Video: The AAP Daily Rundown for Monday

In today's Daily Rundown, Jeff and Zev fill in for Jim and talk about Monday's trades (you can read more about it in our Alert here), they recap Honeywell's (HON) earningsreport from last Thursday, and they preview this week's upcoming earnings releases.

Zev Fima: Hi, everybody. I'm Zev Fima, Research Analyst with Action Alerts Plus. I'll be filling in for Catherine Ross all this week. Jim is out today but I'm joined with Jeff Marks, Senior Portfolio Analyst for the Trust.

Jeff Marks: We're going to keep it here today. We're not going to walk around, although I love watching all the tickers and moving them. We're going to keep it nice and inside here today.

Zev Fima: Jeff, there's a lot to cover today so let's just dive right into it. This morning we took off 100 shares of Cisco, 100 shares of Disney and 25 shares of Home Depot. Has our view changed on these names at all or is it more just discipline?

Jeff Marks: It's discipline-based. We told you last Thursday in our Alert that we had plans to trim these three names. Really, they've been huge winners. They've been huge gains for us this year. It's only natural to take something off, right?

Jeff Marks: Let's take a look at Cisco, right? This is probably one of the two or three stocks we added to the most during the December bear market at the end of the year. We really beefed up on that position and we were rewarded handsomely with those buys, right? Cisco has been one of the best performing stocks in the Dow Jones Industrial Average this year. It's up, I want to say, almost 30% year to date, give or take whatever it's doing this morning. I haven't had a chance to look at it recently.

Jeff Marks: Look, bulls make money, bears make money, pigs get slaughtered. We love what Chuck Robbins is doing. We love their focus into software, away from hardware. We love their focus into security, cyber security. We saw the banks that the U.S. said that was the number one threat. We still like the position. We just felt like it was time to take something off.

Zev Fima: For sure, yes, and if I can just add to that. A lot of people ask, "How do you know you're getting kind of piggish with a holding?"

Jeff Marks: Yeah.

Zev Fima: For me, what it really was was I would constantly, every single day, I'm turning over to Jeff and it's like, "This Cisco does one thing, it goes up 0.50% every day. It doesn't pull back." After a while, you realize this can't go on forever and even though we think the valuation is reasonable and it could go higher, when you realize that every single day you're looking at a name and you almost expect it to just go higher, that's when you know maybe you're getting a little greedy. It's time to take some off. I think that's really the same thing that happened with Home Depot.

Jeff Marks: Yeah, it's the same thing that happened with Home Depot, right. When I look at Home Depot, we picked this off perfectly right after that quarter where it pulled back because there was some weather and people were concerned about it. It went back to the low $180's and now look at it. What is it? North of $200.

Zev Fima: Highest dividend yields in roughly five years at 3%.

Jeff Marks: Yeah, well not anymore, because it's rallied, yeah.

Zev Fima: Not anymore, but When we picked it us, it was.

Jeff Marks: Oh, right, exactly. All the signals pointed to a great time to buy it. You had the dividend. You had a huge buy back and it was right before their spring selling season, which is historically a strong time.

Zev Fima: ... and the end market, the housing market.

Jeff Marks: Right, right. You had kind of the Powell pivot so that did well for housing.

Zev Fima: Remember, real quick, the Powell pivot, that affects the Fed rate which has impact on interest rates and the tenure is oftentimes what's going to drive the mortgage rates. Once that started to come down, that's kind of what gave us the signal that, "You know what? The housing market might be starting to bottom because it's getting more attractive as the mortgage rates come down."

Jeff Marks: Right, but now when I look at Home depot, I see a stock that's maybe $10 removed from its September/October, 2018, highs. I feel it was right to take a gain. If the stock ever fell because of something like market-related weakness, I'd love to buy their shares back, absolutely. It's still a great stock. The weather is improving so we have a significant position to take advantage of the upcoming selling spring season for when they report. Because the weather is improving, were getting to see the gardeners out and all that stuff, and buying. It's still good stock. Just again, the theme from all these trades, or this morning's was, we had big gains. Let's take them. It's not a gain unless you sell.

Zev Fima: Oh, absolutely. Cisco and Home Depot are two cases of stocks that just slowly grinded higher. Disney, on the other hand, a huge jump following the investor day. One thing that I think happened with Disney is we started asking ourselves, "What is the catalyst coming up?" The only thing we could really come to is maybe the release of Endgame except that's pretty much understood. Some people were expecting it to be one of the biggest releases ever. What it really comes down to is these trades don't speak at all to a change in our stance. It's just when stocks are just going up endlessly, you have to take some off and set yourself up for an optionality to buy back on the pullback.

Jeff Marks: Yeah, I think that's a fabulous point. We grabbed this one at $108 when there was Fox-related ... Right after that deal closed, there were some merger-related pressure. We picked it up at $108. It was already a very large position already. The stock was running into the investor day event. After the investor day event, obviously, it sprung to $130.

