Markets were volatile this week, experiencing the worst one-day decline since last September. Wednesday's selloff was sparked by political reports released Tuesday night focusing on the firing of FBI Director James Comey, who was allegedly asked by President Trump to drop the investigation of former national security adviser Michael Flynn. As a result, investors began to question the rally in markets over the past seven months or so, doubting whether the administration's pro-business policies would proceed under the current uncertain conditions.
Adding to the shock, investors speculated as to what the political unrest may mean with regard to a June rate hike, causing the financials to pull back. Despite the political turmoil, the selloff was short-lived, with markets coming back with a vengeance to close out the week. As we have reiterated throughout this rally, the fundamentals of the companies supporting this market contribute to a resilience that simply does not want to go away.
For this week, Treasury yields ended lower as market uncertainty caused investors to seek safety in the bond market. The dollar was mostly weaker versus the euro as doubt regarding American economic growth began to rise and Europe begins to emerge from its post-Brexit recession. Gold also trended higher as investors flooded into the safe haven on Wednesday. Lastly, oil trended higher, continuing the uptrend it started at the beginning of last week as investors begin increasing speculation regarding a potential extension of production cuts, which will be discussed at OPEC's meeting next week.
First-quarter earnings are winding down and have been relatively positive versus expectations, with 73.3% of companies reporting a positive EPS surprise. In the portfolio, TJ Maxx and Cisco reported earnings this week.
TJ Maxx's (TJX) revenue rose 3.2% year over year to $7.8 billion, missing consensus of roughly $7.88 billion, but EPS of $0.82 came in $0.03 ahead of consensus. Importantly, same-store sales ("comps") of +1% in the quarter came in at the high end of the company's guidance range of flat to 1%, but missed Street expectations of 1.6%. We note that this was versus a comps performance of +7% in the last fiscal year's first quarter, setting the company up against very difficult comparisons. As for guidance, heading into the current quarter, the company sees EPS of $0.81 to $0.83 versus consensus of $0.92. Comp guidance of +1% to +2% for the second quarter also came in short versus consensus of roughly +2.5%. The stock initially declined on this outlook before finding support later in the week (more below).
For the fiscal third quarter, Cisco (CSCO) reported revenues of $11.94 billion, which beat consensus of roughly $11.9 billion but declined year over year for the sixth straight quarter. EPS was also a beat, with $0.60 edging out consensus of roughly $0.58. These relatively strong results, however, were overshadowed by management's sluggish fiscal-fourth-quarter guide. EPS is expected to come in around $0.60 to $0.62, lower than consensus of $0.62 at the midpoint, and the company sees revenues declining 4% to 6% in the quarter (to a range of $11.88 billion to $12.13 billion versus consensus of $12.53 billion). Digging deeper into the quarter, Switching revenue (the company's largest business) rose 2% year over year in the fiscal third quarter. Routing (second-largest business) fell 2% and Collaboration was down 4% while data centers (servers) were down 5%. Wireless and security were bright spots, up 13% and 9%, respectively.
On the economic front, data were mixed but largely overshadowed by political unrest in Washington and the subsequent market selloff.
On Tuesday, the Commerce Department reported that housing starts for April fell to a seasonally adjusted annual rate of 1.17 million units (lowest reading since November 2016), missing estimates for 1.26 million units and marking the second straight monthly decline (third in four months). Housing starts dipped 6.6% month over month in March. April's reading marks a 2.6% decline from March's downwardly revised 1.2 million units (previously reported to be 1.22 million). Despite the drop, housing starts are still up 0.7% from April of last year.
Breaking down the report further, single-family housing starts came in at 835,000 units, up from March's revised reading of 832,000. Starts for complexes with five or more units decreased to 328,000, down from 363,000 in March. By region, total housing starts rose 41.1% in the Midwest and 5.36% in the West. Offsetting the rise in those regions, starts fell 37.3% in the Northeast and 9.06% in the South. Single-family homebuilding, which accounts for the largest share of the residential housing market, was up 19.4% in the Midwest and 9.1% in the West. Single-unit starts fell 29.2% in the Northeast and 3.9% in the South.
Adding to the disappointment, building permits came in at 1.23 million units, missing estimates of 1.27 million and falling 2.5% from March's revised number of 1.26 million. Despite the monthly drop, permits are up 5.7% from the same time last year. Leading the decline, single-unit permits fell 4.5%, only slightly offset by a 2.5% rise in units for complexes with five or more units.
The decline in both housing starts and building permits is an important theme to watch for the market as these two reports are major indicators for future housing supply. With inventories already at a shortage and home prices/rents hovering near recent highs, tighter supply may only further exacerbate the upward pressure. Although housing demand remains healthy, sluggish wage growth in the labor market may begin to lag home prices, resulting in downward pressure on sales.
Also on Tuesday, the Federal Reserve reported that industrial production rose 1% in April, blowing past expectations for a 0.4% rise. This comes on the heels of a 0.4% rise in March and marks the third straight monthly rise and the largest jump since February 2014.
