THE OUTLOOK INTELLIGENCE FOR THE INDIVIDUAL INVESTOR March 30, 2015 Volume 87 Number 12 The Outlook will not be published on Monday, April 6. The next issue will be published on Monday, April 13. What’s Inside Intelligencer 2 ETF Strategies 3 Sub-Industry Outlook 4 Focus Stock 5 Master List 6 Top Ten Portfolio 7 Observatory 8 To subscribe, call 800-523-4534 Follow us on Twitter: @spmarketscope Please see page 8 for required research analyst certification disclosures. Tech Knowledge Foreign exchange weighs on tech, but opportunities still exist After crossing the psychologically significant 5,000 mark for the first time in 15 years on March 2, the tech-filled Nasdaq composite index traded lower the following two weeks, closed above the 5,000 level on March 20 and March 23, and has since moved lower. Extreme U.S. dollar appreciation has been cited as a key contributor to the tech sector’s sudden loss of price momentum. The U.S. dollar index, which compares the U.S. dollar with a basket of currencies, has risen 7.9% year-to-date through March 26, with a nearly 50% appreciation happening in just the first half of March. Many tech companies anticipated a negative impact from exchange rates when they provided 2015 guidance in January and February. In fact, 2015 S&P 500 tech sector earnings estimates have declined while the dollar has strengthened. In mid-January, as the fourth quarter earnings season kicked off, analysts were anticipating 2015 calendar year tech earnings growth of 10.3%, compared with current expectations of just 5.3%. However, the swift move in currencies has investors and analysts concerned that the initial downward revisions to forward earnings expectations may be too conservative. However, from a valuation perspective, the S&P 500 information technology sector trades at 16.2X on a forward year basis, about in line with its 10-year average. That also compares with a 66X multiple the last time the Nasdaq composite index was at 5,000. Further, the tech sector is trading at a 21% discount to its historical average relative to the S&P 500, which is the largest discount across relative valuations for all 10 subsectors. Typically the sector trades at a 24% premium to the S&P 500. The S&P Capital IQ Investment Policy Committee, chaired by Sam Stovall, managing director of U.S. equity strategy, recommends overweighting the technology sector. The sector makes up 19.8% of the S&P 500; the IPC advises a 20.1% weighting. Of the three tech industry groups (hardware, semiconductors, and software), the semiconductors are trading at a significant discount to historical earnings. (See cover (Continued on page 8) S&P 500 INFORMATION TECHNOLOGY SECTOR VALUATION SUMMARY Semiconductors Industry Group Software & Services Industry Group Hardware & Equip. Industry Group Information Technology Sector 2015 EPS ($) 2015 EPS GROWTH (%) 12-MONTH FORWARD P/E 10-YEAR AVERAGE P/E 35.50 48.40 56.40 42.94 3.1 4.3 9.2 5.3 14.4 18.7 13.7 16.2 21.5 16.8 14.8 15.9 Source: S&P Capital IQ. EPS-earnings per share. P/E-price/earnings ratio. All data as of March 26, 2015. 2 S&P CAPITAL IQ THE OUTLOOK MARCH 30, 2015 www.spoutlook.com Intelligencer S&P Capital IQ’s The Outlook GLOBAL MARKETS INTELLIGENCE Content Director Beth Piskora Contributing Editors John Hackett, Robin Mordfin Headlines, Highlights, and What’s on our Minds RESEARCH & ANALYTICS Director, Global Equity Research Kenneth Leon Managing Director, U.S. Equity Strategy Sam Stovall PORTFOLIO CHANGES: Parexel International (PRXL 67.87 ) replaces Molina Healthcare (MOH 64.44 ) in the Small/Mid-Cap portfolio effective March 30. KRAFT MERGER WITH HEINZ PROMISES TO PAY OFF: The agreement by Kraft Foods Group (KRFT 84.39 ) to merge with food manufacturer H.J. Heinz promises “significant cost-synergy potential and international revenue growth opportunities,” says S&P Capital IQ Equity Analyst Joseph Agnese. The merger will result in a new publicly traded company to be named the Kraft