TheStreet
Markets ground higher during this holiday-shortened trading week as optimism on reopening efforts resulted in a huge, multi-day rotation out of "stay at home" stocks, healthcare, and high growth tech and into cyclical, reopening, and value stocks that had been previously been left out in the cold during the recovery in the stock market. However, despite the move, we remain cautiously optimistic and defensive as for the time being as many of the stocks that led the S&P 500 higher this week are still tied to businesses that are under massive pressure with great uncertainty as a result of the long-term ramifications of pandemic-induced economic shutdown and social distancing recommendations. While the rotation was violent to the upside for many beaten down stocks, we would not be surprised to see it short lived as there can only be so much momentum and conviction in a move out of names that are currently working (think those names tied to remote work) to those that may hopefully survive the pandemic and one day make a comeback (think those tied to travel and leisure). We will adjust and adapt like any portfolio manager would if this time is different, but trying to anticipate a rotation into value from growth has been a losers game for many, many years And while chasing those names can be tempting for investors hoping to make a quick buck, we believe that strategy is too trader-like and goes against our long-term investment strategy
It is too difficult to predict when these rotations will occur, but some form of participation in them is still needed because rallies like those can help make an investor's year. We continue to believe the most suitable approach to the market is a barbell -- one side focuses on traditional defensive names, secular growth stocks, and stay at home winners, while the other features reopening plays that will be in a stronger position once we are past the pandemic. We mix this with higher than normal cash levels due to volatility, economic uncertainty, an overbought market condition, and rising tensions between the U.S. and China.
Ten-year Treasury yields remained stuck around the mid-0.6% region. Gold prices finished the week higher around in the mid-$1700s area. The dollar index has pulled back to the ~98 level, while WTI oil prices remained in the low-$30s per barrel area.
First-quarter earnings season is wrapping up. Within the portfolio we heard from Costco (COST) , Marvell Technology Group (MRVL) and Salesforce (CRM) .
Costco reported a top- and bottom-line beat with its fiscal third-quarter results. Total revenue of $37.266 billion (+7% YoY) edged consensus of $37 billion, and earnings per share of $1.89 (-8% YoY) beat estimates of $1.88. Driving the decline in earnings year-over-year was the $283 million pretax, or $0.47 per share, impact from incremental wage and sanitation costs related to Covid-19.
Comparable sales in the quarter increased 5.9% in the United States, fell 2.5% in Canada, and grew 6.2% in other international, leading to a total company comp of 4.8%. Excluding the impact of changes in gasoline prices and foreign exchange, comps in the United States were 8.0%, 3.0% in Canada, and 12.2% in other international for a total company comp of 7.8%. E-commerce comps looked strong, growing 64.5% in the period or 66.1% ex-gas and foreign exchange as buy online, pickup at warehouse was likely a popular option due to the pandemic.
As for some other metrics, membership fee income was about $815 million, up 5% year-over-year. Gross margins expanded 54-basis points year-over-year to 11.53% but were up only 38 basis points excluding gas inflation. The average transaction size or ticket grew 9.3%, including the negative impact of gas inflation and FX.
Costco ended its second quarter with 55.8 total million member households and 101.8 million total cardholders. Both were up over prior periods. Retention rates looked strong and consistent with levels from prior quarters with the U.S. and Canada both coming in at 91.0% and the worldwide rate hitting 88.4% in the quarter.
Marvell Technology Group reported its fiscal first-quarter results after the closing bell Thursday. Revenue of $694 million (+5% year over year) outpaced estimates of $680 million, while adjusted earnings of $0.18 per share (+12.5% YoY) exceeded the $0.14 per share consensus.
Digging into the results, revenue from its storage business, which is consists of HDD (think traditional hard drives) and SSD (flash memory) controllers, fiber channel adapters and data center storage solutions, was roughly $259 million (-7.0% YoY, -13.0% QoQ), missing expectations of $276 million. Meanwhile, revenue from its networking business -- the segment that will benefit from 5G down the road -- was nearly $394 million (+15% YoY, +5% QoQ), outpacing expectations of $358 million. This business includes Ethernet switchers and transceivers, automotive Ethernet, security adapters and processors.
Looking ahead to the second quarter of fiscal 2021, management's guidance incorporated the U.S. government's export restriction on certain Chinese customers -- such as Huawei -- and again provided a widened range on revenue guidance due to ongoing uncertainty associated with the coronavirus.
In the upcoming quarter revenue is expected to be $720 million +/-5%, better than the $686 million Wall Street was looking for. Non-gross margins are expected to be approximately 63%. Finally, adjusted earnings per share are expected to be in the range of $0.17 to $0.23 per share, which, at the midpoint ($0.20 per share) is better than expectations coming into the print for earnings of $0.16 per share in the upcoming quarter.
Salesforce.com reported a strong top-and-bottom-line beat with its first-quarter results. Revenues of $4.87 billion (+30% YoY) exceeded consensus estimates of $4.85 billion, and adjusted earnings per share of 70 cents (-23 cents YoY) beat estimates by one penny.
Adjusted operating margins were 13.1% (-520 bps YoY), worse than the 16.8% consensus. This lighter than expected figure was likely a result of all the investment Salesforce made in its customers, employees and community in response to the coronavirus pandemic. Meanwhile, operating cash flow of $1.859 billion (-5% YoY) came in below expectations of about $2 billion.
The all-important billings measure, which represents the portion of revenue generated from new business within the quarter, registered at $3.305 billion (+21.7% YoY). That's a slight beat against expectations for $3.25 billion.
Another key metric we look for when evaluating CRM is its remaining performance obligations (RPO), which represents all future revenue under contract that has not yet been recognized as revenue. Total RPO ended the quarter at $29.3 billion, representing an increase of 18% from the year-ago period.
While the quarterly results look great, next quarter guidance was far more conservative. For the second quarter, management expects revenues of $4.89 billion to $4.9 billion (+22% to 24% YoY), slightly lower than expectations of about $5.035 billion. Additionally, adjusted earnings per share are expected to be between $0.66 to $0.67, slightly lower than expectations of $0.74.
For full fiscal 2021, management lowered its guidance. Management now expects revenue to increase 17% YoY to about $20 billion (down from $21 billion to $21.1 billion), and that's slightly less than $20.7 billion expectations. Additionally, adjusted earnings per share are expected to be in the range of $2.93 to $2.95 (from $3.16 to $3.18), and that's also less than the $3.06 consensus. This new outlook incorporates a slight, temporary increase in attrition from record low levels of less than 9% to 10% as well as incremental new business expectations because of Covid-19. Lastly, management said its long-term target of revenues in the range of $34 billion to $35 billion in fiscal year 2024 is being reassessed.
Economy
On Tuesday, The U.S. Census Bureau reported that new home sales in April ticked up 0.6% month-over-month (-6.2% YoY) to a seasonally adjusted annual rate of 623,000. The reading greatly exceeded expectations for an over 20% decline to a 480,000 seasonally adjusted unit rate. Slightly offsetting the beat, March's estimate was revised lower, to a 619,000-unit rate, from 627,000 previously. As for costs, the average selling price in April decreased to $364,500 from $377,400 in April. The median sales price also moved lower, falling to $309,900 from $364,500 in April. Inventories, at the current rate of sales, currently sit at 6.3 months, on a seasonally adjusted basis, down from the 6.4-month level seen in March. See here for our full analysis.
On Thursday, The Commerce Department reported that the preliminary reading for new orders for manufactured durable goods fell 17.2% in April to $170.0 billion. This follows a 16.6% increase in March (revised down from -14.7% previously reported) and better than expectations for a 19.05% decrease. New orders for durable goods are down 11.4% from the same time last year on an unadjusted, year-to-date basis. Excluding transportation equipment, such as airplanes and automobiles, new orders were down 7.4% in April, better than expectations for a 15.0% decline. Excluding defense, new orders fell 16.2% last month.
Shipments for manufactured durable goods decreased 17.7% in April to $192.3 billion. Unfilled orders were down 1.6% in April, decreasing to $1,107.8 billion. Finally, inventories increased 0.2% to $425.6 billion. With April's readings, on an unadjusted year-to-date basis, shipments are down 8.0%, unfilled orders are down 4.7%, and total inventories have grown by 3.2% from the same period last year.
