Weekly Roundup
It was another week dominated by Washington politicians and the debate over the fiscal cliff. The S&P 500 was down slightly, led by a mix of cyclicals and defensives. Leaders were financials, utilities, consumer staples and industrials. Laggards were materials, technology and discretionary stocks. Natural gas rose more than 3%, oil fell 3%, and gold dropped 1%, while the volatility index (the VIX) increased 4.5%, as it now looks like a coin toss on a fiscal cliff deal.
The economic data both in the U.S. and abroad were decent -- better U.S. construction spending, productivity, unit labor costs, factory orders and jobs (ADP/non-farm payrolls), stronger-than-expected purchasing managers' indices in both China (a seven-month high) and Brazil (a 20-month high), an Australian rate cut and steady (yet still soft) PMI in Europe.
Thirty-nine companies announced special dividends this week ahead of the tax changes in 2013, and the tally year to date now stands at 572, or an 81% increase year over year. On company fundamentals, Broadcom (BRCM) , Starbucks (SBUX) and Yum! Brands (YUM) all held analyst meetings that were positive, driving their shares higher. Freeport-McMoRan (FCX) announced that it was getting back into the energy market with the surprising acquisitions of McMoRan Exploration and Plains Exploration. And Citigroup (C) announced another cost-cutting program with the elimination of 11,000 employees. But the relentless selling of Apple (AAPL) was hard to ignore -- the stock fell 8% on the week, its worst week in more than two and a half years.
It's clear that on the margin the U.S. economy is firming and that the global markets are healing, but until we get the fiscal decision, we are likely range-bound in the market. We continue to use the volatility to add on the weak days and take gains into strength. We took gains in American International Group (AIG) , JPMorgan (JPM) and Boeing (BA) and used the cash to add to several stocks -- Abbott Laboratories (ABT) , Bed Bath & Beyond (BBBY) , General Electric (GE) , Mondelez International (MDLZ) , News Corp (NWSA) , Southwestern Energy (SWN) , Vale (VALE) and Weyerhaeuser (WY) . We added two new positions in MasterCard (MA) and Procter & Gamble (PG) . We downgraded DuPont (DD) to a Two, because we are less inclined to add to it until titanium oxide prices stabilize.
Next week, the big event in the U.S. will be the Federal Reserve's rate decision on Wednesday, though we don't expect any changes to policy or language, and we do expect it to keep interest rates at current levels with further purchases of mortgage-backed securities and its Operation Twist program. Other economic events will be retail sales, consumer price index, producer price index, business inventories and industrial production reports. Data from China will be important as well and should support the soft landing that we've talked about for some time. Next weekend, China will release its consumer price index, producer price index, industrial production, retail sales, trade balance and M2 supply. In Europe, several industrial production figures and CPIs will be watched, and in Japan, the Tankan Large Manufacturers Index will be reported.
Important earnings will be Texas Instruments (TXN) , Dollar General (DG) , Costco (COST) , Joy Global (JOY) and Adobe (ADBE) . Analyst meetings of note are Dover Energy (DOV) , Humana (HUM) , Aetna (AET) , Danaher (DHR) , CVS (CVS) and United Technologies (UTX) .
New folks, welcome aboard! You will see many of the same disciplines at work, in real time, that are in "Jim Cramer's Mad Money: Watch TV, Get Rich," "Jim Cramer's Real Money: Sane Investing in an Insane World," "Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich" and "Jim Cramer's Getting Back to Even".
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" on "Mad Money", he is talking about the trust that holds the Action Alerts PLUS portfolio. The winnings 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 my trading restrictions allow.
ONES:
Abbott Laboratories (ABT:NYSE; $65.53; 1,400 shares; 3.03%; Sector: Health Care): With the company's split-up on Jan. 1, investors will gain exposure to a medical-products business that has strong emerging-market exposure, top-tier growth and expanding margins as well as a pharmaceutical company that has a robust pipeline, strong cash flow and attractive returns to shareholders. The medical-products business will have sales evenly distributed among the U.S., developed markets and emerging markets, while the pharma business will focus on developing its pipeline of 10 phase III programs and 10 phase II programs, along with a number of early stage treatments. We like the mix, and the split will build value by allowing each business to be properly priced on its own. We added on weakness. Our target is $72.