Heinz Company, and “we expect the deal to be completed in the second half of 2015, pending approvals,” says Agnese. S&P Capital IQ is raising its 12-month target price by $15 to $89. For customer service, please call 1-800-5234534 and choose option 1 and then option 2 between 9am and 4pm Eastern Time, Monday through Friday. The Outlook (USPS 415-780, ISSN 0030-7246) is published weekly except for one issue in January, April, July, and December by S&P Capital IQ, 55 Water St., New York, NY 10041. Annual subscription: $360. Periodicals postage paid at New York, NY, and additional mailing offices. POSTMASTER: Send address changes to The Outlook, S&P Capital IQ, 55 Water St., New York, NY 10041. Copyright ©2015. All rights reserved. “Standard & Poor’s,” “S&P,” “S&P 500,” “S&P MidCap 400,” and “S&P SmallCap 600” are registered trademarks of McGraw Hill Financial. Reproduction in whole or in part prohibited except by permission. All rights reserved. Executive Committee of McGraw Hill Financial: Douglas Peterson, President and Chief Executive Officer; Jack F. Callahan, Jr., Executive Vice President and Chief Financial Officer; Lucy Fato, Executive Vice President and General Counsel; and Imogen Dillon Hatcher, President, S&P Capital IQ. Because of the possibility of human or mechanical error by S&P’s sources, S&P, or others, S&P does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. GOOGLE’S INCOMING CFO COULD BE GOOD NEWS FOR INVESTORS: Google (GOOGL 563.64 ) announced that May 26 will be the start date for its new chief financial officer, Ruth Porat, currently CFO at Morgan Stanley. Porat will replace CFO Patrick Pichette, who announced his planned retirement three weeks ago. Porat has been CFO of Morgan Stanley for more than five years, and was the lead investment banker for a number of technology-related companies, including Amazon, eBay, and Netscape. “We wonder if Porat’s arrival will lead to more shareholder-friendly capital allocation actions, perhaps related to stock repurchases and dividends,” says S&P Capital IQ Equity Analyst Scott Kessler. S&P CAPITAL IQ STARTS AMERICAN AIRLINES OFF WITH A ‘BUY’: “Based on our posi- tive industry view and a favorable view on valuation, we find shares of American Airlines (AAL 51.27 ) attractive,” says S&P Capital IQ Equity Analyst Jim Corridore. S&P Capital IQ has initiated EPS estimates for 2015 and 2016 at $10.34 and $9.97, respectively, with a 12-month target price of $70. “American Airlines deserves to trade at a modest discount to the group based on a slower revenue growth rate and higher debt levels, but we see the current valuation gap versus peers as too high,” says Corridore. TENET HEALHCARE ENTERS $2.6 BILLION JOINT VENTURE DEAL: Tenet Healthcare (THC 49.61 ) has entered into a deal with Welsh, Carson, Anderson & Stowe to merge Tenet Healthcare’s short-stay surgery and imaging centers with United Surgical Partners International in a joint venture valued at $2.6 billion. Tenet will own 50.1% of the joint venture, with an option to buy the rest within five years. The deal is expected to close in the third quarter of this year. “We view the deal positively, as we see outpatient admissions growing faster than inpatient admissions,” says S&P Capital IQ Equity Analyst Jeffrey Loo. “We are keeping our 12-month target price at $68.” GROWTH IS FORECAST IN AMEX BUSINESS LINES: S&P Capital IQ is lowering its 12-month target price on shares of American Express (AXP 78.48 ) by $3 to $87. Reflecting foreign exchange headwinds and company guidance, S&P Capital IQ is also cutting its 2015 EPS estimate to $5.50 from $6.00, and the 2016 EPS estimate to $5.80 from $6.65. “However, we see good growth in many of American Express’s business lines, and we expect the company to transform itself so it can outperform in an increasingly competitive environment,” says S&P Capital IQ Equity Analyst Erik Oja. S&P CAPITAL IQ EVALUATION SYMBOLS STARS Rankings Our evaluation of the 12-month