New orders for non-defense capital goods, excluding aircraft (core capital goods) fell 5.8% in April, a beat versus expectations for a 10.0% monthly decline. This followed a 1.1% decline in March and a 0.6 advance in February. Shipments of core capital goods fell 5.4% in the month following a 1.2% decline in March and a 0.6% decrease in February. With the monthly readings, on an unadjusted, year-to-date basis, new orders for core capital goods are down 1.3% from the same time last year, while shipments are down 1.6% annually. See here for our full analysis.
Also, on Thursday, the Bureau of Economic Analysis reported, in its "second" reading (which is based on a more complete set of data versus the "advance" estimate), that real Gross Domestic Product -- GDP adjusted for inflation, our best gauge for economic growth -- contracted at a seasonally adjusted annual rate of 5.0% in the first quarter of 2020, missing expectations for a 4.8% decline (as indicated by the "advance" estimate).
In addition to real GDP, we want to point out that the core personal consumption expenditures (PCE) price index (which takes out food and energy to reduce month-to-month volatility) rose 1.7% from the same time last year (first quarter of 2019), an acceleration from 4Q19's 1.6% annual increase. On a quarter-over-quarter basis, the core PCE price index is up 1.6%, an acceleration from 4Q19's 1.3% quarterly rate of advance, however, a miss versus expectations for a 1.8% quarterly increase. See here for our full analysis.
Also, on Thursday, The National Association of Realtors reported that its Pending Home Sales Index declined 21.8% in April to 69.0 (100 representing the level of contract activity in 2001), missing expectations for a 17.0% monthly decline and marking the greatest decline since tracking began in 2001. Recall that pending home sales represent contracts signed for existing home sales set to close over the next month or two. With April's reading, pending home sales are down 33.8% year-over-year, also missing expectations for a 28.65% annual decline. See here for our full analysis.
Additionally, on Thursday, the Department of Labor reported that initial jobless claims for the week ended May 23 were 2,123,000, a decrease of 323,000 from the previous week's revised level of 2,446,000 (revised up from 2,438,000). The reading missed expectations for 2,050,000 claims.
Importantly, the four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) was 2,608,000, a decrease of 436,000 from the previous week's revised average of 3,044,000 (revised up from 3,042,000). Lastly, we want to note that on the release, the Department of Labor noted: "The COVID-19 virus continues to impact the number of initial claims and insured unemployment. This report includes information on claimants filing Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation claims." For the official weekly release, please see here.
On Friday, the Bureau of Economic Analysis (BEA) released personal income and spending numbers for April. Personal income increased 10.5% (or $1.97 trillion), greatly exceeding expectations for a 6.0% decrease, following a 2.2% decline in March. Personal disposable income -- the income available for spending or saving after taxes -- also advanced 12.9% (or $2.23 trillion) in April, following a 2.1% decrease in March.
Personal consumption expenditures (PCE) dropped 13.6% (or $1.89 trillion) in April, missing expectations for a 12.8% decline, following a 6.9% decline in March. When adjusted for inflation, real PCE fell 13.2% monthly, a miss versus the 12.9% decline expected, following a 6.7% decrease in March.
Notably, the PCE price index fell 0.5% in April, marginally better than expectations for a 0.6% decline following a 0.2% decrease in March. The Core PCE price index was down 0.4% in April, missing expectations for a 0.3% decline, following a flat March reading. More importantly, on a year-over-year basis, the core index was up 1.0% in April, missing expectations for a 1.1% annual advance and representing deceleration from the 1.7% annual rate of advance seen in March. See here for our full analysis.
(Note: T is the most recent period, T-1 is the prior period's reading and T-2 is two periods back, the intent being to illustrate any trends)
Oil
On the commodity front, oil prices remain in the low-$30s as supply cuts are met with ongoing skepticism on the demand front. While reopening should certainly help demand, analysts at Bernstein pointed out that the rise of remote work resulting from the pandemic, and potential for the trend to remain well after the pandemic, poses "the biggest threat to oil demand."
On the domestic front, on Thursday, the U.S. Energy Information Administration (EIA), reported that in the week ending May 22 U.S. stockpiles (excluding those in the Strategic Petroleum Reserve) increased by 7.9 million barrels to 534.4 million barrels, missing expectations for a 1.94 million barrel decrease. It is also worth noting that 2.1 million barrels were added to the Strategic Petroleum Reserve. Additionally, U.S. production pulled back, falling by 100,000 to 11.4 million bpd. Lastly, net imports increased by 2,066,000 bpd as imports increased by 2,003,000 bpd, while exports decreased by 63,000 bpd. See here for the full report.
Lastly, we note that the spread between WTI and Brent stands at around the $1 to $2 per barrel level. Recall, this is a key metric as the wider the spread, the more attractive U.S. based crude (WTI) becomes to foreign buyers, though we note that strength in the dollar can offset this effect as foreign buyers convert their home currencies to the dollar.
Stocks
In the portfolio this week, we added to our position in Seattle Genetics (SGEN) (here and here) while trimming our position in Goldman Sachs (GS) (here and here).
Moving on to the S&P 500, first-quarter season is winding down, with 65.6% of companies reporting a positive EPS surprise. For the first quarter, earnings growth is down roughly 12.3% year over year vs. expectations for an overall 12.5% decline throughout the season. Revenues for the S&P 500 are down 1.4% vs. expectations throughout the season for a 1.4% decrease; 65.6% of companies beat EPS expectations, 29.6% missed the mark and 4.8% were in line with consensus. On a year-over-year comparison basis, 47.82% beat the prior year's EPS results, 50.10% came up short and 2.07% were virtually in line. The best performing sectors have been Materials, Healthcare and Consumer Staples while the worst performing have been Financials, Consumer Discretionary and Real Estate.
Next week we will hear from Broadcom (AVGO) on Thursday, after the closing bell.
Other key earnings reports for the market include: HeadHunter Group HHR, Embraer SA ERJ, Autohome ATHM, NGL Energy NGL, Enersys ENS, ProPetro PUMP, Baozun BZUN, Dick's Sporting Goods DKS, Donaldson DCI, Cracker Barrel CBRL, Zoom Video ZM, HealthEquity HQY, CrowdStrike CRWD, Medallia MDLA, Ambarella AMBA, Campbell Soup CPB, American Eagle AEO, Cinemark CNK, Canada Goose GOOS, Vera Bradley VRA, Greif GEF, Change Healthcare CHNG, Cloudera CLDR, Guidewire Software GWRE, Comtech Telecom CMTL, Elastic ESTC, Smartsheet SMAR, Zuora ZUO, J.M. Smucker SJM, Navistar NAV, Toro TTC, Michaels Stores MIK, Ciena CIEN, SecureWorks SCWX, Gap GPS, Science Applications SAIC, Vail Resorts MTN, Cooper COO, Caleres CAL, DocuSign DOCU, Sportsman's Warehouse SPWH, Quanex NX, Slack WORK, Zumiez ZUMZ, MongoDB MDB, Yext YEXT, PagerDuty PD, Domo DOMO and Tiffany & Co TIF
Economic Data (*all times ET)
U.S.
