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THE OUTLOOK
INTELLIGENCE FOR THE INDIVIDUAL INVESTOR

JUNE 25, 2018


Volume 90 Can Retail Continue to Rally?
Number 24 It depends; not all retailers are created equal
Lindsey Bell, CFRA Investment Strategist

While the cloud of trade weighs on the industries of specialty and multiline retail
market, the U.S. consumer is doing A-OK. shouldn’t be ignored. They may not
Consumer confidence is near a 17-year high, contribute significantly to the Retail index,
unemployment is at an 18-year low, wages but as individual stocks they have been a
are moving higher (even if slowly) and bright spot in a sea of volatility.
spending has ensued. Retail sales increased Several of the traditional retailers have
0.8% in May, from April, which was the fastest jumped 20% or more in 2018. Macy’s (M 39
rate of growth since November. In response, ***) has been the comeback kid of the group,
retail stocks have been rewarded. The S&P advancing 54.3% year-to-date. Kohl’s (KSS 77
500 Retail index advanced 9% from the end ***) is 38.9% higher, Tiffany’s (TIF 135 ***) is
of March to the end of May and has continued 30.9% higher, Advanced Auto Parts (AAP 140
***) is up 38.7% and Foot Locker (FL 57 ***)
to move higher in June at an elevated pace.
is up 19.5%. If you want to expand outside of
On a year-to-date basis, the Retail index is
the S&P 500 Retail index, Abercrombie &
30.7% higher, well ahead of the 3.5% increase
Fitch (ANF 28 ***) and Dillard’s (DDS 98 ***)
for the S&P 500.
are 25-55% higher on the year.
Of course, Amazon and Netflix account for
In general, retail stocks started the year
more than 80% of the 30.7% Retail index
flying high, and reacted well to strong fourth-
increase. TripAdvisor (TRIP 57 **) and
quarter earnings. Consumers ramped up
Booking Holdings (BKNG 2,122 ***) are not
holiday spending in anticipation of tax reform
What’s Inside your typical retailers, but their 71.6% and
benefits and retail sales soared. Then, the
Intelligencer 2 23.1% advances year-to-date account for
consumer pulled-back on spending in the
Fund Strategies 3 about 5% of the gain in the retail index.
first quarter, which is not unusual, but the
That being said, big moves by some
Sub-Industry Outlook 4
traditional retailers suggest the sub- (Continued on page 8)
Focus Stock of the Week 5
Master List Portfolio 6 RECOMMENDED RETAILERS
Top 10 Model Portfolio 7 Y/Y EPS Y/Y SALES
12-MONTH GROWTH (%) GROWTH (%) PRICE SHORT FWD P/E
Observatory 8 RECENT TARGET PERF INTEREST MULTIPLE
COMPANY NAME / TICKER STARS PRICE ($) PRICE ($) 2018E 2017 2018E 2017 YTD (%) (%) (X)
Amazon / AMZN 4 1,730 1,800 197 -11.1 33.5 30.8 48.3 1.2 138.8
Follow our experts on Twitter:
Dollar General / DG 4 99 122 33.9 3.2 8.4 6.8 4.8 1.8 16.2
@cfraresearch Dollar Tree / DLTR 4 86 105 13.6 33.2 3.0 7.4 -18.7 2.4 15.6
@StovallCFRA Home Depot / HD 4 200 227 27.8 16.7 7.0 6.7 5.1 0.8 21.0
@ToddCFRA LKQ Corporation / LKQ 4 32 35 20.4 4.4 21.8 13.4 -19.3 1.8 14.4
@LBellCFRA
Netflix / NFLX 4 415 465 129.8 201.6 37.7 32.4 111.0 4.7 145.1
@KesslerCFRA
@GlickmanCFRA Tractor Supply / TSCO 4 78 85 24.4 1.6 6.5 7.0 1.2 6.1 18.7
Sources: CFRA, powered by data from S&P Global. All growth, short interest, price performance and multiple data as of June 19.
2 THE OUTLOOK JUNE 25, 2018 CFRAOutlook.com