Bed Bath & Beyond (BBBY:NYSE; $58.23; 1,750 shares; 3.65%; Sector: Consumer Discretionary): We added to the position this week after another positive report on October construction spending. Shares have fallen 22% since the company reported a solid June quarter that lacked only gross-margin strength. As housing improves, so will consumer demand for home furnishings as people begin to work to increase their homes' value. Shares are now pricing in a lot of downside, but we believe fundamentals are on the rise. The gross-margin weakness in the June quarter can be attributed to the recent Cost Plus acquisition, which, once fully integrated, will be accretive to performance. The company also has $1 billion in free cash along with no debt, indicating the likelihood of more share buybacks or dividend boosts. Shares trade at 11.3x forward estimates, well below the 15.7x long-term average. Our target is $68.
Bristol-Myers Squibb (BMY:NYSE; $32.56; 3,300 shares; 3.85%; Sector: Health Care): The Eliquis EU label was updated recently to include the approved stroke-prevention atrial fibrillation treatment. The label also includes a statement noting its superiority to warfarin in efficacy, major bleeding and all-cause mortality -- a triple superiority claim (this is rare). We continue to anticipate a FDA approval date around March 17, 2013, and we see a high probability of success, which would likely lead to a strong position in the $10 billion market. The company maintains one of the best pipelines in the business, and we expect this to continue to help the company deliver above-average growth. Shares trade at 17.7x forward estimates and carry a nice dividend of 4.27%, compared with an average group dividend rate of 3.78%. Our target is $36.
Broadcom (BRCM:Nasdaq; $34.24; 3,000 shares; 3.68%; Sector: Technology): In front of the analyst meeting this week, the company raised the low end of its earnings guidance -- the move was expected, and it's why we added to our position last week. The revenue guidance is now up $25 million to $2.05 billion, with gross margins 20 to 40 basis points higher and operating expenses down $10 million, $2 million more than previously anticipated. The mobile unit is driving this upside, and during the analyst meeting, management remained particularly bullish on this segment. The company sees a 34% compound annual growth rate through 2016 in mobile as it expects to gain continued market share in connectivity. The higher margin guidance also points to encouraging results from other segments such as infrastructure, which the company is predicting it will have an 80% CAGR through 2016. At the meeting, management summed up its dominant position by showing that it will grow at 8% this year, compared with flat growth for its peers. We continue to be bullish on long-term fundamentals and remain buyers on the dips. Our target is $40.
Caterpillar (CAT:NYSE; $86.99; 800 shares; 2.49%; Sector: Industrials): The Chinese soon-to-be new Prime Minister Li Keqiang made a few enticing comments concerning the country's economic development this week that were supportive of continued stimulus to ensure a soft landing. Some speculate that the prime minister may tackle state- owned monopolies to further the "reform dividend," a term used in opposition to "demographic dividend," which refers to its historical surplus of cheap labor. Any adjustment to Chinese domestic preference in the industrial sector would certainly benefit Caterpillar, as the company continues to try to grow in that booming economy. Meanwhile, excavator sales in November in China fell 25%, better than the 35% drop seen in September/October -- this is supportive of a troughing in this segment, with Caterpillar posting share gains. Our target is $95.
Chevron (CVX:NYSE; $106.99; 450 shares; 1.73%; Sector: Energy): The company released its 2013 budget this week, showing a 12% increase in spending, predicting $33.4 billion next year. This was in line with expectations. Also, the company increased its Gorgon project spending to $52 billion, lower than the feared $60 billion. This is the largest project in the company's pipeline, and after its startup in 2014, we expect oil and gas production to reach 3.3 million barrels per day in 2017. Shares are down 14% from recent highs, and we will look to add to this position, as this is one of the best production growth platforms over the next 10 years. Shares trade at a 11.5% enterprise-value- to-EBITDA discount to group in front of what will be a long period of production growth outperformance. We remain buyers. Our target is $112.
