Starting a New Energy Position

-- Selling 500 shares of ADT (ADT) .

-- Buying 300 shares of AIG (AIG) .

-- Buying 400 shares of Schlumberger (SLB) .

-- Buying 200 shares of the Vanguard Europe ETF (VGK) .

We are going to sell 500 shares of ADT (ADT) , which have a bid/ask of $40.10-40.74. ADT is a Three-rated stock in the portfolio.

We've said that the company was in show-me mode following last quarter where the margins, revenues and attrition rates were below plan. Yesterday, the company reported earnings that showed improvement on several fronts: revenues, earnings and EBITDA margins. But after adjusting for the revisions in attrition rates from prior quarters, attrition in fiscal 3Q rose 30 bps sequentially. This is likely the reason the stock gave back its gains, as well as the premium that came out of the stock when Ackman announced he was buying a stake in Air Products (APD) instead of ADT.

Shares rallied 15% on the activist speculation and gave back part of that yesterday. While we were pleased to see the company make progress on its fundamentals and the fact that the company has increased its leverage (to make acquisitions/buy back more stock) we think the attrition levels will need to improve for the stock to move materially higher. Also, another headwind is that the housing-related stocks are now out of favor as interest rates rise. We've been scaling out of this theme (although still own the banks, which will benefit from the steeper yield curve) as we think the stocks pause for a bit. Simply put, we're moving on.

We'll add 300 shares to AIG (AIG) , at a bid/ask of $45.85-45.98, with shares pulling back 5% (since July 22) ahead of earnings.

We expect a mixed, but solid, earnings report tonight, with pricing challenges in its property/casualty segment offset by strong volumes in its life division. But more importantly, the company is in the process of selling or taking public its aircraft leasing division and we view this as a strong positive both because of the strong industry dynamics (and a likely high valuation) and because it continues to simplify its structure.

We'll add a new position in Schlumberger (SLB) with 400 shares, which have a bid/ask of $81.65-81.87.

We've owned the stock in the past and following the strong quarter (beating on revenues, earnings and margins) and the prospects for improved international pricing, we want to get back involved. Shares trade at 14.2x forward estimates, which is below its 5- and 10-year averages of 15.8x and 18.5x respectively, and have lagged its peers year to date by 90 bps. SLB is the largest provider of services and equipment used in drilling, evaluation, completion, production and maintenance for oil and natural gas wells. We like to say it's a technology company as much as it is an oil service one. Its customer base is an impressive list of blue-chip global energy companies and its geographic region is the most diverse in the industry.

We like the mix of U.S. (23% of total revenue), international (68% of total revenue) and the deep water (with a 60% market share). In the most recent quarter, the North American results were the reason for the earnings beat, with revenue led by better deep-water results. Margins were impressive at 19.7% vs. the 18% expectation. Latin America revenues were below, but margins in this region were ahead at 20.6% vs. the 20% expectation. Middle East/Asia revenues and margins beat while Europe/CIS/Africa was the only segment to show softness (we believe this is the trough). As activity continues to improve and global growth gradually recovers we expect pricing to continue to move upward providing more upside to earnings, revenues and margins.

The company also announced a new $10 billion buyback program that will be completed by June 2018. While this is a large amount, with expected free cash flow of $6.1 billion this year and $6.6 billion next (vs. $2.2 billion in 2012) we wouldn't be surprised to see this increase over time. Having raised its dividend on average 13% over the past 10 yearsm this is also another option for its cash.

Finally, we'll add 200 shares of the Vanguard Europe ETF (VGK) , which has a bid/ask of $51.86-54.01.

We want exposure to the recovery in Europe, which we believe is in early recovery stages aided by fiscal and monetary policy measures by the ECB. There was no change to the interest rate policy this morning, which was expected. But the commentary remained supportive for further actions, with rates remaining low "for an extended period" with the goal to help keep businesses borrowing costs low and give European governments time to finance their debts and improve growth. PMIs have already started to recover and we expect further economic evidence to lead to higher asset prices.

After the trades, we'll own 850 shares of ADT, or 1.1%, 2,100 shares of AIG, or 3.2%, 400 shares of SLB, or 1.1%, and 1,000 shares of VGK, or 1.7%.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long ADT, AIG, SLB and VGK.