potential of stocks is indicated by STARS: Strong Buy—Total return is expected to outperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares rising in price on an absolute basis. Buy—Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis. Hold—Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis. Sell—Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain. Strong Sell—Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis. NR Not ranked. Quality & Fair Value Rankings Our appraisals of the growth and stability of earnings and dividends over the past 10 years for STARS and other companies are indicated by Quality Rankings: For important legal disclosures, go to www.capitaliq.com/home/legal-disclaimers/sp-capital-iq-research-reports. A+ A A- Highest High Above Avg. B+ Average B Below Avg. B- Lower C Lowest D In reorganization NR Not Ranked Quality Rankings are not intended to predict stock price movements. S&P Fair Value Rank: Using S&P’s exclusive proprietary quantitative model, stocks are ranked in one of five groups, ranging from Group 5, listing the most undervalued stocks, to Group 1, the most overvalued issues. Group 5 stocks are expected to generally outperform all others. The Fair Value rankings imply the following: 5-Stock is significantly undervalued; 4-Stock is moderately undervalued; 3-Stock is fairly valued; 2-Stock is modestly overvalued; 1-Stock is significantly overvalued. As an input to the S&P Mutual Fund Ranking, S&P evaluates the weighted average Fair Value Rank of the underlying holdings of the mutual fund compared with its category. www.spoutlook.com S&P CAPITAL IQ THE OUTLOOK MARCH 30, 2015 3 ETF STRATEGIES Todd Rosenbluth S&P Capital IQ Director of ETF Research Don’t Forget to Look Inside Choosing among funds should involve more than comparing expense ratios As new and innovative ETFs that hedge foreign currencies or U.S. interest rates gain traction, it is easy to forget that many investors are using plain vanilla products to build asset allocation strategies. However, we are concerned that these investors are focusing too exclusively on finding the ETFs with the lowest expense ratios, rather than understanding what’s inside these funds. With over $18 billion in assets, Vanguard Value Index (VTV) is more than twice the size of iShares S&P 500 Value (IVE) and has seen stronger inflows thus far in 2015. Vanguard, with a 0.09% net expense ratio, is half the cost of iShares. But there are other differences to consider. Vanguard’s U.S style ETFs seek to track a CRSP index, run by the University of Chicago. Unlike the S&P Dow Jones Index followed by IVE, CRSP uses a different approach, involving “packeting,” which allows a holding to be shared between two indices of the same family, and thereby cushions movement between indices. In other words, a stock can be in both the CRSP Large Cap Value and Large Cap Growth indices. In addition, the value criteria used by the two index providers is different. S&P Dow Jones Indices uses historical book value, earnings and sales-to-price ratios of the S&P 500 Index constituents to form its S&P 500 Value Index. CRSP incorporates those factors, along with 12-month forward earnings/price ratio and dividend yield, in forming its value universe. (S&P Capital IQ operates independently of S&P Dow Jones Indices; as such, we have no insight into the selection criteria other than what can be found on its website.) Both Vanguard Value and iShares S&P 500 have more than 300 holdings and 26% of assets in their top 10 positions, but the exposures are different. VTV’s largest sector weightings are financials (21% of assets), health care (15%), consumer staples (12%), and information technology (11%), which is a surprisingly high level for a value product. Meanwhile, consumer discretionary (5%) is one of the larger underweights compared with the more broadly diversified large-cap index. In contrast, IVE’s largest sector exposure is also in financials (24%), but energy (14%) was 400 basis points higher, while information technology (7%) was similarly lower relative to VTV. Meanwhile, consumer discretionary (8%) and consumer staples (10%) weightings are also notably different. The distinctions between VTV and IVE are further visible when looking into industry exposure, as IVE has a larger stake in oil, gas & consumable fuels companies (12% vs. 10%) but a smaller stake in pharmaceuticals (6% vs. 9%). In the one-year period ended March 20, VTV’s 12.3% return was ahead of IVE’s 11.5%, though they have a similar fractional gain thus far in 2015. While some investors might look further back in time to see a stronger three-year record and lower standard deviation for VTV than IVE, we caution that part of this record occurred while Vanguard was constructed differently. In April 2013, Vanguard changed the index VTV seeks to replicate from an MSCI benchmark to a CRSP one. Both ETFs have favorable strong risk considerations, using S&P Capital IQ Quality Rankings and Standard & Poor’s Credit Ratings of the holdings, and modest costs, using expense ratio and bid/ask spread analysis. (S&P Capital IQ also operates independently from Standard & Poor’s Ratings Services.) From a cost perspective, while VTV has a lower expense ratio, it had a wider bid/ask spread than IVE. FUNDS WITH NOTABLE DISTINCTIONS FUND NAME / SYMBOL RANK CURRENT PRICE ($) Vanguard Value Index / VTV iShares S&P 500 Value / IVE OW OW 83.05 91.89 Source: S&P Capital IQ. OW-Overweight. *Average annualized. TOTAL RETURN (%) YIELD (%) 1-YEAR 3-YEAR* 5-YEAR* EXPENSE RATIO (%) ASSETS ($ MLNS) 2.20 2.12 11.82 10.95 16.48 15.47 13.64 13.04 0.09 0.18 18,226 8,246 4 S&P CAPITAL IQ THE OUTLOOK MARCH 30, 2015 www.spoutlook.com SUBINDUSTRY OUTLOOK Erik Oja S&P Capital IQ Equity Analyst Consumer Finance Outlook: Positive S&P Capital IQ’s fundamental outlook for the consumer finance sub-industry for 2015 is positive, as we think companies in this sub-industry are positioned well to reap the rewards of an improving economic environment. A dramatic improvement in credit quality that began in 2011 has continued through 2015 due to tight underwriting standards employed through the downturn. S&P Capital IQ thinks overall credit quality trends will be stable in 2015, and we expect card spending to grow at a faster rate than consumer loans. While the industry is now under a higher level of regulatory scrutiny than in the past, we think companies will act prudently. And with credit at historically strong levels, company managements have time to focus on strategic growth initiatives. Of the types of consumer loans offered by companies within this sub-industry, credit cards are the biggest segment, as auto finance and private student loan portfolios are relatively smaller markets. The U.S. credit card industry is relatively mature, but its players have experience dealing with competition, and balancing account growth, margin, and expenses. With credit at historically strong levels, companies have time to focus on strategic growth initiatives. These companies are sophisticated, information-rich marketers, and we expect them to develop innovative new products. The most significant area of development is in mobile payments, which are producing new industry competitors. S&P Capital IQ forecasts a slight gain in receivables and loans in the next 12 months. Companies will likely continue to modestly loosen credit standards over the next couple of years. Industry receivables growth and discount revenues for the card networks will likely continue to be moderate due to lackluster spending and consumers’ increasingly cautious attitude toward debt. We think receivables growth and spending will pick up as consumer confidence and employment levels improve. For the longer term, we think pricing pressure and competition will remain intense, and we expect the larger consumer finance companies to continue to look to develop new niches. Year to date through March 