Digging a bit deeper, most indices were up from March. Within the major market groups (on a month-over-month basis), final products rose 1.4% (consumer goods up 1.5% and business equipment up 1.2%), non-industrial supplies rose 0.4% and materials rose 0.8%. Within the major industry groups, manufacturing (the largest component of the overall index) rose 1%, while mining and utilities rose 1.2% and 0.7%, respectively. On an annual basis, the total index is up 2.2%, final products and non-industrial supplies are both up 1.7%, materials are up 2.8%, manufacturing is up 1.7% and mining is up a whopping 7.3%. Utilities are the only component to show a year-over-year decline, down 0.5%. The overall strength of the report is indicative of a healthy consumer and business demand environment compared to readings earlier in the year.
Heading into Wednesday, markets were hit with a surprise when The New York Times reported that President Trump allegedly asked then-FBI Director James Comey to drop the investigation of former national security adviser Michael Flynn. As it relates to the broader stock market, this development raised doubts regarding the ability of the administration to push forward with the Trump agenda, which is largely viewed as pro-business, and therefore, a positive for the stock market. You can read our detailed reaction from the week here.
On Thursday, the Department of Labor reported that initial jobless claims for the week ending May 13 were 232,000, a 4,000-claim decrease from the prior week's unrevised numbers and 8,000 claims lower than the market's expectations. The drop brings claims to another 28½-year low and builds momentum for a labor market that was shown to be strong in April, as evidenced by the jobs report released earlier this month (read here).
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 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 88 straight weeks (compared with 115 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) dipped by 2,750 to 240,750 last week. Importantly, this claims report covered the survey period for May's jobs report (to be released at the beginning of June), helping to support expectations for continued strength in the labor market.
On the commodity front, oil prices trended higher, rallying on Monday before trading in a more volatile fashion to close out the week. Setting the stage more broadly, recall that West Texas Intermediate crude oil prices have largely traded in a range of mid-$40s to low $50s for the majority of the year, vacillating on intermittent inventory reports and OPEC commentary, which has attempted to keep a sustained floor underneath the trade and perhaps move prices higher.
On Monday, oil prices built on the momentum from the prior week, moving higher toward the middle of the year-to-date range and attempting to break above the $50 threshold. The upswing came as Saudi Arabia and Russia explored talks of a nine-month production-cut extension, going above and beyond the six-month extension that many investors believed was already priced into these levels. The two oil powerhouses released a joint statement on Monday, noting that an extension into the end of March 2018 was likely necessary in order to drive inventories back to their five-year historical average, despite the current efforts from OPEC and key non-OPEC members that have worked to deplete the global oversupply.
The joint statement also noted that OPEC has had encouraging conversations with other countries to participate in efforts to curb production, and there may even be additional countries, aside from those already involved in the current agreement, who would comply with a new deal. Saudi Arabia's energy minister Khalid al-Falih noted: "We have, before coming to this announcement today, reached out to many of our colleagues within and outside OPEC, and I think there is general consensus that this is the right approach and the right thing to do."
That being said, the joint statement, while encouraging, does not alter the current dynamic: U.S. shale producers continue to bring more oil to market, and this is in addition to rising output from Canada and other areas of the world.
On one hand, the cooperation of Saudi Arabia and Russia is encouraging, given that failure to reach an extension agreement on production cuts would likely cause oil prices to fall dramatically. On the other hand, we cannot be sure that any extension will do anything more than offset the rising production from areas outside of OPEC and those countries contributing to the cuts. An extension of nine months is certainly toward the longer end of expectations, so that is a noted positive.
More holistically, perhaps the most important signal from here is that the world's oil powerhouses are willing to do whatever it takes to keep oil prices from sliding down a cliff. This is a supportive dynamic for the trade moving forward. All of this is at least enough to keep oil above its recent lows, and perhaps some technical momentum can help the trade move even higher.
As a reminder, OPEC will officially meet in Vienna on Thursday to finalize an extension agreement. We expect to hear a lot of chatter coming from various sources regarding the prospects of the extension -- this has become commonplace with OPEC, which has been difficult to fully trust in its efforts to maintain market share. At this point, the market will largely be expecting some sort of cut, but the questions will continue to revolve around how many countries are contributing and how long the cuts will last. For now, a move higher is indicative of the improving sentiment across the space and the lack of optimism in the trade over the past couple of months. We will be watching to see if WTI crude can break above the $51 threshold, a move that could be a sign of higher levels to come.
In the portfolio this week, we were busy as we attempted to navigate the market selloff on Wednesday. We initiated a position in the iShares Eurozone ETF (EZU) , added to Nucor (NUE) , Snap-On (SNA) and Danaher (DHR) , and trimmed Arconic (ARNC) and Citi (C) .
On EZU, as we mentioned on our members call, we are using the ETF as a way to gain exposure to Europe and the euro currency. As for NUE and SNA, both stocks hit our levels mentioned on the members call, and we took advantage of the opportunity to lower our cost basis. Lastly, we cut our ARNC stake as the stock traded above the $28 threshold earlier in the week.
We also upgraded TJX and CSCO to One from Two. In both cases, we viewed the pullback following earnings as overdone, creating buying opportunities for those with long-term investment horizons.