Monday (6/1)
Markit US Manufacturing PMI (9:45)
Construction Spending MoM (10:00): -6.50% expected
ISM Manufacturing (10:00): 43.5 expected
ISM Prices Paid (10:00): 40 expected
Tuesday (6/2)
Wednesday (6/3)
MBA Mortgage Applications (7:00)
ADP Employment Change (8:15): -9500k expected
Markit US Services PMI (9:45)
Markit US Composite PMI (9:45)
Factory Orders (10:00): -15.00% expected
Durable Goods Orders (10:00)
ISM Non-Manufacturing Index (10:00): 44 expected
Durables Ex Transportation (10:00)
Cap Goods Orders Nondef Ex Air (10:00)
Cap Goods Ship Nondef Ex Air (10:00)
Thursday (6/4)
Trade Balance (8:30): -$41.5b expected
Initial Jobless Claims (8:30)
Continuing Claims (8:30)
Bloomberg Consumer Comfort (9:45)
Friday (6/5)
Change in Nonfarm Payrolls (8:30): -8000k expected
Change in Manufact. Payrolls (8:30): -400k expected
Unemployment Rate (8:30): 19.50% expected
Consumer Credit (15:00): -$15.000b expected
International
Monday (6/1)
Japan Vehicle Sales YoY (1:00)
Germany Markit/BME Germany Manufacturing PMI (3:55): 36.8 expected
EU Agg Markit Eurozone Manufacturing PMI (4:00): 39.5 expected
UK Markit UK PMI Manufacturing SA (4:30): 40.9 expected
Japan Monetary Base YoY (19:50)
Tuesday (6/2)
UK Nationwide House PX MoM (2:00): -1.00% expected
UK Nationwide House Px NSA YoY (2:00): 2.80% expected
UK Mortgage Approvals (4:30): 35.0k expected
UK Money Supply M4 MoM (4:30)
UK M4 Money Supply YoY (4:30)
Japan Jibun Bank Japan PMI Services (20:30)
Japan Jibun Bank Japan PMI Composite (20:30)
China Caixin China PMI Composite (21:45)
China Caixin China PMI Services (21:45): 47.5 expected
Wednesday (6/3)
Germany Unemployment Change (000's) (3:55): 180.0k expected
Germany Unemployment Claims Rate SA (3:55): 6.10% expected
UK Markit/CIPS UK Services PMI (4:30): 28 expected
UK Markit/CIPS UK Composite PMI (4:30): 29.3 expected
EU Agg PPI MoM (5:00): -1.50% expected
EU Agg PPI YoY (5:00): -4.00% expected
Japan Buying Foreign Bonds (19:50)
Japan Foreign Buying Japan Stocks (19:50)
Thursday (6/4)
Germany Markit Germany Construction PMI (3:30)
Germany Markit Germany Services PMI (3:55): 31.4 expected
Germany Markit/BME Germany Composite PMI (3:55): 31.4 expected
EU Agg Markit Eurozone Services PMI (4:00): 28.7 expected
EU Agg Markit Eurozone Composite PMI (4:00): 30.5 expected
UK Markit/CIPS UK Construction PMI (4:30)
EU Agg Retail Sales MoM (5:00): -18.00% expected
EU Agg Retail Sales YoY (5:00)
EU Agg ECB Main Refinancing Rate (7:45): 0.00% expected
EU Agg ECB Marginal Lending Facility (7:45): 0.25% expected
EU Agg ECB Deposit Facility Rate (7:45): -0.50% expected
UK GfK Consumer Confidence (19:01): -34 expected
Japan Household Spending YoY (19:30): -12.30% expected
Friday (6/5)
Japan Leading Index CI (1:00)
Germany Factory Orders MoM (2:00): -15.00% expected
Germany Factory Orders WDA YoY (2:00): -22.00% expected
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ONES
AbbVie (ABBV) ; $92.67; 1,150 shares; 3.88%; Sector: Healthcare
WEEKLY UPDATE: We discussed RBC Capital's survey work and we raised our price target on shares (to ~9x 2021 earnings estimates) as we believe a slightly higher multiple is warranted because the revenue stream has become much more diversified following the Allergan acquisition and the cash flow is there to both pay down debt and further increase the dividend. 1-Wk. Price Change: 0.62%; Yield: 5.09%
INVESTMENT THESIS: AbbVie is a biopharmaceutical company best known for its blockbuster drug Humira, which is expected to generate about $19 billion in sales this calendar year and more than $18 billion in 2020. Despite the incredible selling strength of this product, investors have shied away from this name due to Humira's lost patent protection in Europe and risk in the United States in 2023. Key to the AbbVie's future is the acquisition of Allergan, a deal that will diversify the company's revenue stream and give it exposure to Medical Aesthetics, neuroscience, and eye care, while also increase operating cash flow. Lastly, the company pays a high yielding dividend that we believe is supported by the balance sheet and well covered by the cash flow. Target Price: Increased to $110. Rating: One
RISKS: Execution of the Allergan integration, drug pricing, pipeline issues, loss of exclusivity on key drugs, competition
ACTIONS, ANALYSIS & MORE: CEO Richard Gonzalez on CNBC (5/14/20), AbbVie, Allergan Close Acquisition Deal (5/11/20), FY1Q20 Earnings Analysis (5/1/20), General Update (1/27/19), 3Q19 Earnings Analysis (11/1/19), Initiation (10/1/18), Investor Relations
Amazon (AMZN) ; $2,442.37; 80 shares; 7.11%; Sector: Consumer Discretionary
WEEKLY UPDATE: In line with the guidance provided on the company's most recent earnings release, management published a blog post in which they reiterated expectations to invest ~$4 billion in the June quarter on COVID-related initiatives and discussed some of the ways those investments were being made. Also, this week, Axios reported, following last week's news that Spotify signed an exclusive partnership with Joe Rogan for "The Joe Rogan Experience" podcast, that Amazon "is looking to invest in localized podcast content, like news and sports." 1-Wk. Price Change: 0.23%; Yield: 0.00%
INVESTMENT THESIS: We believe upside will result from Amazon's continued Commerce dominance, AWS' continued leadership in the public cloud space, and ongoing growth of the company's advertising revenue stream, which feeds off Amazon's eCommerce business. Additionally, we believe profitability will continue to improve as AWS and advertising account for a larger portion of total sales as both these segments sport higher margins than the eCommerce operation. And while we believe the increasing share of revenue from these higher margin businesses will be key to driving profitability longer-term, we believe margins on ecommerce stand to improve as the company's infrastructure is further built out and economies of scale further kick in. The embedded call option is that management is always looking to enter a new space and generate new revenue streams. Target Price: Reiterate $2,700; Rating: One
RISKS: High valuation exposes the stock to volatile swings, eCommerce has exposure to slower consumer spending, competition, management is not afraid to invest heavily, potential headwinds resulting from new eCommerce regulation in India, management is not scared to invest aggressively for growth, which can at times cause volatile reactions as near-term concerns arise relating to the impact on margins.