20, the S&P consumer finance index was down 7.7% versus a 2.7% increase for the S&P 1500 index and a 2.4% increase for the S&P 500 index. In 2014, the S&P Consumer Finance Index was up 7.1%, trailing a 10.9% rise in the S&P 1500 Index and an 11.4% increase for the S&P 500. The table lists all of the stocks in this sub-industry that garner a 5- (strong buy) or 4-STARS (buy) ranking from S&P Capital IQ. RECOMMENDED STOCKS STARS QUALITY RANKING CURRENT PRICE ($) 12-MONTH TARGET PRICE ($) STYLE P/E RATIO* YIELD (%) American Express / AXP 4 B+ 77.89 87 Growth 14.6 1.4 Capital One Financial / COF 5 B+ 78.89 93 Blend 10.6 1.5 Discover Financial Services / DFS 4 NR 56.82 65 Growth 11.8 1.7 Navient / NAVI 4 B- 20.32 23 Blend 7.7 3.1 PRA Group / PRAA 4 B+ 54.31 69 Growth 15.8 Nil COMPANY NAME / SYMBOL Source: S&P Capital IQ. *Trailing 12 months. www.spoutlook.com S&P CAPITAL IQ THE OUTLOOK MARCH 30, 2015 5 FOCUS STOCK Efraim Levy S&P Capital IQ Equity Analyst Magna International This auto components firm set to benefit from expected rise in vehicle production The Focus Stock for the week ended March 29 is Magna International Inc., which carries S&P Capital IQ’s highest investment recommendation of 5-STARS, or strong buy. Based in Aurora, Ontario, Magna is one of the world’s largest automotive components manufacturers and the biggest in Canada. We expect the company to generate about $34.3 billion in revenues in 2015, and $36.4 billion in 2016. Our recommendation is based on our expectation that Magna will benefit from rising global vehicle production, led by growth in the U.S., despite lower total revenues expected in 2015, and that the stock has attractive total return potential. Magna’s operations include producing body, chassis, interior, exterior, seating, power train, electronic, vision, closure of roof systems and modules, as well as complete vehicle engineering and contract manufacturing. The company is focusing its product strategy on becoming a full systems supplier or integrator for large automotive body systems. Magna also plans to pursue strategic acquisitions that provide access to new technologies, entry into new markets, and diversification of its customer base. Sales in North America accounted for almost 52% of 2014 revenues, with Europe at 42%, and other international at 6.2%. This excludes revenues from complete vehicle assembly and tooling, engineering and other. We forecast 6.6% lower revenues for 2015, with decreases largely the result of exchange rates and regional weakness (notably South America and Russia), along with lower complete vehicle assembly sales. North America sales should be higher. Revenues are likely to recover 6.2% in 2016. S&P Capital IQ Equity Research forecasts U.S. new light vehicle sales volume will rise 2.7% to 16.9 million units in 2015. J.D. Power & Associates (which, like S&P, is owned by McGraw Hill Financial) and LMC Automotive project global new light vehicle sales volume will increase 3.2% in 2015 to 89.6 million units, and 4.9% to 94.0 million units in 2016. With volume and exchange rate pressure, Magna operating margins are likely to be near 2014 levels of 7.2%, although we see an upside bias. Significant progress is being made in Europe, we believe, aided by higher production (excluding Russia) in that key region. Mean- MAGNA INTERNATIONAL Ticker: MGA S&P Ranking: Current Price: $51.71 12-Month Target Price: $64 Market Capitalization ($ Blns): $22.05 Price/Earnings Ratio: 11.09 Yield: 1.64% Source: S&P Capital IQ. while, Magna is investing heavily in expanding in new and emerging regions. These actions are likely to aid results in 2015, we expect. The drain from troubled European plants should be mitigated over time as the company focuses on profitability over revenue. We view the company’s financial position as strong, with $1.25 billion in cash and cash equivalents as of December 31, 2014, and long-term debt of $811 million (including $750 million recently issued