The markets were down slightly for the week, but it felt worse, given the three-day losing streak from Wednesday to Friday. The lackluster economic data in housing, industrial production and retail sales started the week on a down note. And then the disappointing Dell (DELL) earnings, along with Bank of America's downgrade of the semiconductor industry, gave the bears exactly what they were looking for to push the averages down. I even heard "double dip" a few times, suggesting the economy was headed south. The dollar was up (meaning markets down), and oil was all over the lot.
I choose to look at things differently -- that the economy as a whole is doing better than it was a few months ago and certainly better than the catastrophe from last year. We're not out of the woods, but the environment is recovering. I believe that the housing-starts numbers were actually "good" for the market, because it means less supply out there (single-family homebuilding is 10% lower than a year ago, and building permits are down 4%). These lower inventories, the 30%-50% price declines and sub-5% mortgage rates will lead to better demand.
Just this week, both Home Depot (HD) and Lowe's (LOW) confirmed that the environment was getting better. Industrial production, capacity utilization and the manufacturing surveys are all decisively higher from a year ago and show expansion, even if they were light of consensus forecasts this week. Emerson Electric (EMR) , Cooper (CBE) , Eaton (ETN) and many other industrial pure plays noted this in their third-quarter earnings reports.
On Dell, it's clear that its problems are company-specific, because its products have been commoditized, and the company was slow in recognizing this while its chief competitor, Hewlett Packard (HPQ) , continues to stroll along and take share. And the semi downgrade -- the easy money has been made, and why not take some money off? -- never argue with profit-taking. That's how I interpreted the call.
Unemployment remains high, but we are losing fewer jobs that we were, Master Trust credit card data released this week showed that delinquencies have peaked, and many retailers posted better profits on disciplined inventory control and a tick up in demand. In fact, there was a lot of good news out this week -- from Network Appliance (NTAP) , Ross Stores (ROST) , The Limited (LTD) and Home Depot, as well as the new recent highs in the Baltic Dry Index -- a clear indication that activity is picking up around the world.
Right now, there are two schools of thought out there in terms of where to put money. The first is that we're getting close to the end of the year, looking for a "safe harbor" with defensive stocks. The other is that there will be a mad scramble to improve performance by those who have underperformed year to date. I'm fortunate that I am beating the market and can have a clear head about what I want to do and where I want to be invested, and the fact that I have a lot of diversified positions in the portfolio has served me well this year.
I own defensives -- Pepsi is my largest holding in the fund currently, with Procter & Gamble (PG) and Abbott (ABT) not far behind. But I also own beta with positions in Cisco (CSCO) , Qualcomm (QCOM) and an overweight position in industrials. This combination is important, because I get to participate on the "economic recovery days" yet stay protected on the "double-dip fear" days. I'll continue to tweak as the environment changes, but for now I like where I stand -- overweight in industrials, technology, staples and health care, and underweight in financials, energy, discretionary and market- weight materials.
I took advantage of the weakness in Marathon Oil (MRO) and Weatherford International (WFT) to add to those bets this week, and increased the China Unicom (CHU) position. I took profits in Vale (VALE) to fund the buys. On rating changes, I upgraded Vale (VALE) from a Three to a Two, because I am done selling the stock for now, and upgraded eBay (EBAY) from a Two to a One, because I plan on buying more in front of analyst meetings. I downgraded Procter & Gamble from a One to a Two, just given that it's up $10 since I first started buying, and I am not likely to chase it here. And I downgraded Wells Fargo (WFC) from a One to a Two just because I prefer JPMorgan Chase (JPM) at the current price and keep adding to that bet.
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Here's the quick guide to my rating system, too: Ones are stocks I would buy right now, Twos are stocks that I would buy on a pullback, Threes are stocks I would sell on strength and Fours are stocks I want to unload as soon as my trading restrictions allow.