ACTIONS, ANALYSIS & MORE: FY1Q20 Earnings Analysis (4/30/20), FY2Q19 Earnings Analysis (7/25/19), Mad Money Interview with Amazon Web Services CEO Andy Jassey (2/28/19), One More Reason to Invest in Amazon (3/1/19), Amazon Remains One of the Best Stories in Technology (2/11/19), Keep These Themes In Mind (1/10/19), Initiation (2/2/18), Investor Relations
Bristol-Meyers Squibb (BMY) ; $59.72; 1650 shares; 3.59%; Sector: Healthcare
WEEKLY UPDATE: CEO Dr. Giovanni Caforio spoke, on CNBC, about the American Society of Clinical Oncology conference taking place this weekend and about some of the company's key drugs. 1-Wk. Price Change: -1.76%; Yield: 3.01%
INVESTMENT THESIS: We view Bristol-Meyers Squibb's strength in cancer, cardiovascular and autoimmune disease treatments, key areas of focus that provide strong growth opportunities as they are always in need of further innovation. Key drugs include Eliquis, which has a best-in-class profile and is used to prevent strokes in patients with atrial fibrillation; Opdivo, a drug designed for people with previously treated advanced non-small cell lung cancer; Orencia, which is used for the treatment of adult rheumatoid arthritis; Sprycel, which is used to treat certain types of leukemia; and Yervoy, which is used to treat certain types of skin cancer. That in mind, the big, "control your own destiny move" the company made was the Celgene deal. From a financial perspective, the deal is expected to achieve greater than 40% accretion in the first full year with roughly $800 million in synergies in 2020, 2021, and 2022. The deal was necessary because it better positions Bristol-Myers for the back half of the decade through the creation of a more robust pipeline. Target Price: Reiterate $74; Rating: One
RISKS: Execution of the Celgene integration, drug pricing, pipeline issues, loss of exclusivity on key drugs, competition
ACTIONS, ANALYSIS & MORE: FY1Q20 Earnings Analysis (5/7/20), Trade Alert (1/24/20)), Jim & Jeff discuss BMY (12/11/19), Initiation (12/2/19), Bristol-Myers Squibb Joins the Bullpen (11/26/19), Investor Relations
Colgate-Palmolive (CL) ; $72.33; 800 shares; 2.11%; Sector: Consumer Staples
WEEKLY UPDATE: Nielsen data for the week ended May 16th was published earlier in the week and indicated weekly Colgate sales were up 3.95%, a rate that may not be as high as the levels we saw at the start of the pandemic but still an acceleration from the prior week. 1-Wk. Price Change: 2.23%; Yield: 2.43%
INVESTMENT THESIS: Colgate-Palmolive is a household products company with leading brands in Oral Care, Personal Care, Home Care, and Pet Nutrition. The company is the worldwide market share leader in several categories including toothpaste, manual toothbrushes and liquid hand soap, and pet food brands, and number two in areas such as mouthwash, bar soap & liquid body wash cleansing, and also liquid fabric conditioners and hand dishwashing. Given the economic uncertainty following the coronavirus outbreak, we believe Colgate-Palmolive fits the three criteria we want in a new position initiated in this environment, the stock must be down, the dividend needs to be safe, and the business has to currently be in demand with limited sensitivity to economic recession. It is for these reason that we believe investors ultimately seek out shelter in this name. Target Price: Reiterate $77; Rating: One
RISKS: higher input costs, weaker consumer, competition, foreign exchange
ACTIONS, ANALYSIS & MORE: FY1Q20 Earnings Analysis (5/1/20), Nielsen Data Alert (4/1/20),Initiation (3/25/20), Investor Relations
Costco (COST) ; $308.47; 335 shares; 3.76%; Sector: Consumer Staples
WEEKLY UPDATE: Reported earnings. 1-Wk. Price Change: 3.86%; Yield: 0.91%
INVESTMENT THESIS: We like Costco's long-term prospects, driven by a club-based operating model that focuses on volumes, not margins, and therefore offers its customers a value proposition of everyday low prices. The strength of this model has created an incredible loyal customer base with low churn and continued share gains in both brick and mortar and e-commerce. And this is a global concept, evidenced by the strength of sales both in the U.S. and abroad, which includes an emerging China opportunity. Current dividend policy is limited, but management always keeps an eye on how to return capital back to shareholders, most notably through large special dividends which they have not issued since FY 2017. Target Price: Reiterate $350; Rating: One
RISKS: Inability to pass through higher costs, fuel prices, weaker consumer, membership churn
ACTIONS, ANALYSIS & MORE: FY3Q20 Earnings Analysis (5/28/20), Recent Buy Alert (2/28/20), Initiation (1/27/20), Investor Relations
AlphabetGOOGL ; $1,433.52; 60 shares; 3.13%; Sector: Communication Services
WEEKLY UPDATE: CEO Sundar Pichai stated this week, via a blog post, that Alphabet will look to reopen buildings in more cities starting on July 6th, with plans to start at 10% capacity and slowly ramp to 30% in September, conditions permitting. Additionally, Pichai noted "Because we still expect that most Googlers will be largely working from home for the rest of this year, we'll be giving each Googler an allowance of $1,000 USD, or the equivalent value in your country, to expense necessary equipment and office furniture." 1-Wk. Price Change: 1.44%; Yield: 0.00%
INVESTMENT THESIS: We believe that while Search and digital ad dominance is what will carry shares in the near- to- midterm, longer-term it is the company's artificial intelligence (AI) "moat" that will provide for new avenues of growth. AI is what has made the company's Search, Video (YouTube) and targeted ad capabilities best-in-class and is the driving force behind the company's success in voice (Google Home) and autonomous driving (Waymo). Furthermore, we believe it is this AI expertise that will also make the company more prevalent in other industries, including healthcare via subsidiary Verily, as AI and machine learning continue to disrupt operations across industries. We believe Alphabet's willingness to invest in new areas, knowing most will fail, is a recipe for long-term success as while most "X Moonshot Factory" projects may fail, every once in a while, you end up with a Waymo, perhaps the division's, most successful graduate to date. Lastly, compounding out positive view of the company's future opportunities, we believe that Alphabet's free cash flow generation and solid balance sheet set it apart and are what will allow the company to continue taking chances on far-out ground-breaking and potentially world changing projects. Target Price: Reiterate $1,600; Rating: One
RISKS: Regulatory risk (data privacy), competition, macroeconomic slowdown impacting consumers and therefore ad buyer activity
ACTIONS, ANALYSIS & MORE: FY1Q20 Earnings Analysis (4/28/20), CEO Sundar Pichai Speaks at the World Economic Forum (1/22/20), Alphabet Gets a New Street High Price Target (10/3/19), MoffettNathanson's positive take on Alphabet (8/19/19), Regulation Fears (6/3/19), Daily Rundown (4/30/19), Alphabet Announces Stadia (3/19/19), , A Check on the Market, Tech and Media (1/28/19), Initiation (11/27/13), Investor Relations
McCormick & Company (MKC) ; $175.16; 350 shares; 2.23%; Sector: Consumer Staples
WEEKLY UPDATE: Nielsen data for the week ending 5/16 was published this week, and McCormick continued to see an elevated pace of growth with sales up 55.4% in the one-week period. This suggests the stay-at-home and eat trend is still very strong. Over a 4 week, 12-week, and 52-week period, Nielsen data shows McCormick sales have increased 61%, 51%, and 12%, respectively. 1-Wk. Price Change: 1.91%; Yield: 1.42%
INVESTMENT THESIS: As we continue to seek out positions that work in a market battling headwinds caused by the coronavirus, we are constantly looking through those contained in Jim's "COVID-19 index" as this basket represents stocks that outperformed the S&P 500 year-to-date (through the point at which the index was created), indicating a desirable level of resilience in a volatile market. We view MKC as the ultimate stay-at-home stock because consumers like to load up their pantries with McCormick products when they know they have to cook more. This makes MKC a great recession stock too because consumers eat out less if they are on a budget. The company manufactures, markets, and distributes popular spices, seasoning mixes, condiments and other products to the entire food industry. It features several high performing brands such French's, Frank's Red Hot, and the recently launched an Old Bay Hot Sauce that consumers simply cannot get enough of. We believe that if consumers have tighter budgets because of the economy and are also more inclined to eat at home due to health precautions, even when we see shelter-at-home restrictions ease, more people will be making more meals at home and consuming more McCormick products. Target Price: Reiterate $180; Rating: One
RISKS: Food Service Exposure (~20% of revenues), M&A execution, competition, FX
ACTIONS, ANALYSIS & MORE: Initiation (5/12/20), Investor Relations
Microsoft Corp (MSFT) ; $183.25; 500 shares; 3.34%; Sector: Technology
WEEKLY UPDATE: None 1-Wk. Price Change: -0.14%; Yield: 1.11%
INVESTMENT THESIS: We believe the cloud to be a secular growth trend and that upside to shares will result from Microsoft's hybrid cloud leadership as the company grab's market in this expanding industry. While companies may look to build out multi-cloud environments, Microsoft's Azure offering will be a prime choice thanks to the company's decision to provide the same "stack" used in the public cloud, to companies for their on-premise data centers. Additionally, we would note that hybrid environments are currently the preference for most companies because it allows them to maintain critical data in house while taking advantage of the agility and scalability provided by public clouds. Outside of the cloud opportunity, we maintain a positive view on the company's growing gaming business, which we believe is becoming an increasingly prominent factor in the Microsoft growth story as gaming becomes more mainstream, management works to convert its gaming revenue from one-time license purchase to a recurring subscription model and as technologies like augmented/virtual reality evolve. Finally, as it relates to LinkedIn and other subscription-based services such as O365 and various Dynamics products, we continue to value them highly for their recurring revenue streams, which we remind members, provides for greater transparency of future earnings. Target Price: Reiterate $200; Rating: One
RISKS: Slowdown in IT spending, competition, cannibalization of on premises business by the cloud
ACTIONS, ANALYSIS & MORE: FY3Q20 Earnings Analysis (4/29/20), CEO Satya Nadella on CNBC (3/25/20), CEO Satya Nadella speaks at the World Economic Forum (1/23/20), CEO Satya Nadella Join Mastercard CEO Ajay Banag to discuss "The Role of the New Industrialists" at the World Economic Forum (1/22/20), Jim sits down with CEO Satya Nadella and CFO Amy Hood - part one, part two (1/16/20), Microsoft Secured the JEDI Contract (10/28/19), What Can We Learn from Facebook, Microsoft, and Lam Research Earnings? (4/25/19), Initiation (11/27/17), Investor Relations
Nvidia (NVDA) ; $355.02; 400 shares; 5.17%; Sector: Info. Tech.
