Tech Services): Shares underperformed the market this week and traded lower on little news. We are not surprised to see the move lower after the stock had rallied higher immediately following the spin merge with HP Enterprise Services. On the rally, we downgraded the name as we recognized the short-term gains were likely unsustainable after the initial euphoria died down. That does not mean we do not believe in this company's long-term prospects, but we understand that stocks can sometimes simply get too hot. We downgraded the name here. The pullback this week makes the shares more attractive and we will be watching for further weakness to build our position. You can read our deep dive on the company here. We reiterate our $81 target.
Newell Brands (NWL) ; $47.74; 1,900 shares; 3.29%; Sector: Consumer Discretionary): Shares traded in volatile fashion this week and were roughly flat. The stock has faced pressure of late as concerns regarding the retail mall environment and hesitations regarding management's ability to execute on its divestitures and integrations have combined to create a "wait and see" approach for investors. Quoting from our members call this week: "Why hold on to it? Because we believe CEO Mike Polk will ultimately make this into one of the few pure-play non-food and beverage consumer product companies out there." The broader environment is creating a tougher road to get there, but Polk and his team have the chops to get it done for shareholders. We reiterate our $60 target.
NXP Semiconductors (NXPI) ; $105.75; 650 shares; 2.49%; Sector: Information Technology): Shares traded slightly lower this week on little news, although Qualcomm (QCOM) , which will soon acquire NXPI, pre-announced disappointing quarterly results. NXPI is set to report next week, a print we largely expect to be a non-event given the expectation that the QCOM merger will close later this year. We will be listening for any commentary surrounding the deal, but we do not expect management to divulge anything new. Overall, we remain inclined to sell out of this position to build cash for both protection and optionality for purchases of other names, given that, at this point, the incremental move toward $110 a share from these levels only offer limited upside (although it does offer a solid anchor for protection in a portfolio). We reiterate our $110 target.
PepsiCo (PEP) ; $113.26; 800 shares; 3.29%; Sector: Consumer Staples): Shares underperformed the broader market this week as the company's steady earnings report was not enough to support further gains in a name that had reached all-time highs, partly on the back of M&A speculation. However, PEP did reaffirm its full-year 2017 guidance for 3% core sales growth (with sequential improvement in the coming quarter) and EPS of $5.09, which slightly lags Street consensus of $5.14, as analysts tend to expect management to remain conservative. During the call, PEP explained that this outlook is "fueled by successful product innovation and strong marketplace execution, but tempered by a cautious macro-environment," again, leaving room for upside down the line. This quarter was affected by the Easter and New Year's holiday shifts, and management has already seen acceleration in the ongoing quarter. Overall, we viewed the quarter as mostly in line, but we understand short-term traders took profits at all-time highs as the company is sticking to the under-promise, over-deliver playbook that has served it well in recent years. We are happy with execution, and while we understand that the sellers prefer to wait to see if PEP can deliver on its sequential improvement, we have no reason to believe management will not beat their conservative guide by the end of the year. We are raising our price target slightly to $120 (from $115), reflecting continued execution and an expansion of the multiple to slightly under 22x 2018 consensus earnings, closing the valuation gap to slower-growing peer Coca-Cola (KO) .
Starbucks (SBUX) ; $60.06; 1,300 shares; 2.83%; Sector: Consumer Discretionary): Shares slumped this week following the company's earnings report. We trimmed our position heading into the report as we recognized that expectations for a strong back half of the year had seemingly crept into expectations for the quarter just reported, a dynamic we suspected the company would not be able to satisfy. The results were softer than investors typically expect for SBUX, but investors were well aware of the through-put issues facing the company heading into this quarter. You can read our full analysis of the quarter here. We reiterate our $65 target and will be following shares in the coming trading days for a potential buying opportunity as we expect the back half of the year to still be strong. We will be disciplined in our approach, however, waiting until shares hit around or below the middle $50s.
T.J. Maxx (TJX) ; $78.64; 1,300 shares; 3.71%; Sector: Consumer Discretionary): Shares traded roughly flat on little news. Recall that retail names tend to report earnings toward the end of the season, so there are still more fireworks to come for the embattled sector. We trimmed our TJX position slightly this week as the stock was trading above our cost basis and we had been looking for areas where we could build up some additional cash following our initiation of Nucor -- TJX's weighting in the portfolio had been over 4%, and so, given the tough retail backdrop, we felt it was a place where we could book slight profits and build cash. We continue to believe TJX is the best in the space, but we recognize the space is challenged (a dynamic from which TJX can actually benefit). You can read a charting piece we posted on TJX earlier in the week here. We reiterate our $85 target.
Walgreens Boots Alliance (WBA) ; $86.54; 800 shares; 2.51%; Sector: Health Care): Shares traded higher this week as the stock continued its rebound from its somewhat weak quarter a couple of weeks back, when we noted we would be buyers near $80. The rise was in part due to Rite Aid's (RAD) quarterly report, where the company noted it remains committed to the WBA merger. We trimmed the stock slightly this week to build some cash, as we mentioned above in our TJX commentary. Our view on WBA remains the same: The stock is stuck in limbo as we await a decision on the impending Rite Aid takeover, and so we are incremental sellers on strength into the high $80s. That being said, we are also buyers into the low $80s (when we are not restricted), as we believe the stock can rise once a decision is made either way. We reiterate our $90 target for now.
Wells Fargo (WFC) ; $53.84; 1,900 shares; 3.71%; Sector: Financials): Shares traded roughly flat on the week, underperforming the overall market. On Tuesday, the FDIC and Federal Reserve voted to unanimously approve the company's living will. Living wills outline a quick and orderly resolution strategy for banks in the potential case of bankruptcy due to material financial distress. The approval has allowed for regulators to remove the company's growth restrictions, which were put in place last year. WFC is now required to file a new resolution plan by July 1, as the approval related only to the company's 2015 plan. The approval is a nice next step in Wells putting its recent brand issues in the past (in addition to the cross-selling scandal). Also on Tuesday, the bank announced that shareholders had approved the re-election of all 15 board members. Despite spiking on the news of the living will, the stock eventually gave up all its gains for the week after the White House announced its very vague and uninformative tax plan, leaving investors to speculate on what may be in store (assuming it gets approved once the critical details are announced). WFC has been beaten up lately due to its recent sales scandal; however, we remain holders here and believe the bank can turn it around in the long run. As Jim mentioned on this month's members call, WFC seems to be the "Chipotle of finance" -- we just need to put some distance between it and its transgressions. We reiterate our $60 price target and would recommend adding on any prolonged weakness for those who find themselves underweight.
Western Digital (WDC) ; $89.07; 1,100 shares; 3.55%; Sector: Technology Hardware): Shares traded significantly higher this week, rallying in recent weeks into the report and still surging following the report on Friday. You can read our detailed earnings analysis here. The move higher was supported by a strong NAND business, which WDC had gained from the smart SanDisk acquisition. Most importantly, management indicated that market fundamentals will remain favorable through the first half of 2018 and that the company could potentially hit $12 in EPS for the calendar year of 2017, implying further acceleration throughout the back half of the calendar year (guidance for the June quarter blew away current consensus). On the back of these results, we raised our price target to $108, reflecting 9x calendar-year 2017 EPS of $12. We also downgraded the name as we let the nearly 20% rise in the past five weeks settle down.