Moving on to the broader market, as we mentioned, first-quarter earnings are winding down and have been relatively positive versus expectations, with 73.3% of companies reporting a positive EPS surprise. Total first-quarter earnings growth is up roughly 14% year over year versus expectations for an overall 13.5% increase throughout the season; of the 399 non-financials that reported, earnings growth is 13.4%. Revenues are up 7.4% versus expectations throughout the season for a 7.13% increase; 73.3% of companies beat EPS expectations, 20.3% missed the mark and 6.4% were in line with consensus. On a year-over-year comparison basis, 74.14% beat the prior year's EPS results, 23.92% came up short and 1.94% were virtually in line. Information tech, industrials 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 23 companies in the S&P 500 will report earnings. Within the portfolio, DXC Technology (DXC) will report. We note that DXC will only be reporting fiscal-fourth-quarter 2017 results for CSC (more below). Other key earnings reports for the market include: Booz Allen (BAH), Cheetah Mobile (CMCM), Ferroglobe PLC (GSM), Agilent (A), Nordson (NDSN), Luxoft Holding (LXFT), AutoZone (AZO), Toll Brothers (TOL), Cracker Barrel (CBRL), DSW (DSW), Intuit (INTU), Aegean Marine Petrol (ANW), ViaSat (VSAT), HEICO (HEI), Take-Two (TTWO), Lowe's (LOW), Bank of Montreal (BMO), Advance Auto (AAP), Triumph Group (TFI), Tiffany & Co. (TIF), Dycom (DY), Chico's FAS (CHS), HP (HPQ), SpartanNash (SPTN), PVH (PVH), NetApp (NTAP), CSRA (CSRA), Williams-Sonoma (WSM), Royal Bank of Canada (RY), TD Bank (TD), Best Buy (BBY), Medtronic (MDT), Burlington Stores (BURL), Abercrombie & Fitch (ANF), Costco (COST), GameStop (GME), Ulta Beauty (ULTA), Lions Gate (LGF.A), Marvell (MRVL), Nutanix (NTNX), Brocade (BRCD), Deckers Outdoor (DECK) and Big Lots (BIG).
Economic Data (all times ET):
U.S.
Monday (5/22)
Chicago Fed Nat Activity Index (8:30)
Tuesday (5/23)
Markit US Manufacturing PMI (9:45)
Markit US Services PMI (9:45)
Markit US Composite PMI (9:45)
New Home Sales (10:00): 620k expected
Richmond Fed Manufacturing Index (10:00): 15 expected
Wednesday (5/24)
MBA Mortgage Applications (7:00)
FHFA House Price Index MoM (9:00)
Existing Home Sales (10:00): 5.67m expected
Thursday (5/25)
Initial Jobless Claims (8:30)
Continuing Claims (8:30)
Wholesale Inventories MoM (8:30)
Bloomberg Consumer Comfort (9:45)
Friday (5/26)
GDP Annualized QoQ (8:30): 0.9% expected
Personal Consumption (8:30)
GDP Price Index (8:30): 2.3% expected
Durable Goods Orders (8:30): -1.5% expected
Core PCE QoQ (8:30)
Durables Ex Transportation (8:30) 0.3% expected
Cap Gods Orders Nondef Ex Air (8:30)
Cap Goods Ship Nondef Ex Air (8:30)
Univ. of Mich. Sentiment (10:00): 97.5 expected
International
Monday (5/22)
Tuesday (5/23)
Eurozone Agg. Markit Eurozone Manufacturing PMI (4:00)
Eurozone Agg. Markit Eurozone Services PMI (4:00)
Eurozone Agg. Markit Eurozone Composite PMI (4:00)
Germany GDP SA QoQ (2:00)
Germany GDP WDA YoY (2:00)
Germany GDP NSA YoY (2:00)
Germany Markit/BME Germany Manufacturing PMI (3:30)
Germany Markit Germany Services PMI (3:30)
Germany Markit/BME Germany Composite PMI (3:30)
Germany IFO Business Climate (4:00)
Germany IFO Expectations (4:00)
Germany IFO Current Assessment (4:00)
Japan All Industry Activity Index MoM (00:30): -0.5% expected
Japan Machine Tool Orders YoY (2:00)
Japan Nikkei Japan PMI Mfg (20:30)
UK PSNB ex Banking Groups (4:30)
Wednesday (5/24)
Germany GfK Consumer Confidence (2:00)
Thursday (5/25)
Japan Natl CPI YoY (19:30): 0.4% expected
Japan Natl CPI Ex Fresh Food YoY (19:30): 0.3% expected
Japan Tokyo CPI YoY (19:30): 0.0% expected
Japan Tokyo CPI Ex-Fresh Food YoY (19:30): -0.1% expected
UK GDP QoQ (4:30)
UK GDP YoY (4:30)
Friday (5/26)
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 the Action Alerts PLUS staff 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.
To learn more about how we construct and trade the portfolio, click on Getting Started in the dropdown menu of the Help link above.
We also want to be sure you're not confused about the terminology that Jim uses on his Mad Money television show: When you hear Jim refer to the charitable trust, he is talking about the trust that holds the Action Alerts PLUS portfolio. The gains from Action Alerts PLUS go to charity after the close of each trading year.
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.