Coca-Cola (KO:NYSE; $37.71; 1,300 shares; 1.76%; Sector: Consumer Staples): We expect the coming year to offer bottom-line improvements with much lower cost inflation than this year, as well as a tempering foreign-exchange impact. Volume growth should remain in the mid-single digits, led by Asia and Latin America, and price mix will likely be up modestly in the low single digits. For the long term, we are in this position for the company's strong competitive position over its main rival, PepsiCo (PEP) , as well as its global diversification. We believe the emerging markets are starting to turn, as monetary easing is having a positive effect on many of those economies, and with heavy leverage there, the company will benefit. The stock trades at 17.1x forward estimates, 10.0% below its long-term average. Our target is $45.
Dollar General (DG:NYSE; $46.80; 1,900 shares; 3.19%; Sector: Consumer Discretionary): Shares fell 7% this week as volume created by the stock's addition to the S&P 500 index was taken advantage of by the private-equity group that helped launch the company, Buck Holdings. The private-equity firm sold 12.169 million shares and reduced its stake to 17%, and we expect it to continue to reduce its stake over the coming months. This eventual exit will be a positive, as it removes a very large seller, and we expect shares to gain once the sale is completed. The company reports third- quarter earnings on Tuesday into expectations of $0.60 a share in earnings on $3.96 billion in revenue, same-store comps up 4% to 4.5% and gross margin expansion of 25 basis points. We expect the company to guide comps to 4% and 5% and possibly adjust its EPS range, and we will be listening for any commentary on 2013. Shares trade at 14x forward estimates, with square-footage growth of 7% to 10%. Our target is $56.
Emerson Electric (EMR:NYSE; $50.85; 1,550 shares; 2.82%; Sector: Industrials): We like the diversification that the company offers, and although investors are keying in on weakness in industrial automation, process management is a much bigger unit at the company (accounting for 38% of operating profit, vs. 21%), and it will continue to drive results. The unit also benefits from heavy end-market exposure to oil and gas (47%), which remains in a robust capex market. The company derives 45% of total sales from the U.S. and Canada, which continue to grow at a steady pace, and its second-largest region is hyper-growth Asia. This exposure will continue to help management produce steady earnings, and once the company finds a buyer for its network power division, look for profitability to significantly improve. Our target is $55.
FedEx (FDX:NYSE; $89.36; 1,200 shares; 3.84%; Sector: Transports): October domestic air cargo tonnage grew 2.9% year over year for the company, the first positive monthly comparison since May. This is a positive data point and one that we are hoping signals a new trend, as the domestic freight market has been weak. Also this week, the company announced the details of its employee buyout program, which amounts to between $500 million and $600 million. The buyout program will give four weeks' pay to a max of two years for each year of service, the bonus to be paid for the current year, and a $25,000 health debit card that expires in five years. This is part of the restructuring program that was announced on its investor day, and it should lead to a much more profitable Express division and overall a more competitive company. Shares trade at 11.6x forward estimates, 19.5% below its rival United Parcel Service (UPS) . Our target is $100.
General Electric (GE:NYSE; $21.46; 4,800 shares; 3.69%; Sector: Industrials): The renewed focus on the industrial segment over the past few years has led to solid growth. Management expects 5% revenue growth this year, behind 10% industrial organic growth. The company's energy acquisitions ($11 billion invested since 2007) are performing very well as the main focus is on technological superiority. GE Capital is on the mend as the losses continue to shrink, and the turn in real estate is beginning to have a positive effect. We bought more this week ahead of the Dec. 17 analyst day, which we expect to be upbeat, and ahead of a possible dividend increase. Shares trade at 12.5x 2013 estimates, well below the long-term average of 13.9x. Our target is $26.