Intelligencer The Outlook


EQUITY & FUND RESEARCH SERVICES
Headlines, Highlights, and What’s on our Minds Vice President – Editorial Operations Beth Piskora
Senior Editor Marc Bastow
Associate Editor Raymond Jarvis
PORTFOLIO CHANGES: Effective June 18, LyondellBasell (LYB 108 ****) was deleted CEO, CFRA
from the Platinum Portfolio. Peter de Boer
Chief Investment Strategist
ALPHABET SETS CHINA PARTNERSHIP: CFRA reiterates its Strong Buy ranking on Sam Stovall
Alphabet (GOOGL 1,169 *****) after the tech giant announced a new strategic Investment Strategist
Lindsey Bell
partnership with JD.com, a leading e-commerce company in China. Alphabet plans
Director, ETF & Fund Research
to invest $550 million in JD for 27.1 million newly-issued American Depositary Todd Rosenbluth
Shares (ADSs) of JD at $40.58 each, amounting to an ownership stake of less than
1%. “We think Alphabet is looking to JD as a way to enhance its standing and For billing queries, e-mail
ordermgmt@cfraresearch.com.
market share in China and the great Asia-Pacific region,” says CFRA Equity Analyst
The Outlook (USPS 415-780, ISSN 0030-7246) is
Scott Kessler. “Years ago, in 2010, Alphabet pulled back from mainland China. We published weekly except for one issue in January,
see Alphabet partnering with JD in areas such as search and cloud infrastructure, May, September, November and December by CFRA,
One New York Plaza, Suite 3410, New York, NY 10004.
and maybe even around advertising solutions for platform merchants. JD would
Periodicals postage paid at New York, NY, and
also join Google Shopping. We think this is a positive development for Alphabet. additional mailing offices. POSTMASTER: Send
address changes to The Outlook, CFRA, 675 Peter
HIGHER TARGET PRICE FOR TRACTOR SUPPLY: CFRA raises its 12-month target price Jefferson Pkwy, Suite 100, Charlottesville, VA 22911.

for Tractor Supply (TSCO 78 ****) by $10 to $85, a forward P/E of 18.9X against our Copyright © 2018 CFRA. All rights reserved.
Reproduction in whole or in part prohibited except by
newly-initiated 2019 EPS estimate of $4.49. With 2018 now about halfway over, permission. Because of the possibility of human or
mechanical error by CFRA and its data sources, CFRA
we think it’s appropriate to push our valuation out to base it on '19 EPS. This does not guarantee the accuracy, adequacy, or
multiple is slightly above the peer median, reflecting likely faster-than-peer completeness of any information and is not
responsible for any errors or omissions or for the
revenue and EPS growth. It is also in the middle of TSCO's ten-year P/E range. We results obtained from the use of such information.
are encouraged by the progress TSCO is making in leveraging its existing store
base, expanding e-commerce and emphasizing its omni-channel offering as nearly 70% of total online orders are now being
fulfilled at company stores. We are also encouraged by stronger-than-expected Q1 same-store-sales growth of 3.7%.
CHANGING OF THE DOW: Walgreens Boots Alliance (WBA 68 ****) will replace General Electric (GE 13 ***) in the Dow Jones
Industrial Average, effective prior to the open of trading on Tuesday, June 26, 2018. “General Electric was an original member
of the DJIA in 1896 and a member continuously since 1907,” says David Blitzer, Managing Director and Chairman of the index
committee at S&P Dow Jones Indices. “Since then the U.S. economy has changed: consumer, finance, health care and
technology companies are more prominent today and the relative importance of industrial companies is less. Walgreens is a
national retail drug store chain offering prescription and non-prescription drugs, related health services and general goods.
With its addition, the DJIA will be more representative of the consumer and health care sectors of the U.S. economy. This
change to the DJIA will make the index a better measure of the economy and the stock market.”