ONES:
Abbott Laboratories (ABT: NYSE, $53.64, 2,100 shares, 3.76%) INDUSTRY SECTOR -- HEALTH CARE: The company received positive data on its drug Niaspan over Zetia/Vytorin for lowering cholesterol with fewer adverse heart issues (such as heart attacks). Shares rallied, because this could mean upside to earnings growth, even though Niaspan is only 3% of total sales. The momentum could continue, as its next- generation drug, TriLipix, has shown promising results as well and will offset the Niaspan patent expiration in 2013. Shares remain attractive at 12.6 times earnings, and this will continue to be a core holding.
Altria (MO:NYSE, $18.98, 5,000 shares, 3.16%) INDUSTRY SECTOR -- CONSUMER STAPLES: SABMiller reported better-than- expected earnings and announced a four-year cost-cutting program that will yield $300 million in savings per year until 2013. I care, because MO owns 28.6% of SABMiller, and it is nice extra income. Whether it monetizes its SAB stake or not, this is good news and one of the reasons I remain positive on the shares (the other reasons: smoking is on the rise, MO dominates the cigarette business, price increases are sticking, and the UST deal is in the early stages of a turnaround). I expect MO to continue to support and raise its dividend as well.
Cisco Systems (CSCO: Nasdaq, $23.46, 6,300 shares, 4.93%) INDUSTRY SECTOR -- TECHNOLOGY: As expected, the company increased its offer for the Norwegian video conference company, Tandberg, to $3.4 billion from $3 billion. The price still makes sense (18 times forward, 22 times trailing earnings) for the No. 1 company in this segment, and the deal will add nicely to CSCO's current telepresence segment. I was restricted this week but am a buyer of the stock in the low $20s on valuation, the strong quarter it just posted and improving visibility to its 12%-17% growth.
China Unicom (CHU:NYSE, $13.57, 5,900 shares 2.67%) INDUSTRY SECTOR -- TECHNOLOGY: I bought 100 shares this week on the pullback, because the 3G story is in the first inning, and over time the company is positioned well with its superior technology and first-mover advantage to gain subscriber growth and market share. With only 9% share, it won't take much to double in size, especially since it's opening 3,000 additional distributors by the end of November (on top of its 19,000 current CHU-owned facilities). The stock trades at 1 times book, which is below the mean for the group at 1.5 times, and an attractive buy point.
Cooper Industries (CBE:NYSE, $42.64, 2,400 shares, 3.41%) INDUSTRY SECTOR -- INDUSTRIAL: Morgan Stanley upgraded the industrials this week as evidence is building that the M&A activity is about to pick up. I wrote about this last week and expect CBE to use its strong balance sheet (debt/cap is 16%) to beef up its businesses either in the smart-grid or tools segment. I think investors would applaud an accretive acquisition, especially with prices continuing to be depressed. Shares remain attractive, and the company has real operating leverage, given its low inventory/sales ratio.
eBay (EBAY:Nasdaq, $22.79, 3,600 shares, 2.74%) INDUSTRY SECTOR -- TECHNOLOGY: I moved this back up to a One from a Two, because I want to buy more of this position ahead of analyst meetings in the first week of December. The CEO will tell a good story of the turnaround in its Marketplace unit and the growing opportunities in PayPal (I don't believe American Express' acquisition of Revolutionary Money will affect PayPal in the near to medium term). At 14 times conservatively guided earnings ahead of the holiday season, the stock remains attractive.
Gilead Sciences (GILD: Nasdaq, $46.39, 2,300 shares, 3.56%) INDUSTRY SECTOR -- HEALTH CARE: Shares were flat on the week with a quiet news week for the company. I still like the growth prospects of the company, the strong late-stage pipeline and the recently increased HIV guidelines in the E.U., which will be followed in the U.S. in the next few months. Shares trade at 14 times earnings, which is too cheap for this high-quality biotechnology play. It has over $3 billion in cash to fund its growth both internally and externally, and I will stick with this stock with a target in the low $50s.
Home Depot (HD: NYSE, $27.18, 2,600 shares, 2.36%) INDUSTRY SECTOR -- CONSUMER DISCRETIONARY: The company beat earnings and revenue estimates and increased guidance, but the run- up ahead of the report was too much, and shares pulled back on the news. I will buy this stock aggressively if it weakens to the mid-$20s, especially since the sales trends (on a two-year basis up 60 basis points sequentially) are improving. Easy sales comparisons, better in-store merchandising and cost-cutting will lead to better operating margins and earnings in 2010, and the valuation remains in the middle of its long-term range.