WEEKLY UPDATE: We upgraded shares to a One this week as the stock sold off, despite what was a strong earnings release that in our view was better than the lofty expectations investors had into the print. 1-Wk. Price Change: -1.67% Yield: 0.18%
INVESTMENT THESIS: We believe upside will result from Nvidia's GPU dominance, the moat created by its CUDA, the company's parallel computing platform, and significant growth in all of the company's end markets including, the cloud (think datacenter), gaming, autonomous vehicles and pro visualization. Furthermore, we believe the cloud (i.e. data center) growth will be even more of a factor in upside following the acquisition of Mellanox, which thanks to its low latency "InfiniBand" technology, provides Nvidia the ability be a more integral player in the buildout of data centers by working to both accelerate server subsystems via GPU-acceleration and accelerate the data center overall by "tying together" the multiple subsystems and allowing them to operate as a single cohesive unit. Target Price: Reiterate $400; Rating: One
RISKS: slow uptake of ray-tracing chips which will depend on gaming publishers' implementation of the new technology in software releases, a slowdown in the IT/data center spending, competition, slower than expected inventory channel normalization.
ACTIONS, ANALYSIS & MORE: FY1Q21 Earnings Analysis (5/22/20), Gets OK for Mellanox Buy (4/16/20), Morgan Stanley Upgrades to Overweight (11/25/19), Nvidia Rallies on Latest Analyst Call (10/7/19), Nvidia Rallies on Analysts Calls (10/7/19), We like Nvidia despite trade issues (5/20/19), Updates on Nvidia (3/26/19)Adding to Nvidia (3/25/19)Stocks We Are Looking at During Friday's Selloff (3/22/19), A look at Gaming/eSports (3/21/19), Initiation (3/18/19), Investor Relations
PepsiCo (PEP) ; $131.55; 475 shares; 2.27%; Sector: Consumer Staples
WEEKLY UPDATE: Nielsen data for the week end May 16th was published earlier in the week and indicated weekly Pepscio beverage sales were up 6.9%, a rate that is higher than its 2-year average but which represents a slight slowdown from the prior week. 1-Wk. Price Change: -0.82% Yield: 3.11%
INVESTMENT THESIS: PepsiCo is a global food and beverage company with a proven track record of success. While its best-known beverage franchises have steadily improved in North America, snacks (Frito-Lay) is the key growth engine at the company. We also value management's capital returns track record. PepsiCo has increased the dividend for 48 straight years plus management regularly repurchases stock. Target Price: Reiterate $145 Rating: One
RISKS: Rising inflation, freight costs, competitive pressures, shifts in consumer tastes
ACTIONS, ANALYSIS & MORE: FY1Q20 Earnings Analysis (4/28/20), Nielsen Data Alert (4/1/20), Adding to and Upgrading PepsiCo (3/10/20), Initiation (8/2/19), Investor Relations
Seattle Genetics (SGEN) ; $157.21; 800 shares; 4.58%; Sector: Healthcare
WEEKLY UPDATE: We nibbled on more shares (here and here) as analysts from Goldman Sachs added the name to their "Conviction Buy List," stating "SGEN is poised for both near- and long-term growth on the back of three approved drugs with multiple label expansion...and a robust R&D pipeline built on a proven antibody-drug conjugate platform." On Friday ahead of ASCO, the company announced Positive Results from Exploratory Analyses of HER2CLIMB for TUKYSA (tucatinib) in Brain Metastases Patients with HER2-Positive Breast Cancer. 1-Wk. Price Change: 0.92%; Yield: 0.00%
INVESTMENT THESIS: Seattle Genetics is a biotech focused on creating live-saving treatments for people with cancer. The company's first commercial treatment was Adcetris, a drug for the treatment of several types of CD30-expressing lymphomas. However, where we believe further upside will come from is the company's next two drugs, Padcev and Tukysa. Padcev was previously approved for the treatment of locally advanced or metastatic urothelial (bladder) cancer. Looking beyond Padcev's current label, management sees opportunities in earlier line and late stages of bladder cancer. Work is under way combining Padcev with Merck's blockbuster cancer drug Keytruda. As for Tukysa, this is a treatment to be used for certain types of breast cancer and certain patients with brain metastasis, which can unfortunately develop as a tumor in the breast region progresses and that's why this drug is so critically important. Additionally, there is a pipeline here management is committed to developing. While we hardly expect them to produce another potential blockbuster every four months, like they recently achieved, these are still developments worth monitoring. That in mind, we must note that this position is more of a speculative play due to the lack of earnings and dividend yield to fall back on. Target Price: Reiterate $170 Rating: One
RISKS: Competition, regulation, failure to meet end points for new drugs, as noted in the investment thesis above, this position is more of a speculative play compared to our other holdings due to the lack of earnings and dividend yield to fall back on.
ACTIONS, ANALYSIS & MORE: Initiation (5/5/20), Investor Relations
Starbucks (SBUX) ; $77.99; 925 shares; 2.63%; Sector: Consumer Discretionary
WEEKLY UPDATE: None 1-Wk. Price Change: 0.%; Yield: 2.10%
INVESTMENT THESIS: Growth at Scale business model driving solid comp growth in key growth markets in the United States and China and extending global reach of brand through Global Coffee Alliance. These initiatives drive a long-term operating growth model of +10% earnings per share growth. Also, we see a management team that has become more and more conscious of capital returns. Starbucks has delivered 10 straight years of double-digit dividend increases, and stock repurchases have increasingly become part of the conversation. Target Price: Reiterate $90 Rating: One
RISKS: Rising inflation, freight costs, competitive pressures, shifts in consumer tastes, China exposure
ACTIONS, ANALYSIS & MORE: FY2Q20 Earnings Analysis (4/28/20), CEO Kevin Johnson on CNBC Discussing How Starbucks is Managing the Coronavirus Outbreak (3/24/20), CEO Kevin Johnson on Mad Money (3/18/20), Trimming and Downgrading to Two (2/18/20), Starbucks Catches a Big Upgrade (12/12/19), Initiation (11/12/19), Investor Relations
Take-Two Interactive (TTWO) ; $136.17; 500 shares; 2.48%; Sector: Consumer Discretionary
WEEKLY UPDATE: As noted previously, analysts at BMO Capital Markets upgraded their TTWO rating to Outperform with a $170 price target. 1-Wk. Price Change: 6.01%; Yield: 0.00%
INVESTMENT THESIS: We are high on TTWO because it benefits from stay-at-home trends (which are expected to last for the foreseeable future), it has games that act as alternatives to live sports (its NBA 2K franchise and future football title), and historically speaking, gaming stocks tend to outperform the broader market in the year leading up to a major console upgrade cycle. We think Take-Two Interactive is a company of the moment and its earnings are more likely to be revised up from Covid-19 than down like the majority of the market. Target Price: Increasing our price target to $150, representing roughly 26x consensus FY 2022 earnings per share. Rating: One
RISKS: Competition, poor consumer reception to highly anticipated releases, industry regulation
ACTIONS, ANALYSIS & MORE: FY4Q20 Earnings Analysis (5/20/20), Initiation (4/14/20), Investor Relations
TJX Companies (TJX) ; $52.76; 1900 shares; 3.65%; Sector: Consumer Discretionary
WEEKLY UPDATE: Morgan Stanley analysts hosted a virtual meeting with TJX management and published several positive takeaways about TJX Companies' positioning to the reopen. "Robust consumer response in re-opened stores (sales at roughly 24% of TJX's global stores which had reopened for at least one full week were up y/y as of 5/21) confirms TJX/off-price deep value, store-based retailing strategy remains as relevant as ever even while shoppers shun other store-based retail formats (reopened M and KSS locations delivered roughly -50% y/y store productivity declines over the same time frame)," the analysts said in their note. 1-Wk. Price Change: 13.23%; Yield: 0.00%