SUPREME COURT TAX RULING: By a split 5-to-4 decision, the U.S. Supreme Court rules that states can collect sales taxes from
online retailers. After some related controversies over the past several years, the highly anticipated ruling is only mildly
surprising to us, setting another precedent that effectively overturned the court's prior ruling in 1992 that barred states from
collecting such taxes. On face value, the ruling might raise the specter of potential negative implications for Amazon (AMZN
1,730 ****), which recently accounted for about 44% of the U.S. e-commerce market and an even more dominant 70% of
overall e-commerce growth. Still, we see a relatively limited exposure for AMZN, which already collects a sizable amount of
sales taxes across many states where it qualifies as taxable due to its sufficiently large physical presence. Thus, AMZN is
unlikely to cede a meaningful portion of its market share to traditional retailers as a result of the ruling, in our view. 

EVALUATION SYMBOLS  Hold—Total return is expected to closely approximate S&P Global Market Intelligence’s Quality Rank
the total return of a relevant benchmark over the
STARS Rankings coming 12 months, with shares generally rising in S&P Global Market Intelligence’s appraisals of the growth and
price on an absolute basis. stability of earnings and dividends over the past 10 years for STARS
CFRA’s evaluation of the 12-month potential of stocks is indicated and other companies are indicated by Quality Rankings:
by STARS:
 Sell—Total return is expected to underperform the
total return of a relevant benchmark over the coming A+ Highest B+ Average C Lowest
12 months, and the share price is not anticipated to A High B Below Avg. D In reorganization
 Strong Buy—Total return is expected to outperform show a gain. A- Above Avg. B- Lower NR Not Ranked
the total return of a relevant benchmark by a wide
margin over the coming 12 months, with shares
 Strong Sell—Total return is expected to underperform Quality Rankings are not intended to predict stock price movements.
the total return of a relevant benchmark by a wide
rising in price on an absolute basis. margin over the coming 12 months, with shares
 Buy—Total return is expected to outperform the total falling in price on an absolute basis.
return of a relevant benchmark over the coming NR Not Ranked
12 months, with shares rising in price on an
absolute basis.
CFRAOutlook.com THE OUTLOOK JUNE 25, 2018 3

FUND
STRATEGIES

Optimistic M&A Activity in 2018


Raymond Jarvis
CFRA
Associate Editor
It appears that deal makers are feeling more confident

With a favorable ruling from U.S. the floodgates of M&A activity in the deals that closed in 2017.”
District Judge Richard Leon and media industry in the latter part of In addition, the total value of
AT&T’s subsequent acquisition of 2018 and beyond.” However, the global M&A transactions has
Time Warner on June 14, M&A has media industry has not been the increased year over year, with a
officially been brought into the only area of M&A activity so far this greater number of $5 billion-plus
spotlight once again. According to year. In fact, according to S&P Global transactions propelling growth in
CFRA Equity Analyst Tuna Amobi, Market Intelligence data, “fourteen first-quarter announced deal value.
CFA, CPA, “the compelling judicial U.S. equity issuance transactions of Global M&A is also expected to rise
precedent on the AT&T/Time Warner at least $1 billion closed in the first to a peak of $3.2 trillion in 2018,
ruling could foster a more favorable quarter 2018, putting the year on according to a report by Baker
regulatory backdrop that could open pace to exceed the 27 $1 billion-plus McKenzie and Oxford Economics.

LARGEST U.S. M&A DEALS ANNOUNCED IN Q1 2018


CFRA CFRA TARGET TRANSACTION
BUYER / SYMBOL STARS TARGET / SYMBOL STARS SECTOR DATE VALUE ($B)

Cigna / CI 3 Express Scripts / ESRX 3 Healthcare 3/8/2018 68.57


Brookfield Property / BPY NR GGP Inc. / GGP 3 Real Estate 3/26/2018 27.17
Dominion Energy / D 4 SCANA / SCG 2 Energy & Utilities 1/3/2018 14.35
Source: S&P Global Market Intelligence, CFRA