ONES
Allergan (AGN) ; $219.13; 550 shares; 4.40%; Sector: Health care): Shares traded lower this week, underperforming the market as the stock continues to show weakness following a downgrade from Goldman Sachs after the company's earnings report. You can read our defense of Allergan from last week here. As we mentioned on our members-only call this week, we are sticking with CEO Brent Saunders, who is focused on delivering value to shareholders and developing Allergan's underappreciated pipeline. We believe the company's six stars (late-stage pipeline drugs) and recent acquisitions will propel the stock higher over time for those willing to wait. We view shares as attractive at these levels for those who are underexposed. Even though we have a large weighting in the name, we would be buyers for the portfolio anywhere close to the $210 level. We reiterate our $270 target.
Apache (APA) ; $51.16; 2,200 shares; 4.11%; Sector: Energy): Shares were pressured this week, pulling back from a recent rally when the stock surged off the lows of under $47 in recent weeks. The stock continues to be tethered to oil prices and the fragile sentiment across the energy sector in the short term. That being said, as we highlighted on our members call this week, we viewed the company's quarter as better than expected and encouraging in terms of the progress of Alpine High (view our quarter analysis here). At these levels, Alpine High is virtually nonexistent in the evaluation, offering significant upside for shareholders. While we could be inclined to trade around the name given the volatility in oil (i.e., capitalizing on interim spikes in order to make room to buy lower), we are confident in the long-term prospects for the company's production growth. Although we would never bank on such a move, we also view APA as a potential takeover target. We reiterate our $63 target.
Cimarex (XEC) ; $117.59; 850 shares; 3.65%; Sector: Energy): Despite a strong earnings announcement last week (including a raise in fiscal 2017 guidance), shares continued to decline this week, underperforming the overall market. As we said last week, XEC is simply not getting the credit it deserves. In our view, given last week's solid quarterly results (EPS of $1.05 blew past estimates of $0.87, and revenues of $447.2 million easily surpassed expectations for $423 million), XEC has proven its ability to be a successful, high-quality, low-cost operator. As crude prices begin to crawl back and solidify a base above the $50-a-barrel level, we believe the stock should pay off for those who are able to remain patient, and weather any near-term volatility resulting from oil prices. We reiterate our $150 target.
Cisco Systems (CSCO) ; $31.21; 3,000 shares; 3.42%; Sector: Technology): Shares traded lower this week after the company's earnings report, which was strong for the quarter but disappointed in regard to the outlook for the coming quarter. You can read our analysis here and our follow-up analysis here, which preceded Jim's interview with CEO Chuck Robbins on Squawk on the Street. After the interview, we came away more confident that the guidance is more a hiccup rather than a long-term issue, and we upgraded the stock to One. CSCO shares also have support from continued expectations for cash repatriation and wide-scale tax reform. We continue to believe the stock will re-rate higher as the transformation continues over the coming years. We reiterate our $35 target.
Comcast (CMCSA) ; $38.85; 2,000 shares; 2.83%; Sector: Consumer Discretionary): Shares traded lower this week, performing in line with the overall market. On Wednesday, the company's Xfinity Mobile service went live. Recall that CMCSA announced that it would be entering the space last year (which we first mentioned here), with management officially releasing plans and pricing options last month (initially covered here). In addition to the Xfinity Mobile rollout, shares benefited from an announcement on Thursday that the FCC voted 2-to-1 to begin rolling back net-neutrality rules, which were originally part of the 2015 Open Internet Order proposed under the Obama administration. See our in-depth analysis of what this means for CMCSA here and here. In short, the yet-to-take-effect FCC rules would have required internet service providers like Comcast to ask for permission before selling client data to third parties. With these regulations removed, we expect CMCSA shares should re-rate higher as the company will be able to freely monetize the data it collects from users. We reiterate our $45 target.
Danaher (DHR) ; $82.14; 1,150 shares; 3.45%; Sector: Life Sciences): Shares traded lower this week on little news, underperforming the overall market. As we mentioned last week, we believe the company will be able to return to historical levels as it realizes improved synergies from its Pall acquisition, and revenues from Cepheid and Phenomenex work their way into the core numbers. In addition, the company plans to further reduce costs related to its dental unit. We continue to hold at these levels and believe the selloff on Wednesday only served to make shares more attractive. As we mentioned last week, we view any weakness as a buying opportunity. Accordingly, with prices below our cost basis, we took advantage of the selloff, purchasing 50 shares on Friday at just under $82. We reiterate our $94 target.
DXC Technology (DXC) ; $78.07; 1,000 shares; 2.85%; Sector: Tech Services): Shares traded lower this week, falling victim to their nice run in recent weeks, making the stock a target for profit-takers when the market pulled back in the middle of this week. The company is set to report earnings on Thursday just for CSC's fiscal-fourth-quarter results (recall that CSC merged with HPE Enterprise Services to create DXC Technology). Over time, we expect the company to execute on its cost synergy plans from the spin-merge and we see a long runway for margin expansion that should help the stock close the valuation gap to peers. We reiterate our $89 target.
iShares MSCI Eurozone ETF (EZU) ; $41.22; 500 shares; 0.75%; Sector: Europe): We initiated a position on the EZU ETF this week in order to gain exposure to the European continent, consumer and the euro currency. We want to make it clear that we are interested in this ETF because we think Europe has begun to turn. We have been waiting for the French elections to get out of the way before we pulled the trigger because it could have been horrendous to start a position and then watch the euro fade into the sunset. Now, the coast is clear. The EZU gives us exposure to the largest stocks in Europe -- with the largest weightings spread out in France and Germany, and less so in the Netherlands and Spain. As we noted in our initiation piece, we will not have a price target for EZU given the nature of the ETF (encompassing several companies) and our intent to buy and hold for exposure to the broader themes.