INVESTMENT THESIS: TJX Companies is one of the handful of bricks-and-mortar retailers out that has thrived despite industry pressures related to e-commerce. TJX's business model is deeply moated and is well-insulated from e-commerce threats thanks to its off-price value chain, treasure-hunt status and fierce customer loyalty. We also favor off-price retail during times when there are disruptions in retail supply chains As challenged retailers struggle to sell their brand names, they are forced to mark down and liquidate excess inventory, allowing off-price retailers such as TJX Companies to opportunistically to buy high-quality brands at fire-sale prices. Lastly, we note the company has a consistent capital allocation policy of increased dividends and share repurchases. Target Price: Reiterate $64 Rating: One
RISKS: Consumer spending, inventory availability, fashion trends
ACTIONS, ANALYSIS & MORE: FY1Q20 Earnings Analysis (5/21/20), Buy Alert (3/19/20), Initiation (3/5/20), Investor Relations
Verizon Communications (VZ) ; $57.38; 250 shares; 0.52%; Sector: Communication Services
WEEKLY UPDATE: None 1-Wk. Price Change: -1.11%; Yield: 4.29%
INVESTMENT THESIS: We believe upside will result from investors seeking out safety during uncertain times (as a result of the coronavirus pandemic) in names with strong balance sheets, defensive business models, US-centric revenue streams and a path toward growth after the outbreak is contained. With communication services becoming more important than ever as vast regions of the US come under "shelter-in-place orders" the company still set to take advantage of the move to 5G and efforts in place to work down debt on its balance sheet, not to mention the company's A- credit rating, we believe Verizon Communications fits this profile on all fronts. Further adding to support the attractive risk/reward profile, the rapid decline in US Treasury rates makes the stock's dividend increasingly more attractive and supportive. Target Price: Reiterate $60 Rating: One
RISKS: A rise in rates may offset the attractiveness to income investors, competition, a change in market share as companies upgrade to 5G networks, price competition between competitors
ACTIONS, ANALYSIS & MORE: CEO Hans Vesberg on Mad Money (5/20/20), 1Q2020 Earnings (4/24/20), Initiation (3/23/20), Investor Relations
TWOS
Abbott Laboratories (ABT) ; $94.92; 975 shares; 3.37%; Sector: Healthcare
WEEKLY UPDATE: None 1-Wk. Price Change: 1.76%; Yield: 1.52%
INVESTMENT THESIS: Strong underlying performance evidenced by sustained strength in organic sales growth. The company boasts high-performing franchises in Medical Devices (with strong growth in Diabetes Care) and Diagnostics (with strong gains in Core Laboratory), while Nutrition and Established Pharmaceutical remain strategic parts of its total portfolio. We believe the company's opportunities for upside rest with additional Libre uptake, the Alinity U.S. launch, and an expanded indication of the MitraClip. We believe in incoming CEO Robert Ford and the rest of the Abbott management team, which has a strong track record of integrating acquisitions and delivering double-digit earnings per share growth. Lastly, Abbott has plenty of financial flexibility to pursue mergers/acquisitions and other strategic actions. Target Price: Reiterate $105 Rating: Two
RISKS: Emerging market exposure, Product disruptions, strong dollar, timing of FDA approvals.
ACTIONS, ANALYSIS & MORE: FY1Q20 Earnings Analysis (4/16/20), Prior CEO Miles White and current CEO Robert Ford on Mad Money (3/30/20), Upgrade to Outperform (4/9/19), Daily Rundown (3/27/2019), Raising Cash Through 2 Small Trades (3/20/2019), Assessing Weakness Related to AT&T's Quarter (1/31/19), Daily Rundown (1/23/19), Initiation (6/27/16), Investor Relations
Apple (AAPL) ; $317.94; 400 shares; 4.63%; Sector: Technology
WEEKLY UPDATE: Analysts at JPMorgan reiterated their Overweight rating, while increasing their price target to $365 (from $350) calling out the recent launch of the iPhone SE. Given the lower price tag, the analysts, in line with our own view, believe the model serves to increase the company's addressable market opportunity, especially in key emerging growth markets such as India, where a $1,000 phone is simply out of budget for most consumers. Apple also scored a big win for its entertainment business this week, buying the rights to Martin Scorsese's next film that you can read about here. 1-Wk. Price Change: 3.63%; Yield: 1.03%
INVESTMENT THESIS: While we acknowledge that near- to- midterm performance remains heavily influenced by iPhone sales, we believe longer-term upside will come as Services revenue grows its share of overall sales. Services provide for a recurring revenue stream at higher margins, a factor that serves to reduce earnings volatility while allowing for a higher percentage of sales to fall to the bottom line, as a result, we believe that Services growth and the installed base, are much more important than how many devices the company can sell in a given 90-day period. In addition to improved profitability we also believe the transparent nature of this revenue stream will demand an expanded price-to-earnings multiple as segment sales grow. Furthermore, we believe that Apple's desire to push deeper into the healthcare arena will help make its devices invaluable as more life-changing features are added and the company works to democratize health records. Lastly, also see upside resulting from increased adoption of wearables (think the Apple Watch) and potential new product announcements such as an AR/VR headset or an update on project Titan, the company's secretive autonomous driving program. Target Price: Reiterate $315 Rating: Two
RISKS: Slowdown in consumer spending, competition, lack of new product innovation, elongated replacement cycles, failure to execute on Services growth initiative
ACTIONS, ANALYSIS & MORE: FY2Q20 Earnings Analysis (4/20/20), At What Price Range Will We Upgrade Apple? (2/18/20), Apple's Underappreciated Ability to Navigate Tariffs (8/26/19), Valuing Apple After Last Night's Quarter (7/31/19), Apple WWDC: Everything You Need to Know (6/4/19), Regulation Fears (6/3/219), The Apple Card: A Huge, Underappreciated Opportunity (4/4/19), Apple Services Event (3/26/19), The Healthcare Ecosystem (1/9/19), Apple should acquire health record company Epic, CEO Tim Cook Interview (1/15/19), Initiation (1/4/10), Investor Relations
Broadcom (AVGO) ; $291.27; 200 shares; 2.12%; Sector: Info. Tech.
WEEKLY UPDATE: We look forward to hearing from management when the company reports earnings, next week, Thursday after the market close. On the top line, we are looking for sales of $5.694 billion. On the bottom line, we are looking for earnings of $5.14 per share. 1-Wk. Price Change: 5.28%; Yield: 4.46%
INVESTMENT THESIS: We are fans of Broadcom's M&A driven push into software through recent acquisitions of CA Technologies and Symantec. These businesses (mainframe an enterprise software security software) are higher in margin and more recurring in revenue compared to cyclical semis, and their growth should drive multiple expansion in the stock. We also like how there is optionality with its wireless business, which has a major customer in Apple and consists of three product lines: RF (tied the initial ramp in 5G phones), WiFi/Bluetooth combos, and mixed signal custom products. We are also attracted to management's shareholder friendly capital allocation policy. Management is committed to returning approximately 50% of its prior year cash flow to stockholders through cash dividends. Target Price: Reiterate $330 Rating: Two
RISKS: Supply chain disruption, macroeconomic slowdown impacting semiconductor demand, smartphone demand, integration risk as the company works to increase its infrastructure software revenue streams, M&A activity.