As with many investment investment approach. Permian Basin, where CFRA Equity
strategies, to get exposure to the Here we look at two funds in the Analyst Stewart Glickman, CFA,
mergers and acquisitions trend M&A sphere: one ETF and one mutual believes there are even more
without going after individual deals, fund. consolidation opportunities.
investors can look to some fund The IQ Arbitrage ETF (MNA), by Westchester Capital’s The Merger
options. However, the long-short MainStay Investments, has Fund (MERFX) is a mutual fund that
strategy funds that offer this approximately 75% country allocation also has about 75% regional
exposure typically have higher fees, to the U.S. As of May 31, MNA’s five- exposure to the U.S. Year to date
less liquidity and greater risk year annualized total return was through June 15, MERFX had a
compared to most other funds. 3.88%, underperforming its trailing total return of 5.33% versus
CFRA does not rate long-short underlying index by 73 basis points the 2.33% alternative event-driven
strategy funds (i.e., taking long due to its 0.77% expense ratio. peer average. Included in its top-five
positions in stocks that are expected However, its largest holding (8.51%) holdings is Rockwell Collins (COL 134
to increase in value and short is CFRA Buy-rated Andeavor (ANDV ***), which is being acquired by
positions in stocks that are expected 135 ****), which has entered into a United Technologies (UTX 123 ****),
to decrease in value). However, we definitive merger agreement with bringing together two aerospace
still conduct research on their record, Marathon Petroleum (MPC 72 ****). giants. COL is also the second largest
underlying holdings, costs and ANDV is crucially positioned in the holding for MNA, at 8.26%. 

FUNDS WITH EXPOSURE TO M&A ACTIVITY


TOTAL RETURN (%) NET
RECENT INCEPTION EXPENSE ASSETS
FUND NAME / SYMBOL RANK PRICE ($) DATE 1-YEAR 3-YEAR* 5-YEAR* RATIO (%) ($M)

IQ Merger Arbitrage ETF / MNA NR 31 11/16/2009 1.12 2.42 3.75 0.77 558.29
The Merger Fund / MERFX NR 17 10/14/1982 6.02 2.56 2.78 1.43 1,150.10
Source: CFRA, powered by data from S&P Global. *Average annualized.
4 THE OUTLOOK JUNE 25, 2018 CFRAOutlook.com

SUB-
INDUSTRY
OUTLOOK

Investment Banking & Brokerage


Kenneth Leon
CFRA
Equity Analyst
Outlook: Positive
CFRA has a positive fundamental now reads 65, up from 63 in the So far in 2018, equity trading
outlook on the investment banking fourth quarter of 2017 (a reading of volumes have rebounded with solid
and brokerage sub-industry. The more than 50 points reflects more growth and fixed income trading is
Trump administration policy raised positive than negative responses). poised for a rebound against
confidence for economic stimulus, In 2018, we see the leading areas weaker comps in 2017. Equities
tax reform and private sector for revenue growth coming from and derivative products will remain
investment, in our opinion. In 2018, investment banking, asset and the most attractive trading areas,
rising rates will likely benefit this wealth management units and in our opinion. Client activity and
sub-industry with higher net equity trading. Principal trading market volatility would be a boost
interest income from direct loans, tied to high yield, foreign exchange to trading, while custody and
securities lending in trading and and select government categories security services are a steady area
wealth management areas. may show single-digit growth in of growth.
Tax reform is a major catalyst 2018, in our view. CFRA thinks the SEC will take
that is likely to be more of a driver Underwriting and investment control of the authority to regulate
of customer activity than any direct banking fees are expected to the fiduciary standard from the
benefits that the investment banks increase by single-digit Department of Labor. Indeed, most
and brokerage firms will gain. At a percentages or more in 2018, with brokerage firms are already
macroeconomic level, CFRA difficult comparisons to strong adapting to it. Investment firms are
forecasts a strong U.S. and global 2017 performance. We see equity spending on strict compliance
economy that spurs higher underwriting doing better than debt controls for advisors that would
commercial and investment underwriting where in many cases, preclude "hat-switching," whether
activity. Investment banking corporations used new debt the fiduciary rule applies to them
related to advisory services (M&A) issuance to fund dividends to for advice on retirement products
and underwriting will likely see shareholders. or not.
2018 growth derived from Market volatility did hurt the IPO Year to date through June 15,
increased business by customers. market in the first quarter of 2018, 2018, the S&P Investment Banking
CEO confidence is another as the number of deals slowed with & Brokerage index was up 1.1%
barometer of the business climate market volatility experienced in versus a 4.2% advance in the S&P
that ties to corporate finance in the February. Announced IPOs in the 1500 Index. In 2017, the sub-
capital markets, M&A activity and second quarter of 2018 will likely industry increased 19.6%,
capital investments. As of April 5, bode well for the investment banks outperforming an increase of
2018, the Conference Board ahead, barring any period of high 18.8% for the broader market
Measure of CEO Confidence, which market volatility. Similar to 2017, benchmark.
rebounded in the fourth quarter of CFRA expects the second half of The table below lists all 4-STARS
2017, made further gains in the 2018 to show more activity for IPOs and 5-STARS stocks in the sub-
first quarter of 2018. The measure than the first half of 2018. industry. 