Facebook (FB) ; $148.06; 1,000 shares; 5.40%; Sector: Technology): Shares traded lower this week, underperforming the overall market. On Tuesday, the company introduced face filters to its Instagram platform; taking another jab at Snapchat (SNAP) , as it continues to copy features that were once unique to the competitor's platform. Later in the week, FB announced it had secured rights to stream 20 Major League Baseball games this season. The first game will be aired today, between the Colorado Rockies and the Cincinnati Reds. In addition to the MLB games, e-sports organization ESL announced it would be increasing the amount of content streamed on the Facebook platform. As e-sports continue to gain in popularity, we believe the additional content can be accretive to ad revenue. Facebook appears to be running on all cylinders and we remain bullish on the company's prospects for growth moving forward. We reiterate our $175 target.
General Electric (GE) ; $28.05; 2,350; 2.40%; Sector: Industrials): Shares traded flat this week, bouncing back after Wednesday's selloff. This continues to be a show-me story, with the stock being weighed down due to concern over the company's ability to generate free cash flows. Should GE fail to execute, we expect there to be a serious challenge to management as pressure has built in recent weeks from Nelson Peltz's Trian Fund Management, a key GE investor. Outside of cash flow, we will be looking for any news related to the company's upcoming merger with Baker Hughes BHI. In the longer term, the real growth story will depend on GE's ability to lever its digital capabilities. Despite the cash flow issues, we do not believe the dividend to be at risk and we are happy to collect the now 3.5% yield while we wait for the operational issues to be resolved. We reiterate our $35 target.
Alphabet (GOOGL) ; $954.65; 150 shares; 5.22%; Sector: Technology): Shares traded flat this week, bouncing back stronger than the overall market following Wednesday's selloff. This week, Alphabet hosted its annual I/O conference, announcing several new products and features related to artificial intelligence, Android and the Chrome browser. In line with others in the mobile space, GOOGL announced it would be placing a lot of focus on "mobile first." Perhaps most interesting was information relating to the company's Google Lens. The platform, which will utilize a phone's camera functionality, will allow users to translate foreign language text, identify food or species of animals, and even pull up information on businesses, simply by snapping a photo. The company also announced it is working on a stand-alone virtual-reality headset (no need for a computer or mobile phone), as well as updates to Android, Google Photos and Gmail. Overall, the conference is in line with what we expect from GOOGL, as the company continues to innovate; breaking new ground in the areas of artificial intelligence and virtual reality. We continue to believe in the growth story and reiterate our $1,100 target.
Hewlett Packard Enterprise (HPE) ; $18.53; 2,000 shares; 1.35%; Sector: Tech hardware): Shares traded lower this week on little news, underperforming the overall market. With earnings just over a week away, we are eager to hear how the company has been executing on its goals. As we've mentioned, the Micro Focus merger is near completion and we expect shares to appreciate as the company delivers on its transformation. We're itching to rebuild our position as it was cut down due to the DXC spinoff; however, we want to remain disciplined and wait for shares to come in below $18 so as not to violate our basis. We reiterate our $21 target.
KeyCorp (KEY) ; $17.73; 2,000 shares; 1.29%; Sector: Financials): Shares traded sharply lower this week, failing to recover meaningfully from Wednesday's selloff and underperforming the overall market. While the selloff was partially impacted by a decline in Treasury yields, the main cause was decreased investor confidence regarding a June rate hike (these concerns seem to have blown over as economic data remain positive). While we must always take political and macroeconomic factors into account, especially when considering the financial sector (due to its high correlation with economic policy and Treasury yields), we maintain the belief that the company-specific factors should be strong enough to drive shares higher in the long term. The company's investment banking division is as strong as ever and the First Niagara integration remains on track. We reiterate our $21 target.
Southwest Airlines (LUV) ; $58.04; 1,000 shares; 2.12%; Sector: Industrials): Shares traded higher this week, outperforming the overall market. On Monday, it was announced that Boeing (BA) had developed a modified version of the 737 Max jet. The aircraft was specifically designed for budget airlines and LUV was cited as being an early buyer. Also on Monday, the European Commission stated that it would meet with U.S. officials to discuss plans for an in-flight laptop ban. Despite the inconvenience this may cause for travelers, we do not believe it will materially impact the stock as there is no reason to think it would decrease the demand to fly. On the contrary, if laptops were to be banned, we see this as potentially being accretive to revenue as customers may be forced to pay for in-flight entertainment (or find other ways to pass the time, perhaps increasing demand for tablets). On Tuesday, the company announced a 25% raise to its quarterly dividend, to $0.50 a share annualized. On top of the dividend increase, the company announced it had authorized a new $2 billion share repurchase program (the previous $2 billion plan was completed on May 5). We also want to remind investors that last week the company announced its official transition to its new passenger service reservation system. We believe this will be a long-term driver for efficiency and productivity gains. We reiterate our $63 target.