IBM (IBM:NYSE; $191.95; 550 shares; 3.78%; Sector: Technology): We continue to like this for the long term, with revenue set to grow in the low single digits and earnings by double digits for the next several years. IBM continues to push its emerging-market exposure, opening 96 offices last year and about 76 in the first quarter. Management noted that it will outspend in these markets by more than 10 points as it targets revenue growth. The company also sees opportunity within the cloud and business analytics. It will cut costs in the face of the slow global economic environment but remains committed to $20 billion in acquisitions between 2010 and 2015. We continue to expect it to hit the $20 EPS target in 2015. Trading at 11.4x forward estimates, shares remain a bargain. Our target is $220.
iShares FTSE China 25 Index Fund (FXI:NYSE; $38.43; 2,000 shares; 2.75%; Sector: Multi Industry): Data continued to be positive out of China this weekend, with the HSBC manufacturing PMI up into expansion territory at 50.5, the first increase since July. This coming weekend will be a big test when we get CPI and PPI data as well as industrial production. We expect the positive trajectory to continue, and we believe this is the best way to play the expanding economy. Holding the country's 25 largest market-traded companies, the index offers broad exposure and is much less risky than owning a single Chinese company. Our target is $43.
KeyCorp (KEY:NYSE; $8.10; 7,900 shares; 2.29%; Sector: Financials): Shares are down more than 9% in the past two months, and we believe the drop represents an opportunity for investors to add -- we were restricted this week but will buy when our restrictions are cleared. The company had very strong third-quarter results, with loan growth and net interest margin expansion the best of its peer group. With shares now trading at 84% tangible book value, we remain bullish. Our target is $11.
MasterCard (MA:NYSE, $476.09; 75 shares; 1.28%; Sector: Financials): We added this new position after taking gains in American International Group (AIG) . We like the secular growth story in the card processors as consumers shift the way they pay for goods and services from "paper" to "plastic." MasterCard has other growth drivers as it takes market share internationally (especially in Europe) and shifts toward higher-end consumers and business customers. Since the company holds $3 billion of cash, we expect further buybacks (it has bought $1.6 billion year to date) and a possible dividend (or special one). It trades below its long-term average but at a premium to rival Visa (V) ; this is justified, because it grows faster at a 20% compound annual growth rate. Our target is $515.
Mondelez International (MDLZ:NYSE; $25.59; 2,800 shares; 2.57%; Sector: Consumer Staples): We added shares this week after an upper-management restructuring announcement. The company plans to streamline operations by merging its European operations, in an attempt to make sure the missteps of its first quarter are not repeated. We believe that Mondelez is the best business of the Kraft Foods breakup, and we like its strong product categories, emerging-market exposure and market-share opportunities. We continue to see high-single-digit organic growth on accelerating fourth- quarter sales. Shares trade at 16.1x 2013 earnings, which is too low, given the robust growth profile. Our target is $33.
News Corp. (NWSA:Nasdaq; $24.86; 2,900 shares; 2.58%; Sector: Consumer Discretionary): We added shares this week to continue to build out the position in front of the publishing spinoff, which will occur next year. We like the plan, as the publishing unit has slow growth and low margins and has been holding down the company's market multiple. Management has not been idle in front of the deal, however, and announced the acquisition of a 49% stake in Yankees Entertainment and Sports Network for $880 million, with the option to purchase a controlling stake down the road. The acquisition continues the company's strategy to enter sports markets, which have been some of the most resilient in terms of advertising dollars. Shares trade at 12.5x forward estimates, 58.4% below the group average. Our target is $30.
Procter & Gamble (PG:NYSE; $70.29; 500 shares; 1.26%; Sector: Consumer Staples): We added back an old favorite this week after a solid third quarter and continued weakness in share price. The company has undertaken a new cost- cutting initiative this year that's aimed at saving $10 billion by 2016 through overhead reduction, declines in cost of goods sold and marketing efficiencies. The plan was announced early in the year, and results have already begun showing in its most recent quarter. The fiscal first quarter saw operating margins grow 390 basis points sequentially and gross margins up 200 basis points, largely due to savings. Management is also intent on increasing its emerging-markets exposure and product innovation in order to drive the top line. Shares yield 3.2% and trade 2.7% below the group average Our target is $77.
Schlumberger (SLB:NYSE; $71.83; 1,550 shares; 3.99%; Sector: Energy): We like the company for its exposure to the international energy market, where it has a significant market-share lead, as well as to the deep-water drilling market. The company has also reworked its North American business and has outperformed the group in terms of margins. We look for the international space to continue to lead the way as countries such as Iraq bring oil production back on line. The company also has a big lead in Saudi Arabia, as it was allowed to operate in the country well before its Western rivals. The stock trades at 14.6x 2013 earnings, 16.9% below its long-term average. Our target is $80.