Johnson Controls (JCI:NYSE, $26.86, 4,300 shares, 3.85%) INDUSTRY SECTOR -- INDUSTRIAL: Home Depot indicated that its energy-efficient business had strong sales in its most recent quarter. This bodes well for JCI, as it is the No. 2 player in the industry (behind Honeywell). I like JCI's diverse set of businesses -- auto parts, batteries and building efficiency -- and the conservative guidance and low expectations. At 1.8 times book value (below its 2-2.2 times average), the stock remains a compelling buy.
JPMorgan Chase (JPM: NYSE, $42.46, 2,200 shares, 2.97%) INDUSTRY SECTOR - FINANCIAL: The company reported mixed data this week: October delinquencies of 5.29% vs. 5.01% in September with net credit losses of 8.89% vs. 9.32%, and this is much like I expect it to go for the next few quarters -- things remain difficult but slowly improving. I continue to like this best-of-breed financial, given its strong reserve base ($30 billion), diverse business exposure, market-share gains and positive operating leverage exposure to the recovery. With earnings power of $5.50-$6, the stock remains very attractive for the long term.
Marathon Oil (MRO:NYSE, $33.02, 2,600 shares, 2.86%): INDUSTRY SECTOR -- ENERGY: The company held its analyst meeting this week, and the story remains on track -- 4-5% production growth and best-in-class refinery operations. It has five regions to continue its above-average production growth -- Norway, Gulf of Mexico, Canada, Lybia and Angola - - and it is generating more growth ($1.5 billion), which will be used to fund/increase its dividend. Shares trade below both the primary and secondary integrated oil companies, and that is too cheap. I added 100 shares this week and will continue to buy more in the low $30s.
Pepsi (PEP: NYSE, $62.08, 2,700 shares, 5.59%) INDUSTRY SECTOR -- CONSUMER STAPLES: This remains my largest consumer staples stock in the fund, because it's historically cheap (14.4 times earnings vs. 17 times), its international snack division remains strong, and its balance sheet is quite strong. U.S. beverage continues to lag (industry issue) but should improve with the acquisition of Pepsi Bottling and Pepsi Americas.
Qualcomm (QCOM: Nasdaq, $45.10, 3,200 shares, 4.81%) INDUSTRY SECTOR -- TECHNOLOGY: The semiconductor sector was downgraded this week by Bank of America/Merrill Lynch, and QCOM got hit in the downdraft. I am hoping the shares pull back in the low $40s to buy more because 2010 will be a great year for the company -- 3G/4G mobile handset growth (- 7% in 2009 to 8% in 2010), market-share wins and adjacent product offerings. Its balance sheet is strong, with $17 billion in cash and no debt, and it will be used to continue to fund the company's growth.
United Parcel Service (UPS) , $57.51, 700 shares, 1.34%): INDUSTRY SECTOR -- TRANSPORTATION: The stock is flat year to date and is one of the biggest beneficiaries to the global recovery and the upcoming holiday season. I'm a buyer of the stock after my restrictions are lifted. Costs have come down and are stickier than most expect, as wage inflation will come down in 2010; this creates leverage as demand recovers in 2010. Its international exposure is increasing, and I wouldn't be surprised if the company makes further small deals to broaden its horizons in the faster-growing emerging markets. Mid-$50s is a buy.
VF Corp. (VFC:NYSE, $72.46, 1,600 shares, 3.87%) INDUSTRY SECTOR -- CONSUMER DISCRETIONARY: High-quality brands, diverse international exposure and a strong balance sheet make this a winner in the apparel sector, and it will remain a core holding. I like its goal of getting to 30% of its revenue exposure to China over the next few years (30% Europe and 30% U.S.); this will lead to better growth and diversification. Its balance sheet is strong to fund the growth and expand where necessary (small acquisitions). At 13 times earnings and the 3.3% yield, this will remain a core position.
