Analysis: M TGT KSS PYPL SQ GOOGL AMZN MSFT FB UNH ABT AMGN CVS

With markets trying to rebound as the day progresses but consumer discretionary remaining under pressure as a result of key department store announcements from names including Macy's (M) , Target (TGT) and Kohl's (KSS) , which we discussed in more detail, here, we want to take a look at a few themes members should keep in mind that continue to work in this market and that we believe can drive growth longer-term.

First, let's look at a few secular trends, something we discussed on our November Members' Only call, here. This morning, on the digital payments front, we received a note from analysts at Baird, discussing the implications for PayPal's (PYPL) Braintree business resulting from competitor Square's (SQ) introduction of an in-app payment platform. Recall, Braintree powers app payment portals such as those seen in the Uber app. Without getting too into the weeds of the note, the main takeaway is that the analysts believe the impact on Braintree will be limited, calling out that while PayPal's business plays to larger companies, Square is more focused on small/medium business and adding that they believe Square to be playing catch-up by addressing what has been a major hole in the company's product suite. Additionally, while the digital payments space is clearly becoming more competitive over time, the analysts added that PayPal remains the "largest online payment platform, with leading e-commerce and mobile commerce market share."

We have long called out digital payments and e-commerce as being secular growth trends that will persist despite the business cycle. With that in mind, the analysts also noted that "mobile commerce represents approximately 30% e-commerce volumes in North America (likely a higher mix in other markets), a large part of which occurs through mobile apps." We believe this points to further upside ahead for payments platform such as PayPal, regardless of weaker-than-expected consumer trends at brick-and-mortar locations for two reasons. First, in our view, mobile commerce will continue to grow its share of total e-commerce volumes (with PayPal leading the way) as consumers increasingly look to mobile platforms, something we've seen with the growth of Venmo and the user trends being seen at company's like Alphabet (GOOGL) . And second, we continue to believe that overall, e-commerce will continue to steal share of brick-and-mortar retailers. The takeaway is that we see digital payments platforms, PayPal being the best of the bunch, continuing to outperform as overall shopping habits trend toward mediums that inherently play to the benefits of the sector. Lastly, we would also call out that brick-and-mortar retailers are well aware of this trend, which is why so many are scrambling to execute on a digital strategy and whether this means building out their online platform or enhancing the mobile experience with mobile checkout, the bottom line is that digital payments stand to benefit and grow, regardless of any broader slowdown in consumer spending, i.e. the pie may get smaller, but digital payments are taking a larger piece of it.

With all that in mind, we remind members that we currently have a Two rating on PYPL as shares have gone on a nice run in recent weeks and while we do not want members to chase, we believe these themes make PYPL deserving of being earmarked by members to be revisited on a pullback.

Another trend to keep in mind is the cloud, on this front, as members know, the two names to keep in mind are Amazon (AMZN) (which itself is the leading e-commerce marketplace and is looking to take advantage of the digital payments trend) and Microsoft (MSFT) . To this point, analysts at Morgan Stanley put out a note this morning titled "CIO Survey Gives Confidence Secular Can Trump the Cyclical at Microsoft," while noting that their 4Q18 survey showed "impressive spending intentions for Microsoft's cloud and on-premise solutions, with CIOs' expectations for on-premise server products improved vs. prior surveys and Microsoft well positioned to garner IT budget share with shift to Public Cloud." As it relates to Microsoft, in line with our own view, the analysts at Morgan Stanley called out that what differentiates the company's Azure offering from public cloud leader Amazon's AWS is the combination of "Public Cloud assets with pre-existing enterprise assets," i.e. Microsoft can attack customer needs as it relates to both the public cloud and on-premises thanks to their significant legacy business.