Southwestern Energy (SWN:NYSE; $34.38; 2,500 shares; 3.08%; Sector: Energy): We continued to build the position this week and took advantage of natural-gas-price-related dips. This company has very low development costs and is levered to some of the biggest gas plays in the country: the Marcellus shale and the Fayetteville. It is basically a pure play on natural gas prices, which we believe bottomed this summer and are due to rise again as refining has been cut way back and the seasonally strong winter months arrive. We will continue to build the position on weakness, as it may also be a takeout candidate as well. Our target is $42.
Starbucks (SBUX:NYSE; $53.63; 1,950 shares; 3.75%; Sector: Consumer Discretionary): The company held its analyst day this week, and we viewed the event as a positive one. Guidance was reiterated for 2013, with same-store sales in the mid- single digits, revenue growth of 10% to 13% and earnings growth of 15% to 20%. The company has impressive new-store growth expectations (which were raised at the meeting), with 3,000 new stores in the Americas by 2017 and 1,500 new stores in China by 2015. Management has also been busy integrating recent acquisitions such as La Boulange Bakery and Evolution Fresh. These integrations are going well, and the company recently put together the Teavana (TEA) deal. We like the growth story and will continue to look to add below $50. Our target is $60.
Vale (VALE:NYSE; $17.98; 4,200 shares; 2.71%; Sector: Basic Materials): Management hosted its analyst meeting this week, lowering its 2013 capital expense plan to $16.3 billion, from the 2012 level of $17.5 billion. The presentations focused on operating profitably, as top executives outlined that 85% of the growth in capex will be in its nine best projects, including the giant Carajas iron mine as well as the coal project Moatize. Once operational, these will both carry low costs of production and have long working lives. Management targets 39% growth by 2017 and remains bullish on iron ore fundamentals, with depletion rates of 5% to 6% per year and growing demand in China. After the bullish meeting, we added shares as we look to build on the current low valuation. Going forward, management will continue to look to sell non-core assets that have higher capital costs as it looks to drive profitability. Our target is $22.
Wells Fargo (WFC:NYSE; $33.23; 3,400 shares; 4.05%; Sector: Financials): This is our favorite low-beta way to play the housing recovery theme. The company is a best-of-breed domestic bank that has little international exposure and a very conservative balance sheet. The low-interest-rate environment will be offset by production in its mortgage division and loan growth in autos, credit cards and commercial real estate. It benefits from an equal split between fee income and non-fee income; this balances its earnings stream and will work to its advantage in the current economic environment. Shares trade at a premium to tangible book value because of its industry-leading fundamentals. Our target is $40.
Weyerhaeuser (WY:NYSE; $27.21; 1,800 shares; 1.76%; Sector: Basic Materials): Shares were off more than 3% early this week, and we used the weakness to add to our new position. Investors have been taking profits in the sector as a whole, as it has been one of the best performers of the year. We believe that housing is still in the early stages of the recovery, and we expect improvements in home sales and construction spending, given low interest rates and better credit markets. The company is one of the most profitable timberland companies, with $82 per acre in earnings before interest, depreciation and amortization. Its REIT conversion will bring the cost structure in line with its peers, and we expect the payout ratio to ramp up as the housing market recovers. Shares trade at a 12% discount to net asset value, too large of a discount to ignore. Our target is $34.
TWOS:
Apple (AAPL:Nasdaq; $533.08; 100 shares; 1.91%; Sector: Shares continued to get pummeled by the bears this week on a technical breakdown and continued worries about iPhone sales in the December and March quarters. We believe the selling is overdone, and we expect the company to hit analysts' target of 45 million iPhone sales in the December quarter. We are also expecting upside to iPad Mini estimates, as the product appears to have become one of the holiday season's hot items. As shares have become a bit of a trading vehicle for hedge funds -- and with no catalyst ahead of the December quarter (reported on Jan. 22) -- we will remain on the sidelines. However, we do believe there is value down here in this strongly growing consumer giant. Our target is $600.