RECOMMENDED INVESTMENT BANKING & BROKERAGE STOCKS


12-MONTH SPGMI’S
RECENT TARGET QUALITY P/E
COMPANY NAME / SYMBOL STARS PRICE ($) PRICE ($) RANKING RATIO* YIELD (%)

E*TRADE Financial / ETFC 4 65 68 B 19.5 Nil


Morgan Stanley / MS 5 50 65 B+ 10.6 2.0
Raymond James / RJF 4 97 109 A+ 13.9 1.2
Stifel Financial / SF 4 57 73 B 11.1 0.8
Charles Schwab / SCHW 5 55 65 B+ 22.6 0.7
Goldman Sachs / GS 4 227 260 B 10.0 1.4
Source: CFRA, powered by data from S&P Global. *Based on CFRA’s 2018 EPS estimates.
CFRAOutlook.com THE OUTLOOK JUNE 25, 2018 5

FOCUS
STOCK

Morgan Stanley, Inc.


Kenneth Leon
CFRA
Equity Analyst
Boosting the wealth management business is key

The focus stock for the week ended The 2018 outlook for trading from equities (57.7% of total
June 24 is Morgan Stanley, which looks promising, with strong trading revenue) compared to fixed
carries CFRA's highest investment income, currency, commodities
recommendation of 5-STARS, or Morgan Stanley has (FICC) revenue at 43.3% in Q1 2018.
Strong Buy. MS is a global financial We like that MS has downsized its
services firm that provides a
transformed its FICC trading platform in the last 18
comprehensive suite of products to corporate profile to a months, which may limit exposure
a diverse group of clients and more reliable, steady to large trading losses.
customers, including corporations, growth company. Asset Regulatory reform tied to Dodd-
governments, financial institutions and wealth management Frank Stress Tests or the Volcker
and individuals. Rule could be a plus for MS trading
A core strategy is growing its
units along with investor revenue, in our view. While it may
Global Wealth Management Group services contribute to be too early to tell on proposed
(GWMG) business. This unit high recurring revenue changes to the Volcker Rule issued
accounted for 39.5% of total net and anchor the firm’s on May 30 by the Federal Reserve
revenues in Q1 2018, lower than more cyclical investment Bank, we expect greater clarity on
past quarters in the mid-40% the activities tied to market making
range. Institutional Securities, with
banking and trading versus proprietary trading.
strong trading, came in at 55.1%. areas. We look to return of capital as the
The remainder is Investment next major catalyst for MS, which is
Management (6.5%), for corporate equities reported in Q1 2018, while subject to the Fed stress tests to
and pension investors, as well as increased customer activity be released in late June. We are
Other (-1.1%). GWMG provides spurred higher trading in other confident MS will get approval of its
management services to clients areas. Compared to direct peers, plan and the consensus is
through a network of 15,712 global MS has one of the highest ratios of estimating a 24% dividend increase
representatives. The business total sales and trading revenue to in Q3 2018.
provides higher recurring fee total net revenue in Q1 2018, and Our 12-month target is $65,
revenue, low client turnover and the firm had a higher contribution applying a forward P/E of 13.8X our
available funds to realize 2018 EPS estimate and a price to
interest income. Morgan Stanley net tangible book value at 1.9X,
Morgan's Institutional both metrics at a premium to
Ticker: MS
Securities Group (ISG) includes direct peers. Our risk premium is
capital raising, financial Ranking:  supported by strong execution and
advisory services, corporate consistency in performance, even
lending, financing and market- Recent Price: $50 with uncertainties regarding
making activities for equity and market volatility and customer
12-Month Target Price: $65
fixed-income securities. MS is activity.
well positioned to realize fee Market Capitalization ($B): 88.14 Risks to our recommendation
growth, often ranking #1 or #2 and target price include weaker
in M&A or equity underwriting. P/E Ratio: 10.6 client trading activity in equity and
We see market share gains with fixed income markets, a slower
Yield: 2.0%
many of the large European release of underwriting deals from
banks retrenching their Source: CFRA, powered by data from the investment bank's pipeline and
investment bank and trading S&P Global. geopolitical risks. 
operations to home markets.
6 THE OUTLOOK JUNE 25, 2018 CFRAOutlook.com