Magellan Midstream Partners (MMP) ; $74.01; 1,150 shares; 3.11%; Sector: Energy): Shares traded lower to start the week but managed to rally on Friday, finishing out the week in line with the overall market. While oil has started to bounce back slightly, the sector remains under pressure. However, we remain upbeat on the name as the company is less levered to the commodity than its peers are (only about 15% of its business is based on the commodity, the other 85% being fee based). Read more about our view on the company's prospects here. Although we realize the stock may remain pressured as we await oil prices to break out above the $50 range, we note that the company has 4.73% distribution, over twice the current yield of the 10-year Treasury. Looking ahead, MMP is making investments into a third oil pipeline in the Permian (which we believe will be especially rewarding as production begins to put pressure on capacity), and sees growth opportunities in both crude oil and refined products exports. We reiterate our $89 target.
Nucor (NUE) ; $56.66; 1,500 shares; 3.10%; Sector: Industrials): Shares continued trending lower this week, underperforming the overall market as concerns regarding global steel demand persisted. Although the sector is out of favor, we took advantage of the decline, buying 100 shares on Monday and another 100 on Thursday. As Jim mentioned on this month's members call, Nucor is the best steel maker in the world. Although steel from overseas has been pressuring the sector, when Jim had Nucor CEO John Ferriola on Mad Money, Ferriola said he felt this would be a record year (regardless of whether we get President Trump's infrastructure plan). Since that time, nothing has changed in the economy that would cause us to doubt Ferriola's view. In addition, the poor car market is adding to the pressure. However, while Nucor has some exposure to the auto space, it also has exposure to pretty much every other kind of steel imaginable. It is completely diversified and no one subsector can pull it down. Although the stock trades at a premium to its peers, we believe the price is warranted due to the company's best-in-class status and the fact that it is a value-add steel producer (meaning it is less levered to the commodity). In addition, the stock pays a 2.7% dividend while we wait for the sentiment to change. We reiterate our $75 target.
Schlumberger (SLB) ; $71.75; 1,250 shares; 3.27%; Sector: Energy): Shares traded lower this week, performing in line with the overall market. As we have mentioned, this is a back-half-of-the-year story. As oil begins to recover and companies continue to increase production, they will be forced to invest to increase capacity. SLB management has stated that they believe these investments will come later this year. On Tuesday, Bloomberg reported that Saudi Aramco plans to sign agreements with at least 10 companies during President Trump's visit on Saturday, including SLB. SLB is the perfect way to play oil without choosing a specific company as it provides services throughout the industry. At current levels, we view shares as undervalued, trading at levels not seen since oil was under $40 a barrel (at the end of 2015). We maintain the belief that the stock will pay off for those with a long-term horizon who are willing to overlook any near-term, oil-related volatility. We reiterate our $93 target.
Snap-On (SNA) ; $165.71; 625 shares; 3.78%; Sector: Industrials): Shares traded sharply lower this week, failing to recover after selling off in high volume on Wednesday. On Thursday, we used the decline as an opportunity to build up our position while lowering our cost basis (buying 50 shares). Also on Thursday, Wunderlich published a report regarding a meeting they hosted with the SNA management team. In it, they touched on many factors that have been key to our investment thesis. Regarding the U.S., as the number of vehicles on the road grows, the demand for repair and maintenance grows with it. In addition, vehicles are becoming increasingly more complex. With this added complexity comes an increased need for more innovative diagnostic solutions. Cars are becoming more like computers every day. As the trend continues, the devices that service those cars must also evolve. SNA is in a unique position to take advantage of the trend as auto mechanics are forced to upgrade their equipment, lest they be unable to provide services for the newer, more complex vehicles on the road. In emerging markets, the company has made several investments to take advantage of the growing auto repair market seen in these countries. There is also a rising population of older cars in emerging markets, providing further opportunities for SNA. While these investments may compress margins in the short term, longer term we believe the move will be key to the company's ability to grow. In addition, the company continues to push ahead with its efforts to develop state-of-the-art tools to address the needs of those industries where there is simply no room for error. This includes industries such as oil and gas, power generation, aerospace and the military. According to management, the repair market for these industries is not only younger than the automotive repair market but also much larger. Overall, we believe SNA is doing exactly what it needs to do to ensure growth moving forward. We reiterate our $200 target.
T.J. Maxx (TJX) ; $74.27; 1,300 shares; 3.52%; Sector: Consumer Discretionary): Shares traded lower this week following the company's earnings report. We remind members that we had trimmed TJX in recent months as a way to de-risk the portfolio from the struggling retail space. The moves have been consistent with our decision to maintain our Two rating on the name for the past several months, clearing up space to purchase other positions but also creating room to add back to TJX on a move such as the one we saw this week. We upgraded the stock on our members-only call this week as we believe the selloff discounts the company's ability to continue to drive traffic through its stores and benefit long-term from bloated inventories in the department store space. In addition, the comp of +1%, while lower than consensus, was actually at the high end of the internal plan and was on top of a +7% compare from the prior year. We reiterate our $85 target and would be buyers on this weakness if not restricted this week.