Weatherford International (WFT:NYSE, $16.93, 2,100, 1.19%): INDUSTRY SECTOR -- ENERGY: I'm in good company with owning this, as it was reported that T. Boone Pickens, the legendary oil tycoon, owns over 350,000 shares in his fund. The company has excellent prospects internationally and trades at a handsome discount (30% to Schlumberger and 19% to Halliburton) to the group, which is unwarranted in my mind. The bad news is out after posting two disappointing quarters in a row, and expectations are very low. Under $18 the stock is very attractive for the long run, and I bought 100 shares on the week.
TWOS
Bristol-Myers Squibb (BMY: NYSE, $22.46, 3,500 shares, 2.85%) INDUSTRY SECTOR -- HEALTH CARE: The announcement of the Mead Johnson (MJN) split-off was welcome news (although not surprising), as it gives the company a tax- free way to divest itself from this non-core asset and bring 10 cents of earnings accretion to 2010 and 2011. The company can use the $10 billion in cash on its balance sheet to continue its "String of Pearls" strategy, which means an acquisition is likely in the works. Shares remain cheap at 10 times earnings, and its 5% yield is another plus.
BP (BP:NYSE, $57.83, 1,500 shares, 2.89%) INDUSTRY SECTOR -- ENERGY: Rumors continue to flow about the company looking to make an acquisition, and this week it was Dana Petroleum. It wouldn't surprise me, as Tony Haywood's priority is to grow production, which this kind of acquisition would do. Other metrics the CEO has been concentrating on remain well in place, such as cost-cutting and smart capital allocation. Its strong dividend policy (and best yield in the group) and balance sheet are reasons enough that it should trade at a premium to the group. Add on the superior growth prospects, and it's icing on the cake.
Chevron (CVX: NYSE, $76.77, 1,700 shares, 4.35%) INDUSTRY GROUP -- SECTOR: The company has the strongest growth rate among the integrated oil companies, a solid balance sheet (it raised its dividend this year) and excellent visibility on project completions for sustainable, above-average production growth. The stock trades at 10 times earnings, yielding an attractive 3.5%, so this will remain my largest energy position.
Emerson Electric (EMR:NYSE, $41.68, 1,800 shares, 2.50%) INDUSTRY SECTOR -- INDUSTRIAL: I am debating on trimming this core position, because I'm up 20% and prefer UPS at the current level from a risk/reward basis. That said, EMR is the best-run industrial, with 30% of its revenue tied to the fast-growing emerging-market countries (mainly China). It's the technology leader and innovator in the segment, and it has significant cash generation and an outstanding management team. It continues to trade at a reasonable trough valuation, so I'll continue to watch this one closely on action. Keeping it at a Two for now.
Express Scripts (ESRX:Nasdaq, $85.09, 1,200 shares, 3.40%) INDUSTRY SECTOR -- HEALTH CARE: Health care reform will not be an issue for the PBM sector, and that is why I started this position two months ago. The huge tailwind of generic launches plus ESRX dominance and customer focus will lead to a sustainable 20%-25% earnings growth over the next several years. I think that's worthy of at least a 20-times on earnings, getting me to low $90s.
Goldman Sachs (GS: NYSE, $170.01, 800 shares, 4.54%) INDUSTRY SECTOR -- FINANCIAL: The company got a lot of negative press on its decision to give $500 million to charity, which is a little more than a good day in its trading area. The hype is big here, but the fundamentals of the company and its businesses are what I care about, and it's humming. The company continues to gain share in trading, capital markets and strong results in its investment account. The stock has been stuck in a trading range -- $160 to $180, and if it hits $180 (and I'm not restricted), I'll trim 100 shares, but this will remain a core position, given its industry dominance, capital position and strong leadership. I'll just take the gain of 60%.
Honeywell (HON:NYSE, $38.04, 1,800 shares, 2.28%) INDUSTRY SECTOR -- INDUSTRIAL: I continue to like the long-term positioning of the firm after years of restructuring and productivity enhancements. Aerospace continues to drag on results but is partially offset by its leaner cost structure and strong results in defense and space, turbochargers and service aftermarket business. Its cash flow generation is strong, valuation cheap, and when the Boeing 878 takes off, HON's shares will move higher.