DuPont (DD:NYSE; $43.18; 2,250 shares; 3.48%; Sector: Industrials): Shares continue to lag the index as traders worry about the health of the titanium oxide market. It has lagged the S&P 500 by 3.5% in the past month and by almost 20% in the past six months. That said, even though it's cheap and has underperformed, we moved it to a Two, as we are less inclined to add here until TiO2 firms and we get more information on the current restructuring. We like the company's divestitures and its focus on growth areas such as agriculture, housing and health care, which over time will reduce the cyclicality and deserve a higher multiple. The valuation is attractive, and the 4% dividend is very secure. But it will take time, and given that it's already a big position, we'll move it down a notch. Our target is $50.
Eaton (ETN:NYSE; $52.47; 2,000 shares; 3.76%; Sector: Industrials): The upcoming quarter will likely be messy, as the acquisition of Cooper Industries will come with a number of one-time events. For the longer term, however, we believe the company could see operating margins improve by a few points as deal synergies are realized, and earnings accretion could come sooner than expected. The acquisition will help the company to achieve less cyclical, more stable earnings and visibility, which in turn will give shares a higher multiple. Trading at 11.7x forward estimates, shares are beginning to reflect expectations of the new reality (the historical average is 10.7x). Our target is $58.
EMC (EMC:NYSE; $24.91; 3,900 shares; 3.48%; Sector: Technology): The company announced a new focus on Cloud computing, labeled the Pivotal Initiative. It will combine 600 employees from the company's Pivotal Labs and Greenplum group as well as 800 from the vFabric, Cloud Foundry and Cetas divisions. The segment will be formalized by the second quarter of 2013 and will be headed by Paul Maritz, formerly of VMware and one of the stars of the management team. We believe the new division allows the company an edge in the budding industry, as it can now offer a comprehensive solution including platform and analytics. This move is a likely offshoot of the management shuffle announced a few months ago. We are encouraged by these actions, which help to promote innovation and a fresh approach to each business segment. Shares trade at 13.1x forward estimates, 6.9% below the group average. Our target is $32.
Lam Research (LRCX:Nasdaq; $35.46; 2,600 shares; 3.30%; Sector: Technology): We remain cautious on the semiconductor equipment space in the face of slowing spending on wafer fabrication equipment. But we like Lam and believe it will grow at a faster rate than the overall spending market as it benefits from Novellus synergies. However, while we also expect continued market-share gains, valuation (10.0x 2013 earnings) is such that we will not likely add in this slow growth environment. Our target is $40.
THREES:
Boeing (BA:NYSE; $74.64; 1,000 shares; 2.67%; Sector: Industrials): We continued to trim back our position this week, as it remains outsized within the fund. Boeing's board of directors is due to meet this Sunday, and while we believe the company could announce cash distribution efforts, we don't believe that it will be as much as we initially thought, as the company continues to push out contract talks with its unions. For the long term, we like the stock, the cash-flow generation story and the product cycle. But we were quick to take our gains, since the stock has rallied 5% since the beginning of November.
Energy Transfer Partners (ETP:NYSE; $43.31; 2,200 shares; 3.41%; Sector: Energy): Management presented at an industry conference this week and said all of the right things -- distribution growth, integrating its acquisitions and no further mergers and acquisitions. To do this, it will simplify the company structure, which we believe has been holding back the multiple for the past few years. Shares have been a big laggard, and while we are encouraged by the presentation this week, we will wait to see if the company can execute on the plan.
Regards, Jim Cramer, Stephanie Link and the Research Team
DISCLOSURE: At the time of publication, Cramer was long Abbott Labs, Apple, Bed Bath & Beyond, Boeing, Bristol-Myers Squibb, Broadcom, Caterpillar, Chevron, Dollar General, DuPont, Eaton, eBay, EMC, Emerson Electric, Energy Transfer Partners, FedEx, FXI, General Electric, IBM, KeyCorp, Lam Research, MasterCard, Mondelez International, News Corp., Procter & Gamble, Schlumberger, Starbucks, Southwestern Energy, Vale, Wells Fargo and Weyerhaeuser.
*****************************************************
WANT MORE CRAMER? Check out TheStreet's special offer forReal Money now! http://secure2.thestreet.com/cap/prm.do?OID=019219
*****************************************************