ACTIONS, ANALYSIS & MORE: 1Q2020 Earnings (3/12/20), Initiation (2/26/20), Investor Relations
Clorox (CLX) ; $206.25; 200 shares; 1.5%; Sector: Consumer Staples
WEEKLY UPDATE: Nielsen data was published earlier in the week and indicated weekly Clorox sales were up an impressive 27.2%, representing an acceleration from the prior week. 1-Wk. Price Change: 3.86%; Yield: 2.15%
INVESTMENT THESIS: Clorox is a manufacturer and marketer of so many well-known household brands such as Clorox, Glad, Kingsford, Burt's Bees, Hidden Valley Ranch. Though organic sales growth has slowed in recent quarters, we believe management will deliver on its second half FY2020 reacceleration guidance We also appreciate Clorox's rich capital return history. Management has increased the dividend for 41 consecutive years, with the most recent raises characterized by an accelerated double-digit percentage rate. There is also a big share repurchase program currently in place. Target Price: Reiterate $205; Rating: Two
RISKS: Rising input and freight costs, continuing challenges in bags and charcoal, foreign currency, adverse weather during grilling season
ACTIONS, ANALYSIS & MORE: FY3Q2020 Earnings Analysis (5/1/2020), Nielsen Data Alert (4/1/20), FY2Q20 Earnings Analysis (2/4/20), Jim & Jeff discuss CLX (12/11/19), Initiation (11/26/19), 2019 Analyst Meeting, Investor Relations
Salesforce (CRM) ; $174.79; 500 shares; 3.18%; Sector: Info. Tech.
WEEKLY UPDATE: Reported earnings. 1-Wk. Price Change: -1.72%; Yield: 0.00%
INVESTMENT THESIS: We are bullish on shares of CRM as we view Salesforce as a key player in the "digital revolution" and invaluable to those companies looking to build out their digital strategy and better understand their customer base. Furthermore, we believe the acquisition of MuleSoft effectively expanded the company's total addressable market by unlocking data previously trapped on legacy systems, to be used on the Salesforce platform. These factors compounded by a strong management team keep us confident that the company remains on track to reach its FY2022 target of $21 billion to $23 billion in revenue. Target Price: Increasing our PT to $200, representing roughly 7x EV to CY2021 estimated revenue; Rating: Two
RISKS: Slowdown in IT spending, competition
ACTIONS, ANALYSIS & MORE: FY1Q21 Earnings Analysis (5/28/20), CEO Marc Benioff Interview at World Economic Forum (1/23/20), Trimming and Downgrading CRM (1/6/20), Salesforce Proves Itself a True Secular Growth Story (11/21/19), Interviews with the CEOs of Salesforce and Nvidia (11/20/19), Rule of 40 (9/17/19), Daily Rundown (3/5/19), January 2019 Members Call w/ Transcript, Pivotal upgrades to Buy, Wedbush adds to "Best Ideas List" (1/7/19), Initiation (6/5/18), Investor Relations
CVS Health (CVS) ; $65.57; 800 shares; 1.91%; Sector: Healthcare
WEEKLY UPDATE: Robotics company Nuro, announced "it is working with CVS Pharmacy to test prescription delivery in the Houston market, beginning in June. Nuro will use its fleet of autonomous vehicles to deliver prescriptions and essentials to CVS Pharmacy customers." With ecommerce adoption having been accelerated by the work from home trend, we view this as an incremental positive that will help CVS further build out its delivery infrastructure. On the release, CVS Senior Vice President of Store Operations Ryan Rumbarger stated "we are seeing an increased demand for prescription delivery. We want to give our customers more choice in how they can quickly access the medications they need when it's not convenient for them to visit one of our pharmacy locations." 1-Wk. Price Change: 3.54%; Yield: 3.05%
INVESTMENT THESIS: We see upside resulting from Aetna integration progress, which we believe will allow shares to re-rate higher as the price-to-earnings valuation closes the gap with peers, and a deleveraging of the balance sheet, which has been another concern for investors. We believe the new CVS Health will transform into a diversified pharmacy/healthcare retailer that is integrated with a managed care operation, creating a more personalized and analytic-based experience that all patients will want. Additionally, we value shares because CVS is an all-domestic company (providing insulation from trade-related headwinds) in the healthcare field (defensive) without a lot of cyclicality, making it even more attractive as we are faced with a barrage of headlines about slower global economic growth. Target Price: Reiterate $84; Rating: Two
RISKS: Failure to execute on Aetna integration, greater than expected rebate guarantee headwinds on PBM business, regulatory headwinds
ACTIONS, ANALYSIS & MORE: CEO Larry Merlo on Mad Money (5/6/20), FY1Q20 Earnings Analysis (5/6/20), CEO Larry Merlo Discussing COVID-19 on Mad Money (3/17/20), Upgrade to One (1/24/20),Cowen Raises Their Price Target (8/27/19), PBMs Receive Key Win With the Removal of Rebate Proposal (7/11/19), Looking for Winners of a Potential Healthcare Policy Proposal (7/9/19), Updating CVS Health (4/8/2019), Our Case for CVS Health Over Walgreens (4/3/2019), A Check on CVS Health After Last Night's Interview (3/22/19), Assessing the Weakness in the Health Insurance Group (3/4/19), "Medicare for All" bill pressures shares (2/27/19), January 2019 Members Call w/ Transcript, Initiation (11/13/18), Investor Relations
Disney (DIS) ; $117.3; 775 shares; 3.31%; Sector: Communication Services
WEEKLY UPDATE: CEO Bob Chapek was on CNBC to discuss the company's plan to reopen Florida-based theme parks in July. 1-Wk. Price Change: -0.61%; Yield: 0.00%
INVESTMENT THESIS: We see upside resulting from Disney's direct to consumer efforts via ESPN+ and Disney+ and are happy to ride out the associated investment cycle. Additionally, we view the integration of Fox assets as another catalyst as progress is made given the acquisition brings with it programming across six continents, reaching over 1.8 billion consumers that speak roughly 50 different languages, as well as the rights to Start India, India being one of the fastest growing countries in the world and all of the domestic content, plus an additional 30% ownership of Hulu, bringing their total Hulu ownership to 60%. Furthermore, we are bullish on the Studio Entertainment division's 2020 movie lineup even as it laps a record 2019 year. Lastly, we believe a strong consumer should continue to support attendance and spending at Parks and Resorts. Target Price: Reiterate $140; Rating: Two
RISKS: Fox integration risk, competition, macroeconomic slowdown impacting the consumer
ACTIONS, ANALYSIS & MORE: Some Positive News About Disney's Parks (5/8/20), FY2Q20 Earnings Analysis (5/5/20), CEO Bob Iger on Mad Money (9/24/19), FY3Q19 Earnings Analysis (8/6/19), Disney announces Marvel "Phase 4" content lineup (7/22/19), Sell-Side Survey Points to Strong Interest in Disney's Streaming Service (6/18/19), Initiation (8/21/18), Investor Relations
FacebookFB ; $225.09; 225 shares; 1.84%; Sector: Communication Services
WEEKLY UPDATE: Facebook CEO Mark Zuckerberg was interviewed by Andrew Ross Sorkin this week, and the two discussed a slew of topics. You can watch the full interview at the site here. 1-Wk.Price Change: -4.18%; Yield: 0.00%
INVESTMENT THESIS: Facebook is the leading social media company. It monetizes its platforms and delivers targeted advertisements across all major demographics at a high ROI. Although revenue is expected to decelerate as the company transitions its monetization emphasis to Instagram Stories from Facebook's NewsFeed, and there are additional risks to margins related to increased OpEx spending, we believe both processes have become well understood by investors at this point. Plus, we think future growth opportunities exist through increased monetization of the WhatsApp and Messenger verticals. While critics claim the member base has become disengaged, Facebook's first quarter results showed trends have held with daily active users (DAUs) of 1.56 billion and monthly active users (MAUs) of 2.375 billion. Lastly, we believe the stock's current price to earnings multiple is cheap relative to the company's growth and competitive moat. Target Price: Reiterate $225; Rating: Two
RISKS: Regulation, weak engagement on core platform, capital spending, margin pressure, monetization strategy of WhatsApp and Messenger, pullback in advertisement spending due to economic pressures