Procter & Gamble (PG:NYSE, $61.80, 2,400 shares, 4.95%) INDUSTRY SECTOR -- CONSUMER STAPLES: The company indicated that organic sales continue to increase sequentially, continuing the momentum from its last quarter. Also, it is in the market, buying back its shares as well. This clearly shows management finds real value in its shares and that the turnaround story is progressing well. The stock is up $10 from where I first started buying, and despite the attractive valuation, I am not likely to chase it here. I'll wait for mid-$50s to add again, and that is why I moved this down a notch to a Two from a One
Vale (VALE:NYSE, $28.19, 2,500 shares, 2.35%) INDUSTRY SECTOR -- BASIC MATERIALS: I sold 800 shares this week to lock in the 41% gain, and because there might be headline risk should the rumors be true that BHP and Rio Tinto (RTP) are considering a merger. I don't think a deal will be struck (they currently have a joint venture in iron ore together, but apparently it isn't going well due to control/leadership issues), but given that the shares are up 133% from its March low, it could be vulnerable. I've moved this back up to a Two from a Three because I am not inclined to sell more at this point and really like the long-term exposure to the global recovery.
Visa (V:NYSE, $80.00, 1,000 shares, 2.67%) INDUSTRY SECTOR - - TECHNOLOGY: The long-awaited government study on interchange rates was issued this week with no recommendation for regulating the rates, meaning status quo will remain and the overhang has been removed. The GAO reported that interchange rates do in fact increase the merchants' costs but if changed/regulated, it would come at the consumer's expense. Visa and MasterCard (MA) rallied on the news, and I'll stick with this core position.
VMware (VMW:NYSE, $40.96, 1,300 shares, 1.78%) INDUSTRY SECTOR -- TECHNOLOGY: This remains a strong secular growth story as corporations look for cloud computing and virtualization software for better productivity and cost benefits. VMW has an elite customer list, a new product cycle and limited competition. Valuation is rich, so I'll wait for a pullback to make this a bigger investment in the mid to upper $30s.
Weyerhaeuser (WY:NYSE, $37.86, 1,000 shares, 1.26%) INDUSTRY SECTOR -- BASIC MATERIALS: Home Depot and Lowe's (LOW) both reported, and generally the housing environment is recovering (with HD continue to gain share). This is bullish for WY, as 80% of its sales are tied to this market. Pulp volumes are improving and prices are firming. The company has done a great job cutting costs and improving its balance sheet and is well positioned (with great operating leverage potential) for the turn in demand. I'll buy more in the mid-$30s.
Wells Fargo (WFC: NYSE, $27.87, 1,900 shares, 1.77%) INDUSTRY SECTOR -- FINANCIALS: I continue to like the long- term story for the recovery in housing and the leverage from the Wachovia Bank acquisition. Its liquidity position has improved (it was the best of the large-cap banks in its most recent quarter), and I expect the firm to repay TARP. I moved it to a Two from a One because I prefer JPMorgan at the current price. My cost is $24, so I'll buy closer to that level.
THREE:
Bank of America (BAC: NYSE, $16.09, 8,000 shares, 4.29%) INDUSTRY SECTOR -- FINANCIALS: Hedge-fund investor Paulson pared back his bet in this financial services play, according the SEC filing. I'm less optimistic on this stock in the near term, given the noise about the succession plan to Ken Lewis, the outgoing CEO. It will take time for the new leader to put in place his or her strategy, and as a result the stock will buy time. I'm up 25% in the position and will take some off when I am not restricted and likely put it into JPM, which is a cleaner story at the moment with an attractive valuation.
Regards,
Jim Cramer
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DISCLOSURE: At the time of publication, Cramer was long Abbott Labs, Altria, Bank of America, Bristol Myers, BP, Chevron, China Unicom, Cisco, Cooper Industries, EBAY, Express Scripts, Home Depot, Honeywell, Emerson Electric, Gilead Sciences, Goldman Sachs, Johnson Controls, JP Morgan, Marathon Oil, Pepsi, Procter and Gamble, Qualcomm, United Parcel Service, Vale, Visa, VF Corp, VMware, Weatherford International, Wells Fargo and Weyerhaeuser