to fund share repurchases). Priorities for using cash are likely to be: organic growth in emerging markets, acquisitions, dividend increases, and stock repurchases. In March, MGA effected another 2-for-1 stock split and a 16% increase in the cash dividend. Our 12-month split-adjusted target price of $64 is 11.4X our 2016 EPS estimate of $5.60, reflecting historical and peer P/E comparisons. We expect EPS of $4.79 for 2015. With a target price of $64, and a recent 1.7% dividend yield, we see approximately $12 upside for the stock and more than 21% total return potential. Risks to our recommendation and target price include a slower-than-expected increase in demand for vehicles in general and for vehicles with high Magna parts content in particular, especially in Europe, as well as weaker-than-expected demand in certain troubled regions. Unfavorable currency movements would be a negative for the stock as well. 6 S&P CAPITAL IQ THE OUTLOOK MARCH 30, 2015 www.spoutlook.com Small/Mid-Cap Model Portfolio To enter the Small/Mid-Cap Model Portfolio, a stock must have a market capitalization of $4 billion or less, a 4-STARS or 5-STARS ranking, and good long-term prospects in the opinion of the S&P Capital IQ equity analyst who follows it. S&P Capital IQ’s Senior Portfolio Group may replace any stock in the portfolio with another stock at any time for reasons that can include a downgrade in STARS ranking or other factors, though a stock will not necessarily be removed for changes to its market capitalization. This portfolio was launched on May 23, 2003. From inception through February 28, 2015, the portfolio rose at an average annualized rate of 13.38% excluding dividends, compared with 10.72% for its benchmark, the S&P Mid-Cap 400. For the period from December 31, 2014 through March 20, 2015, the portfolio rose by 12.83%, compared with 6.00% for the S&P Mid-Cap 400. SMALL/MID-CAP MODEL PORTFOLIO ENTRY PRICE ($) ENTRY DATE 37.21 12/19/2011 CURRENT PRICE ($) 12-MONTH TARGET PRICE ($) STARS QUALITY RANK 4 B+ SYMBOL COMPANY NAME ATW Atwood Oceanics CLW Clearwater Paper 61.89 04/07/2014 63.74 70 4 NR CY Cypress Semiconductor 14.32 02/09/2015 14.12 18 4 B- 28.58 39 DAL Delta Air Lines HAR Harman International 8.03 12/03/2008 44.09 62 5 NR 44.48 03/25/2013 133.02 140 4 B HLX Helix Energy Solutions 26.79 07/28/2014 14.54 19 4 B- ICLR ICON Plc 28.51 01/22/2013 69.61 86 5 NR KELYA Kelly Services 17.03 06/24/2013 17.01 19 4 B- NICE NICE-Systems 54.97 02/17/2015 58.64 78 4 NR PRXL Parexel International 67.87 03/30/2015 67.87 78 5 B+ SBAC SBA Communications 29.62 09/15/2008 119.23 135 4 C SBGI Sinclair Broadcast Group 34.71 12/30/2013 30.70 30 4 B SUNE SunEdison 7.52 06/24/2013 23.76 28 5 C SWFT Swift Transportation 24.75 11/03/2014 26.27 37 5 NR UNFI United Natural Foods 67.99 11/03/2014 73.56 83 4 B+ Source: S&P Capital IQ. All data are as of Friday’s close. Performance calculations do not take into account reinvestment of dividends, capital gains taxes or brokerage commissions and fees. If the foregoing had been factored into the portfolio’s investment performance, it would have been lower. This performance calculation also does not take into account timing differences between the portfolio selections and purchases made based on those selection by actual investors. Over certain periods, the portfolio incurred losses and over time the portfolio is expected to continue to pose a risk of negative investment returns. Because the 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 portfolio. This portfolio does not address the specific investment objectives, financial situation, and particular needs of any person. Stocks in the portfolio will not be suitable for all investors. Past performance is no guarantee of future results. LEADERS NAME LAGGARDS YTD GAIN / LOSS NAME YTD GAIN / LOSS ICON Plc 39.81% Helix Energy Solutions Harman International 27.94% Delta Air Lines -34.88% SunEdison 25.47% Clearwater Paper -3.57% Sinclair Broadcast 