TWOS
Apple (AAPL) ; $153.06; 820 shares; 4.58%; Sector: Technology): Shares traded lower this week as investors sought to take profits during Wednesday's marketwide selloff. The stock quickly recovered (although not to where it was earlier in the week), as the decline provided an opportunity to jump into the tech juggernaut. As has become the new normal recently, the stock saw several upgrades this week as analysts continue to look past this quarter in anticipation of the iPhone 8. In addition, analysts are beginning to place a higher multiple on the company as the Services business comes into its own, providing for a more reliable, transparent stream of income. On Wednesday, AAPL announced it had begun iPhone production in India. Also on Wednesday, Alphabet announced that Siri competitor Google Assistant was officially available on the iPhone. As the iPhone 8 release nears, we believe shares should continue to appreciate; however, we maintain our Two rating, reflecting the amazing run the shares have seen since the beginning of the year. Despite concerns over tax reform and deregulation, investors continue to remain positive on the potential for a repatriation holiday, something that would greatly benefit AAPL as most of its $240 billion-plus cash pile remains overseas. We reiterate our $165 target.
Adobe (ADBE) ; $136.43; 350 shares; 1.74%; Sector: Technology): Shares traded lower this week as the Nasdaq was hit on the larger selloff on Wednesday. We took profits on 200 shares of the position on Thursday purely as a way to raise additional cash for the portfolio after making several moves in recent weeks. As we noted in our trade, the trim was not a reflection whatsoever of our view on the company for the long term, and we noted that those who were comfortable with their cash levels could continue to hold onto their shares. We would relish the opportunity to buy these shares back should the stock show some weakness into the $120s. We reiterate our $150 target.
Arconic (ARNC) ; $27.58; 2,200 shares; 2.21%; Sector: Industrials): Shares were volatile this week, trading in an up-and-down fashion. We took advantage of the highs this week when the stock eclipsed the $28 level, booking profits and building some cash for the portfolio. The stock has tended to see resistance around the $28 threshold, so we wanted to make sure to capitalize on the short-term move higher, especially to further protect from potential volatility heading into the shareholder vote next week. You can read our update on the company from earlier this week here. We reiterate our $31 target.
Citigroup (C) ; $61.10; 1,500 shares; 3.34%; Sector: Financials): Shares trended slightly higher this week. After selling off in high volume on Wednesday, the stock managed to regain momentum on Thursday. Shares were initially pressured by declining yields, worries that the Fed may not raise rates in June (thanks to fears that political turmoil would spill over into economic policy), and uncertainty regarding the potential for tax reform and deregulation. Recall that bank stocks have largely been trading on expectations for deregulation and two more hikes this year. On Tuesday, we trimmed our position by 250 shares (at just over $62), and downgraded the name to Two, as the nearly 8% rally over the last month caused the share prices to come within nearly 6% of our $66 target. For now, our thesis remains unchanged. We anticipate the back half of the year to be largely positive as this is when we can expect to see investments into branded cards and the Costco COST portfolio begin to pay off. We reiterate our $66 target.
Dow Chemical (DOW) ; $61.29; 1,475 shares; 3.30%; Sector: Chemicals): Shares traded lower this week, underperforming the overall market. The stock remains range-bound in the low $60s as investors await confirmation of the intended merger with DuPont (DD) . On Wednesday, the two companies received conditional regulatory approval for the proposed merger from Brazil's Administrative Council for Economic Defense. With this, the two companies are one step closer to completing the union and anticipate closing the deal sometime between Aug. 1 and Sept. 1. Plans to then break the combined entity, DOWDuPont, into three companies are expected to occur within 18 months following completion of the merger. We are encouraged by the progress and will continue to monitor for any updates. We reiterate our $70 target.
Newell Brands (NWL) ; $52.80; 1,300 shares; 2.50%; Sector: Consumer Discretionary): Shares traded flat this week on little news. After selling off with the overall market on Wednesday, the stock managed to recover into the weekend. Shares are up almost 11% following last week's earnings beat. Recall that the company delivered core sales growth of 2.5% in the quarter, beating consensus expectations of around 2% (with many sell-side analysts lower) and buy-side expectations, which were closer to the 1%-1.5% range. Not only did NWL beat estimates, it did so facing its toughest comps from 2016. Given the still-difficult retail environment, last week's beat speaks to the company's best-in-class management team. Looking ahead, the company should continue to benefit from its integration of Jarden, with synergies expected to reach $1 billion by 2021. In addition, the company is targeting $1 billion of e-commerce growth over the next four years, the importance of which is proven by the fact that one of the few retailers to report solid earnings results was Walmart (WMT) , thanks largely to its aggressive efforts to push into the online retail market. We reiterate our $60 target.
NXP Semiconductors (NXPI) ; $107.75; 550 shares; 2.16%; Sector: Information Technology): Shares trended higher this week, outperforming the overall market. Despite Wednesday's marketwide selloff, shares continue to be supported by the $110-per-share takeover bid from Qualcomm QCOM. Last week, CTFN reported that the deal is set to be cleared by the Korean FTC. As the acquisition gets closer to approval, we believe shares will continue to gravitate toward the actual deal price. We reiterate our $110 target.