As for Amazon, AWS remains the public cloud leader with over 50% global market share thanks to a seven year head start, giving us conviction that as the space grows and companies push deeper into the cloud, so too will Amazon's AWS business. Regarding industry growth in general, the analysts at Morgan Stanley noted, "Our 4Q18 survey of 100 US/European CIOs showed stable 2019 IT budget growth expectations, with YoY growth at a strong +4.7%, relatively in-line with +4.9% growth reported for 2018. The slight deceleration into 2019 stems mostly from weaker European spending plans, while growth expectations amongst US CIOs actually step up into the new year - +5.5% growth versus +5.3%," while going on to add that "softwarecentric themes (Cloud Computing, Security and CRM Applications)" were a top priority for survey participants. We believe this plays into the hands of Amazon and Microsoft.

While on the topic of Amazon, we would also note that analysts at Cowen called out the name this morning as being a key beneficiary of another trend we've been vocal about, digital advertising. According to their survey work, the analysts believe that Amazon is the "largest expected Digital ad share gainer, with AMZN's share of Digital budgets rising from 6% in '18 to 12% in '20," with "rising spend coming from other Digital platforms, TV and trade budgets." This is in line with our view that as consumer trends change, with shoppers moving more toward e-commerce and media watchers "cutting the cord", ad buyers have no choice but to reallocate funds toward digital mediums such as Amazon, Facebook (FB) and Alphabet's Google as these platforms support better ROI thanks to their ability to target consumers based on internet search and shopping trends. In the case of Amazon, the company can also target buyers at the point of checkout, something that serves to differentiate in the eyes of online merchants selling on the platform.

Taking a look at the stocks, while we currently have a Two rating on shares of MSFT and believe members should therefore earmark the name to be revisited on a pullback, we reiterate our One rating on shares of AMZN, noting that while there is never a good time to buy as the stock, even after this pullback can't be considered cheap on a P/E basis, the company's exposure to the secular trends of the cloud, e-commerce and digital advertising, compounded by the significant move off its all-time high, keep us bullish long-term and of the belief that shares can be nibbled on here for those who have remained patient.

Lastly, while these are key secular trends we want members to keep in mind, we also believe healthcare, which we discussed in more detail yesterday, here, to be another sector deserving of attention as a number of high quality names have pulled back recently despite strong prospects in 2019. Additionally, for those that are concerned about the business cycle and what the action in discretionary could be indicating about consumer trends, healthcare provides a safe haven with more resilient earnings thanks to the simple fact that the products and services companies such as UnitedHealth (UNH) , Abbott Laboratories (ABT) , Amgen (AMGN) and CVS (CVS) provide are too important to forego, even in the face of an economic downturn.

Regarding CVS, we want to provide some thoughts on the name given the recent pullback on the heels of the company's JP Morgan Healthcare conference presentation. Yesterday, as the stock was falling on what appeared to us to be no news at all, we all went back and forth as a team via e-mail debating the proper course action, i.e. do we buy more shares or do we sit tight. Our first instinct was to grab more shares because our homework has given us the conviction that patience here will be rewarded and that the selling pressure was not a result of any change in the company's outlook. However, despite our desire to pull the trigger, which we were certainly itching to do, our price discipline ultimately kept us from doing so. What it came down to was a simple review of past purchases, sometimes all you need to do in order to stay focused and disciplined is to review past actions. Once, we did this and saw that we had already done the following buys...

Company Name

Purchase Date

Cost Basis per Share ($)

Total # of Shares

CVS Health Corp.

12/28/2018

66.13

100

CVS Health Corp.

12/24/2018

63.044

100

CVS Health Corp.

12/21/2018

64.176

50

...picking up additional shares at ~$66 simply seemed undisciplined, especially in a name that is already over 4% of our total portfolio. We note this to call out that while we could not pull the trigger out of discipline, we continue to view shares as highly attractive at current levels given the transformation story and discount to peers, and believe now to be a good opportunity for members to either initiate a position or add to a current position and improve overall cost basis.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long KSS, PYPL, GOOGL, AMZN, MSFT, FB, UNH, ABT, AMGN, CVS.