Jeff Marks: Jim actually mentioned after when we had a question on this type forum, asking, should I be buying up here? "No, we're really more of a small scaler because our catalysts have now happened. It's in the past. Now we look forward to, yes, good movie slate but what's priced in, what's not, earnings. I do see a catalyst every time they report Disney Plus subscriber growth numbers. That could be a key thing but again, for right now, near term valuation, big position, big gain, we took that gain in.

Zev Fima: Right, absolutely. Jeff, let's talk a little bit about earning. I want to talk real quick about Honeywell, Schlumberger, just looking back and then the earnings in the week ahead. First of all, Honeywell ... I spoke about this with Jim on Thursday. Again, acceleration of organic growth, 8% to 6%. Was there anything else that stuck out at you, though?

Jeff Marks: Right now, we're seeing a lot of analysts come in and bump their price target up on Honeywell because I think it was really a tribute to how special this quarter was, right? What Darius Adamczyk has done with the company, spinning off his residential business, spinning off the auto turbocharger business at a great time, is really bringing out a higher multiple in the company.

Jeff Marks: There's still a lot to look forward to. Even though we just got 8% organic growth, I still see reasons to stay optimistic and bullish down the road. The balance sheet is pristine. It is an absolute fortress and what I think that gives you is that you have an incredible amount of capacity to make something happen.

Jeff Marks: People have been calling for when is Darius Adamczyk going to make his signature acquisition when he really buys another company and brings out that M&E catalyst. We haven't seen it yet, but I'm hopeful that they do do something. If not, I wouldn't be surprised if they bought back a ton of stock because they are doing so well, as you said.

Zev Fima: Right, and to your point, as far as how good the quarter was, yes, we have the 6% in the fourth quarter accelerated to 8%. The other thing is RBC is actually out, a lot of notes coming out again, tons of price target updates. One thing they call out is that it takes a lot of confidence to raise your guidance in the first quarter the way Honeywell did. Again, this early in the year, to be able to say that things are going so well, and part of that is the long cycle business, which is 40% of it.

Jeff Marks: Yeah, so keep in mind they have been conservative on the second half because there's not a great amount of visibility into their short cycle business, but that's interesting because that contrasts a lot of other industrials and multinational companies, who are saying, "We're going to get an acceleration in the back half of the year." I think that's Honeywell still being conservative so I still think they're poised to outperform at least their peer group in the back half of the year as things progress and as time progresses.

Zev Fima: Right. The one other report we got, we did get Danaher. We closed out that position ahead of it and the quick take is available on Action Alerts but-

Jeff Marks: A good quarter from them and again, it was just expectations. We felt things got a little bit too hot after the GE acquisition. The stock was an absolute horse. It was in the $125's. Great company. Look, if it ever pulled back, maybe we'd get interested again. We do like how they're spinning off the dental business later on in the year but look, you've got to take gains at some point and we though expectations were a little too hot. Healthcare, life sciences are a little shaky right now, so we took the win.

Zev Fima: Absolutely, and then Schlumberger, the big things to keep in mind there is the international is picking up. North America is not going to be that hot but this is what we've been waiting for with Schlumberger. It's taken a long time. You've had four years of underinvestment in production capacity and the big reason these companies are focusing on pre-cash flow. The bottom line is, though, while the timing has been off, eventually these global exploration and production companies, they have no choice but to invest because the wells start to dry up. That's why we've been in there. It could still take some time but the thing is, I think the dividend is over 4% at this point.

Jeff Marks: Yeah, and that's backed by cash so I think, as you said, to reiterate, the cycle is more their friend now and not their foe. When we look at the investment activities, look, BP, one of our names, it was just announced over the weekend they're investing $6 billion in a deep water project outside of Azerbaijan. Deep water is like Schlumberger's wheelhouse, right? That's where they're going to get a lot of activity. I think we're starting to see signs.

Jeff Marks: That's international, obviously, so we're starting to see signs of their international call beginning to pick up. North America is still a little bit weaker but as long as they hit on that international growth, I think that, from an earnings revision standpoint, I think the next direction is going to be to the upside and not the downside like we've unfortunately seen quarter after quarter.

Zev Fima: Right, and then ... Jeff, looking ahead, we have Microsoft, Facebook, Lam Research. On Wednesday, Comcast and Amazon the next day. Of those, which ones are you most excited for?

Jeff Marks: You know, I'm excited for all of them. I'm interested to see what they all say. Microsoft, what they've done with the company, Azure has been incredible growth. We're always interested to see what they do on the gaming side as well, whether they talk more about some of the projects they have.

Jeff Marks: Amazon, another big name, huge position of ours. We're going to see if their guidance from last quarter that everyone took issue with because of the India business, eCommerce business, there's a lot of restrictions and regulations going on there. We're going to see if they were able to adapt and make changes proactively without that really being a headwind to the quarter.

Jeff Marks: Then you have advertising, which is a very strong business for them and you have AWS, which is best in class. A lot of good things going on there. I'm excited for Amazon. They have a lot of retail initiatives, too, to try and improve margins. I know we were talking about some of them this morning, about what they were doing from a third party perspective.