ACTIONS, ANALYSIS & MORE: COO Sheryl Sandberg on Mad Money (5/20/20), FY1Q20 Earnings Analysis (4/29/20), Downgrading Facebook (4/14/20), COO Sheryl Sandberg on Mad Money (3/17/20), Facebook's Libra Cryptocurrency (6/18/19), Regulation Fears (6/3/19), What Can We Learn from Facebook, Microsoft, and Lam Research Earnings? (4/25/19), Facebook Instagram Update (4/3/19), Initiation (1/8/2013), Investor Relations
Goldman Sachs (GS) ; $196.49; 400 shares; 2.86%; Sector: Financials
WEEKLY UPDATE: We trimmed shares (here and here) and downgraded the name to a Two this week as shares surged into the holiday shortened trading week. 1-Wk. Price Change: 9.20%; Yield: 2.54%
INVESTMENT THESIS: Goldman Sachs is a strong performing investment bank, and the firm is currently ahead of its goal to generate an additional $5 billion in annual revenue by 2020. Meanwhile, the firm has delivered consistent improvements to its return on equity and return on tangible common equity metrics-which are drivers of a premium over book price-while tangible book value has continued to grow. Another reason why we think the share price deserves a greater premium is because of management's emphasis on fee-based, or more recurring, revenue streams. At the end of 2018, 61% of Goldman's revenues were fee-based, up from 48% in 2013. We also see value in Goldman's retail initiative through Marcus as well as the Apple card. The firm's tangible book value per share as of the end of the fourth quarter 2019 was $205.15 Target Price: Reiterate $240; Rating: Two
RISKS: The economic cycle, Financial System regulation, 1MDB litigation, interest rates, financial market activity
ACTIONS, ANALYSIS & MORE: FY1Q20 Earnings Analysis (4/15/20), CEO David Solomon on CNBC (4/2/20), CEO David Solomon Interview at World Economic Forum (1/22/20), Trade Alert (6/3/19), Trade Alert (5/20/19), The Apple Card: A Huge, Underappreciated Opportunity (4/4/19), Stocks We Are Looking at During Friday's Selloff (3/22/19), Daily Rundown (2/7/19), Daily Rundown (1/16/2019), Initiation (2/14/18), Investor Relations
Johnson & Johnson (JNJ) ; $148.75; 300 shares; 1.62%; Sector: Healthcare
WEEKLY UPDATE: On Friday, Credit Suisse published their second intra-quarter analysis of JNJ's Q2 U.S. Pharma Business. The analysts said their updated analysis of April's scrips and sales trends for the company's largest U.S. Pharma franchises "confirms the company exited April tracking well ahead of our estimates for Q2." 1-Wk. Price Change: 3.03% Yield: 2.72%
INVESTMENT THESIS: We view Johnson and Johnson as a consistent performer with durable franchises across the consumer and healthcare industry. Importantly, we expect the company's Pharmaceutical and Consumer business to grow above their respective industry growth rates, and even though Medical Devices has lagged, we have seen encouraging signs of improvements. Lastly, the company has one of the best balance sheets in the market, providing management with plenty of optionality for strategic M&A and/or buybacks. Target Price: Reiterate $160 Rating: Two
RISKS: Talc Litigation, Biosimilar and generic pressure, pipeline execution, Medical Device execution, strong dollar.
ACTIONS, ANALYSIS & MORE: FY1QQ20 Earnings Analysis (4/14/20), Initiation (2/28/20), Investor Relations
JPMorgan Chase & Co. (JPM) ; $97.31; 500 shares; 1.77%; Sector: Financial
WEEKLY UPDATE: Shares surged this week, partly related to CEO Jamie Dimon's encouraging commentary about the economy and his bank at the Deutsche Bank Global Financial Services conference. He called JPMorgan "a very valuable company at these prices" and said second-quarter trading has been as strong as the first quarter. He also reiterated the safety of the dividend and reminded analysts that the quarterly payment of less than $3 billion represents a very small percent of the bank's capital base. -Wk. Price Change: 8.76% Yield: 3.70%
INVESTMENT THESIS: We view JPMorgan as the best of breed large cap financial. The firm consistently delivers the best return on equity/tangible common equity performance in the industry, making the stock well deserving of a premium to its growing tangible book value. Not only that, but the Fortress balance sheet provides a degree of insulation to the risks associated with an economic shock. Lastly, we believe the valuation is very reasonable, especially considering the nearly 3% dividend yield and big buyback. The firm's tangible book value per share as of the end of the fourth quarter 2019 is $60.98 Target Price: Reiterate $130; Rating: Two
RISKS: The economic cycle, Financial System regulation, interest rates, credit quality.
ACTIONS, ANALYSIS & MORE: FY1Q20 Earnings Analysis (4/14/20), CEO Jamie Dimon Interview at World Economic Forum (1/21/20), Daily Rundown (1/16/2019), Initiation (12/27/2017), Investor Relations
Marvell Technology (MRVL) ; $32.62; 3500 shares; 4.16%; Sector: Info. Tech.
WEEKLY UPDATE: Reported earnings. 1-Wk. Price Change: 8.26%; Yield: 0.74%
INVESTMENT THESIS: Our thesis on MRVL is heavily predicated on Marvell's integral role in the 5G cycle. As noted in our initiation alert, we believe that the 5G upgrade cycle remains in early stages and that from an infrastructure viewpoint, which Marvell plays to by creating the network that needs to be built and running to support all of the new, Marvell will benefit as 5G enabled devices begin coming to market over the next several years. Additionally, we believe the Cavium deal was a big step in the company's transformation while the acquisition of Aquantia, a leader in Multi-Gig Ethernet connectivity, will help in broadening Marvell's connectivity solutions portfolio and capitalizing on the future of high-speed networking requirements in cars that are needed to enable autonomous, electric, and safety/security applications. Furthermore, on the M&A front, we believe the acquisition Avera Semiconductor, a developer of custom ASICs for networking and telecom equipment was a 5G additive play as Avera's biggest end market exposure is base stations, which are leveraged to 5G. Target Price: Increasing our PT to $35, representing roughly 25x consensus FY2022 earrings per share; Rating: Two
RISKS: Further intensification on the US/China trade front, a delayed ramp in 5G infrastructure buildouts.
ACTIONS, ANALYSIS & MORE: FY1Q20 Earnings Analysis (5/28/20), CEO Matt Murphy on Squawk Alley (3/31/20), Adding to and Upgrading Marvell Technology (3/10/20), Marvell Rallies After Bullish Analyst Call (11/4/19)MRVL Get Spotlight in Analyst Calls (8/21/19), Initiation (7/3/19), Investor Relations
Mastercard (MA) ; $300.89; 200 shares; 2.19%; Sector: Info. Tech.
WEEKLY UPDATE: None 1-Wk. Price Change: 2.03%; Yield: 0.53%
INVESTMENT THESIS: We believe upside will result from the secular shift toward digital payments and a growing "network effect" as acceptance rates of digital payments increase among merchants. In line with this view, we also believe the shift to ecommerce to be a tailwind as online purchases inherently require some form of digital payments. In the near-term we also expect a tailwind to result from the coming release of the Apple Card as MasterCard was selected as the card's payment processing platform. Furthermore, we value MasterCard for the strong three-year Performance Objectives management laid out on their fourth quarter 2018 and full year 2018 financial results conference call. For 2019 - 2021, on a currency-neutral basis, excluding future acquisitions and Special Items, management's goal is for low-teen Net Revenue CAGR (compound annual growth rate), a minimum 50% Annual Operating Margin, and high-teens percent earnings per share CAGR. Lastly, the company also has a hefty share repurchase program in place. Target Price: Reiterate $315; Rating: Two
RISKS: Slowdown in consumer spending and a prolonged shift toward digital payment mediums
ACTIONS, ANALYSIS & MORE: FY1Q20 Earnings Analysis (4/29/20), Outgoing CEO Ajay Banga and incoming CEO (current Chief Product Officer) Michael Miebach on Mad Money (2/25/20), CEO Ajay Banga joins Microsoft CEO Satya Nadella at the World Economic Forum to discuss "The Role of the New Industrialists." (1/22/20), Updates on Our E-Commerce and Payment Provider Names (6/6/19), Initiation (5/28/19), Investor Relations
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long ABT ABBV AMZN AAPL AVGO BMY CL CLX COST CRM CVS DIS FB GOOGL GS JPM JNJ MA MRVL MSFT NVDA PEP SBUX SGEN TJX MKC TTWO VZ