High-Quality Capital Appreciation Portfolio


To enter the High-Quality Capital Appreciation Model of the constituents or for other factors.
Portfolio, a stock must have an S&P Global Market This model portfolio was launched on May 23, 2003. For
Intelligence Quality Ranking of A- or better, which indicates a the 10-year period ended April 30, 2018, the model portfolio
10-year history of above average earnings and dividend rose at an average annualized rate of 12.69%, outperforming
growth. Stocks must have a 4-STARS or 5-STARS ranking to the S&P 500 Equal Weight Index’s 10.28% increase for that
enter this model portfolio. period. Year to date through April 30, the model portfolio fell
CFRA’s Senior Portfolio Group may replace any stock in the by 0.30%, outperforming the equal-weighted benchmark’s
model portfolio with another stock at any time for reasons 2.14% decline. 
that can include a downgrade in STARS or Quality Ranking

HIGH-QUALITY CAPITAL APPRECIATION PORTFOLIO


12-MONTH SPGMI’S
ENTRY ENTRY RECENT TARGET QUALITY
SYMBOL COMPANY NAME DATE PRICE ($) PRICE ($) PRICE ($) STARS RANKING

BK Bank of New York Mellon 2/20/2018 56.18 57 65 5 A-


BDX Becton, Dickinson 2/12/2018 218.14 233 263 4 A-
CNI Canadian National Railway 2/24/2014 52.45 80 87 4 A+
CHD Church & Dwight 3/7/2016 43.72 51 55 5 A+
CTSH Cognizant Technology Solutions 11/20/2017 71.54 78 88 5 A-
EWBC East West Bancorp 11/10/2014 35.11 70 78 4 A-
EL Estee Lauder 11/20/2017 124.15 152 170 5 A
IBM International Business Machines 1/16/2018 160.47 141 175 4 A-
JNJ Johnson & Johnson 7/22/2013 80.36 121 170 4 A-
ORCL Oracle 1/23/2017 38.89 43 62 5 A-
SHW Sherwin Williams 10/2/2017 357.06 395 420 4 A+
TMO Thermo Fisher Scientific 3/19/2018 211.72 207 255 5 A-
UTX United Technologies 10/10/2016 95.99 123 155 4 A
WBA Walgreens Boots Alliance 11/9/2015 79.06 68 79 4 A-
DIS Walt Disney 11/14/2011 32.70 106 130 5 A+
Source: CFRA, powered by data from S&P Global.

Portfolio Focus: East West Bancorp


The bank holding company for East cross-Pacific trade is healthy. Overall, with options to grow or increase
West Bank, East West Bancorp has EWBC should continue to produce shareholder return.
assets of $38 billion, more than 130 organic loan growth above peers given Our target price of $78 is 13.8X our
locations and a focus on the U.S. and its Southern California footprint and its 2019 EPS estimate of $5.67, above the
Greater China markets. real estate exposure. S&P 400 Regional Bank average
EWBC's growth and asset quality are CFRA expects higher loan growth because of EWBC's strong growth
dependent mainly on the economic and asset sensitivity to produce rates and capital levels.
trends in Southern California and meaningful net interest income Risks to our recommendation and
growth in China. California is attractive growth. Combined with well controlled target price include greater
and continues to provide a tailwind to costs and stable asset quality, we competition for Southern California
EWBC’s growth, while China is less forecast increasing operating leverage customers, a downturn in the
predictable and not growing as fast as and earnings growth. California real estate market, or a
it has in the past. EWBC expects many EWBC’s relatively high capital levels problem with the bank’s international
sectors of China to remain strong, and will likely provide the mid-cap bank clients. 
CFRAOutlook.com THE OUTLOOK JUNE 25, 2018 7