PepsiCo (PEP) ; $113.69; 800 shares; 3.32%; Sector: Consumer Staples): Shares traded higher this week, bucking the overall market trend. Despite little news on the name, consumers sought safety in this best-in-class, diversified consumer-staples brand. This week, we saw a perfect example of why it is crucial to maintain a properly diversified portfolio. While PEP may not offer the same growth as, say, an AAPL or FB, it provides solid organic revenue growth and allows us to add variety to the portfolio, while still collecting a 2.8% dividend. Regardless of the political turmoil in Washington or worries regarding the possibility of a June rate hike, people will still demand what PEP offers, a diversified mix of food and beverages, with everything from feel-good snacks like chips and soda, to healthier options such as oatmeal and yogurt. The fact that the company has made efforts to further diversify its offerings with healthier options allows it to remain resilient in the face of things such as the Philadelphia "sugar tax." We reiterate our $120 target.
Starbucks (SBUX) ; $61.36; 1,300 shares; 2.91%; Sector: Consumer Discretionary): Shares advanced this week, managing to recover following Wednesday's market turmoil, and surge higher on Friday. After trading up on Monday, thanks to an upgrade to Buy from Hold at Deutsche Bank, the stock was pressured Tuesday when Bloomberg reported that the company's payment system was down in some U.S. and Canadian locations. Also on Tuesday, Oppenheimer reported that SBUX management reiterated their belief that same-store sales had risen to mid-single digits, thanks in part to easier comparisons. We continue to view this is a second-half-of-the-year story. We are confident that management will be able to right the through-put issues that plagued Starbucks in recent quarters. Given the Friday rally, it appears sentiment may finally be starting to shift. As we mentioned last week, we are still looking to buy back the shares we sold ahead of the company's last earnings report. We reiterate our $65 target.
Walgreens Boots Alliance (WBA) ; $80.61; 500 shares; 1.47%; Sector: Health Care): Shares were pressured this week as the market traded lower and investors dumped those stocks perceived as embodying increased uncertainty. WBA fits the bill given its pending merger with Rite Aid (RAD) (hence why we have been trimming in recent weeks when the stock traded near $86). The stock was also pressured as Amazon (AMZN) stepped up efforts to move into the pharmacy space. As for the Amazon news, the company noted that it is looking into hiring a business lead to determine how the company can break into the multibillion-dollar pharmacy market. According to sources, Amazon hosts discussions every year to evaluate the opportunity, but the do-it-all online retailer appears more focused than ever this year on pursuing the business. Nothing is set in stone, but the mere decision to hire a general manager to lead the team and formulate a strategy is a signal of Amazon's intent. In the long term, as we have seen with retail, Amazon tends to lay waste to the inefficient providers in whatever space it looks to conquer. The company is only in its early stages of planning its pharmacy strategy. We have always viewed levels near $80-$81 as buying opportunities for WBA, and each time the stock has moved back into the mid-$80s this has become somewhat of a predictable pattern with Walgreens, as, although the merger uncertainty puts a ceiling on the stock, the potential also provides a floor. We reiterate our $90 target.
Wells Fargo (WFC) ; $53.06; 1,900 shares; 3.68%; Sector: Financials): Shares traded flat on the week, outperforming the overall market. Despite selling off in volume on Wednesday, due to concerns that the Fed may not raise rates in June, shares bounced back later in the week (it appears those fears may have been overblown). As we've mentioned, the bank continues to be pressured by the recent sales scandal. While the pressures may continue in the near term, we believe this provides a unique buying opportunity for those with a long-term investment horizon. We maintain our Two rating, reflecting that the turnaround will take time. However, we want to point out that the decline in price has pushed the dividend yield to just under 3%, providing a nice stream of income (higher than current Treasury yields), while we wait for the stock to bounce back. We reiterate our $60 price target and will be considering an upgrade on any additional weakness in the coming months.
Western Digital (WDC) ; $86.66; 550 shares; 1.74%; Sector: Technology Hardware): Shares underperformed this week, dropping further than the overall market on Wednesday and failing to recover meaningfully into the weekend. When markets sell off in such a broad fashion, high-growth, more cyclical names will inevitably be among the hardest hit as investors look for any reason to take profits and run. Despite the decline, our investment thesis remains intact. Recall that the stock is largely tied to the supply/demand dynamic within the NAND flash memory space. So long as NAND industry supply remains tight, WDC will benefit. You can read more about the company's cyclical nature and its relation to the underlying NAND industry here and here. In the news this week, on Sunday, WDC (through several of its SanDisk subsidiaries) initiated arbitration against Toshiba. The company believes Toshiba does not have the right to sell its stake in the two companies' joint venture without WDC's approval (Toshiba obviously disagrees). WDC maintains the only reason it could take over SanDisk's stake in the JV is because it purchased SanDisk in its entirety (whereas Toshiba is only looking to sell its stake in the JV, not the whole company). While we will be watching closely for any updates, we note that conflicts such as this can take years to resolve. Given the industry's cyclical nature, we will likely be out of the position before a resolution is reached. Although the conflict with Toshiba adds some risk, we are holders for the time being and will keep a close watch on the NAND industry's supply dynamic, which is the real story and ultimately what drives the stock. We reiterate our $108 target.