Zev Fima: They're trying to push from first party over to third party.

Jeff Marks: Yeah.

Zev Fima: The other thing I would mention for Amazon is, BMO was out with a note today and they were talking about the fact that Jeff Bezos said in the letter to shareholders, "$283 billion in gross merchandise value in 2018." Now the reason that's important, they also point out that that implies 10% of global eCommerce and about 1% of global retail sales. The reason I mention that is those are pretty small numbers in comparison to the full size of the pie.

Jeff Marks: Yeah. The Pie is huge. Really, right, they've room to grow. I would just add if you haven't had a chance to read Jeff Bezos' shareholder letter, I would absolutely do it. He is one competitive dude and I think it shines in that letter.

Zev Fima: Oh, absolutely, and the last thing I want to mention to members, because we are always trying to provide some lesson to take away from this, is that the other thing you want to focus on, and we always do it when these companies report, is to read through to other companies. Microsoft reports first. They're going to talk Azure. They're going to talk the cloud and obviously, that's read through for Amazon's AWS, which is also trying to become more of a hybrid cloud.

Zev Fima: The other thing with Microsoft and Amazon is huge in the data center, anything data center related, anything on the investment front, that's going to speak to demand for Semiconductors. Semiconductors, the read through there is Lam Research, obviously, where we are in that cycle.

Jeff Marks: Right. They were upgraded today.

Zev Fima: Right.

Jeff Marks: I forget which firm but it was [crosstalk] Yeah. That sounds right. It's kind of bull versus bear right now because we saw some other notes. I'm kind of saying a little bit more caution in how much upside is already price in because people are just trying to get ahead of the inflection point of the investment cycle.

Zev Fima: Right, the expectations back half of the deal.

Jeff Marks: That's why we have it at two, right, because I forget the price point at which we downgraded it but we kind of felt that way, too. Let's get that visibility into the cycle. Let's see if they give you that when they report it and then we can make the adjustment there.

Zev Fima: Right, and the last reason I'll mention is obviously, Facebook. We are expecting from Facebook huge additional ads but the one thing we are expecting from Amazon is continued growth in that ad business. They are looking to monetize third party resellers by having them advertise on the platform. Remember that the key advances that Amazon can provide an advertiser is they can hit you with an advertisement while you are in your checkout cart. It's like when you're online and they hit you right at the last minute with something you didn't think to buy and but you pick it up anyway.

Jeff Marks: Even so with Instagram, they are the shopping cart now with their partnership with PayPal. That's going to be huge, I think, for them long term. Such a smart deal for them. You see the ad. Now you're at the point of sale as well.

Zev Fima: It will be interesting to see what happens with Pinterest on that front as well. Remember, Jim mentioned on Thursday this is the second day of Pinterest trading. If you did put any on, we're going to have to get an update from him later today, but if you did put anything on, he was recommending that you take some off today just because this is a hot IPO market. We still have Uber. I think we're still looking for slack in a few other of theses unicorns.

Jeff Marks: Yeah, and then that's also kind of why we raise cash, right? People are going to have to make room for these. There was a little bit of an exuberance we saw last Thursday with the Zoom IPO, the Pinterest IPO. We thought it was a good time to raise a little bit of cash, lock in your gains. You know, we are looking to put that cash to work because we do have a lot. We were tossing back symbol names with Jim earlier this morning. We like Dell.

Zev Fima: Still a lot. A lot of debt, but they can pay it off.

Jeff Marks: Yeah, now we're looking for the right time, the right action point to get in. We'll keep you posted on that front.

Zev Fima: All right, Jeff, anything else you're .... Oh, yeah.

Jeff Marks: Yeah, and then we have Comcast, too, this week and that's another stock, that base has been such a winner so far this year. Comcast, Viacom, Disney, they've all seen really strong gains.

Zev Fima: Right, streaming, media platform.

Jeff Marks: Yeah, media and that front. We'll have to see what they say. Cord cutting is probably going to only increase because of things like the Disney_ but they have such a good broadband business and the acquisition of Sky, which was so hated at the time but CEO Brian Roberts said Look, the stock is going to fall about 6% or 7% on this news and then watch us. We'll create value. It has done just that, so Sky is like a cheap way to buy international growth almost.

Zev Fima: Yeah, I think it bumped up their international exposure by about 25%.

Jeff Marks: Yeah, absolutely. Yeah, tons of net customer ads. We'll have to see what they say when they report.

Zev Fima: Right, and the dynamic with Comcast, remember, they are losing the video subscribers but the offset is broadband. If you want to do eSports, if you want to do online streaming, especially with things moving to 8K streaming, all of that is incredibly debt intensive so you need broadband, you need high speeds and that's where Comcast comes in, the number one broadband provider in the country. Jeff, anything else?

Jeff Marks: That's all I got.

Zev Fima: That's all we've got. Jeff, thank you so much.

Jeff Marks: We got to get back to write the Alerts out now.

Zev Fima: Yeah, exactly. I'm Zev Fima, Research Analyst for Action Alerts Plus. See you tomorrow. 

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long HON.