Top Ten Model Portfolio


The Top Ten Model Portfolio comprises to be fairly balanced among economic period ended April 30, 2018, the model
stocks that CFRA thinks are well sectors. portfolio rose at an average annualized
positioned for total return over the Stocks must have a 5-STARS rate of 6.75%, compared with the Equal
next 12 months. ranking to enter the model portfolio Weight S&P 500’s 10.28% average
The goal of the Top Ten Model but can remain in the model portfolio if annualized advance over that time.
Portfolio is to outperform the S&P 500 the ranking drops. In addition, any Last year, the model portfolio rose by
index on a total return basis. CFRA’s stock in the model portfolio may be 25.37%, compared with 17.84% for the
Senior Portfolio Group, a replaced with a 5-STARS stock at any Equal Weight S&P 500.
subcommittee of our Investment time. Past performance is not a reliable
Policy Committee, selects the stocks. The model portfolio was launched on indicator of future results. 
The intention of the model portfolio is December 31, 2001. For the 10-year

TOP TEN MODEL PORTFOLIO


12-MONTH
ENTRY ENTRY RECENT TARGET
SYMBOL COMPANY NAME DATE PRICE ($) PRICE ($) PRICE ($) SECTOR STARS

AVGO Broadcom 11/17/2016 161.71 260 310 Technology 5


SCHW Charles Schwab 7/19/2016 27.05 55 65 Financials 5
STZ Constellation Brands 10/27/2017 210.17 231 288 Staples 5
DXC DXC Technology 10/27/2017 79.22 81 105 Technology 5
FMC FMC Corporation 11/17/2017 92.57 87 100 Materials 5
MAS Masco 2/16/2017 33.23 38 48 Industrials 5
MS Morgan Stanley 2/26/2018 56.74 50 65 Financials 5
SU Suncor Energy 11/17/2016 28.95 39 48 Energy 5
TMO Thermo Fisher Scientific 2/16/2017 157.05 207 255 Health Care 5
WHR Whirlpool Corporation 3/22/2017 164.75 144 210 Cons. Disc. 5
Source: CFRA, powered by data from S&P Global.

Performance calculations for all model portfolios do not take into account capital gains taxes or brokerage commissions and fees. If the foregoing had been factored into the model
portfolio’s investment performance, it would have been lower. This performance calculation also does not take into account timing differences between the model portfolio selections and
purchases made based on those selection by actual investors. Over certain periods, the model portfolio incurred losses and over time the model portfolio is expected to continue to pose a
risk of negative investment returns. Because the model portfolio has a high turnover rate, it is best suited for tax-deferred accounts such as IRAs and is less suited for other accounts.
Investors should seek financial advice before investing based on the model portfolio. This model portfolio does not address the specific investment objectives, financial situation, and
particular needs of any person. Stocks in the model portfolio will not be suitable for all investors. Past performance is no guarantee of future results.

Portfolio Focus: Thermo Fisher Scientific


A leading provider of life science and with development and manufacturing capital deployment strategy of M&A,
laboratory analytical instruments, needs. PTHN has estimated sales of $2 stock buybacks and dividends.
equipment, reagents and billion and EBITDA of $437 million. In 2016 and 2017, TMO repurchased
consumables, software and services We expect 2018 sales, including the a total of $2B shares, after temporarily
for research, analysis, discovery and Patheon acquisition, to grow 13.8% to suspending buybacks subsequent to
diagnosis, Thermo Fisher Scientific $23.8B. the Patheon deal. TMO has $500M
was formed in 2006 when Thermo TMO says the addition of Patheon remaining in its stock repurchase
Electron and Fisher Scientific merged. created a $3B pharma services program.
In August 2017, TMO acquired business. We think TMO is well- Our 12-month target price of $255 is
Patheon NV (PTHN) for $7.2B, including balanced, with 25% in instrument 23.4X our 2018 earnings per share
$2.0B of net debt. PTHN is a contract sales and 75% in recurring revenues, estimate of $10.88, below the peer
development and manufacturing and we see the percentage of average price/earnings ratio of 25.9X,
company that helps biopharma firms instrument sales falling. TMO has as we discount some growth via
employed what we view as a balanced acquisitions. 
8 THE OUTLOOK JUNE 25, 2018 CFRAOutlook.com

The Observatory
Selected actions for June 15 to June 21
STARS 12-MONTH SPGMI’S
NEW OLD RANKING RECENT TARGET QUALITY FAIR VALUE
COMPANY NAME / SYMBOL STARS STARS DATE PRICE ($) PRICE ($) RANKING RANK

8point3 Energy Partners / CAFD 0 3 6/20/2018 12 NA NR NR


Greenhill & Co. / GHL 0 3 6/20/2018 29 NA B- NR
Lithia Motors / LAD 4 3 6/20/2018 101 125 B+ 5
LyondellBasell / LYB 4 5 6/15/2018 108 125 NR 4
Plains All American Pipeline / PAA 4 3 6/15/2018 24 28 NR NR
TechnipFMC / FTI 2 3 6/18/2018 31 28 NR 3
Twenty-First Century Fox / FOXA 3 4 6/20/2018 48 48 B+ 3
VeriSign / VRSN 2 3 6/20/2018 140 120 B 1
Vitamin Shoppe / VSI 0 3 6/20/2018 7 NA NR NR
Welltower / WELL 2 3 6/21/2018 59 53 A- NR
Source: CFRA, S&P Global Market Intelligence (SPGMI). NR-Not ranked. NA-Not available.

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selected by The Outlook according to factors including, but not limited to, newsworthiness, capitalization, and inclusion in a model portfolio published by The Outlook. For all STARS
changes in real time, go to CFRAOutlook.com. Please note that all investments carry risks. Investors should seek financial advice before investing.
All of the views expressed in this research report accurately reflect the research analysts’ personal views regarding any and all of the subject securities or issuers. No part of the
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Can Retail Continue To Rally? (Continued from cover)


rate of the decline was swift. That led of short interest. When those recorded solid upticks month-over-
investors to lower expectations for companies report better-than- month, a trend we expect to continue
first-quarter earnings results from expected results, the shorts get over the next several months. Retail
retailers and the stocks took a pause. squeezed (they have to cover their sales are accelerating again, and April
The bag was mixed on first-quarter short position by buying shares), numbers were revised higher. The May
results, but companies that showed helping to accelerate upside in those retail sales data showed a solid
improvement in same store sales or stocks. Macy’s and Kohl’s are increase in sales at department stores
progress on turnaround plans were examples of this with 17.7% and 16.7% and clothing retailers, one area the
rewarded. Those improvements, short interest, well ahead the sector consumer hadn’t spent money on in a
coupled with some spectacular results average of 6.5%. very long time.
from a handful of retailers (Tiffany’s, We won’t get another update on the The biggest risk is the valuations.
Macy’s, TJX (TJX 96 ***)) helped to health of individual retailers until mid- Most of the stocks that made big
drive interest to the group again in late August when they report second moves now trade at or higher than
April and early May. quarter results. Historically, retail their historical averages. If you aren’t
But not all retailers are created stocks perform best in the third and already in these stocks, it may be too
equal. Dollar Tree is 18.7% lower year- fourth quarter when the consumer is late to buy.
to-date, L Brands (LB 37 ***) is 40% spending on back-to-school and The cover table lists retailers for
lower, The Gap (GPS 34 ***) is 4.5% holidays. Even though the second which our analysts still predict more
lower and AutoZone (AZO 689 ***) is quarter isn’t usually the strongest one upside over the next 12 months.
down 3.5%. For this reason, it is for retail stocks, we don’t see much on For a diversified approach to
difficult to say the retail group as a the horizon that will slow these high- investing in retail, investors might
whole is back. flying stocks down in the near term consider SPDR S&P Retail ETF (XRT 51
Some of the retailers that have from a fundamental standpoint. Marketweight), which holds many of
outperformed in 2018 have high levels Consumer spending in March and April the retailers discussed in this article. 