14.11% United Natural Foods -2.00% Atwood Oceanics -0.67% -3.60% Source: S&P Capital IQ. Current portfolio members only. Performance is based on the year to date through 3/20/2015, or, if the security was added after the start of the year, for the time it has been a portfolio member. www.spoutlook.com S&P CAPITAL IQ THE OUTLOOK MARCH 30, 2015 7 Top Ten Model Portfolio The Top Ten Model Portfolio comprises stocks that S&P Capital IQ believes to be well positioned for capital appreciation over the next 12 months. The goal of the Top Ten Model Portfolio is to outperform the S&P 500 index on a capital appreciation basis. S&P Capital IQ’s Senior Portfolio Group, a subcommittee of our Investment Policy Committee, selects the stocks. The intention of the model portfolio is to be fairly balanced among economic sectors. Stocks must have a 5-STARS ranking to enter the model portfolio, but can remain in the model portfolio if the ranking drops to 4 STARS. If the ranking drops below 4 STARS, the stock will be removed. In addition, any stock in the model portfolio may be replaced with a 5-STARS stock at any time. The model portfolio was launched on December 31, 2001. From inception to February 28, 2015, the model portfolio rose at an average annualized rate of 5.59% excluding dividends, compared with 4.71% for the S&P 500. For the period from December 31, 2014 to March 20, 2015, the model portfolio rose by 11.44% excluding dividends, compared with 2.39% for the S&P 500. TOP TEN PORTFOLIO ENTRY DATE STARS 12-MONTH TARGET PRICE ($) 49.55 5 108 0.59 5 68 114.81 47.14 5 125 56.80 6.35 4 65 -6.78 5 110 180.57 5 86 ENTRY PRICE ($) CURRENT PRICE ($) PRICE CHANGE (%) SYMBOL COMPANY NAME AET Aetna 04/11/2014 70.82 105.91 CBS CBS 04/17/2014 60.64 61.00 STZ Constellation Brands 04/11/2014 78.03 DFS Discover Financial 01/17/2014 53.41 EOG EOG Resources 04/30/2014 98.00 91.36 ICLR ICON Plc 10/18/2012 24.81 69.61 QRVO Qorvo 01/29/2015 75.76 77.19 1.89 5 80 SAVE Spirit Airlines 02/07/2014 46.00 73.67 60.15 5 100 SUNE SunEdison 02/26/2015 22.49 23.76 5.65 5 28 TROW T.Rowe Price Group 06/14/2013 73.40 81.16 10.57 4 92 Source: S&P Capital IQ. All data are as of Thursday’s close. Performance calculations do not take into account reinvestment of dividends, capital gains taxes or brokerage commissions and fees. If the foregoing had been factored into the portfolio’s investment performance, it would have been lower. This performance calculation also does not take into account timing differences between the portfolio selections and purchases made based on those selection by actual investors. Over certain periods, the portfolio incurred losses and over time the portfolio is expected to continue to pose a risk of negative investment returns. Because the 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 portfolio. This portfolio does not address the specific investment objectives, financial situation, and particular needs of any person. Stocks in the portfolio will not be suitable for all investors. Past performance is no guarantee of future results. Por tfolio Focus: SunEdison SunEdison is the most recent addition to the Top 10 portfolio, added on February 26, 2015. S&P Capital IQ Equity Analyst Angelo Zino has a bullish outlook on the company, a leading solar systems installer and producer of silicon wafers used in semiconductors for microelectronic applications. The company was formerly called MEMC Electronic Materials. “Our strong buy recommendation reflects our view of recent construction activity providing better visibility, pipeline expansion and renewable expansion into the wind arena,” says Zino. “We see the company’s solar energy pipeline offering some stability in the volatile solar industry, with its backlog concentrated in North America but diversifying. “We believe the acquisition of First Wind doubles SunEdison’s total addressable market and provides greater diversification.” Zino forecasts significant long-term revenue growth potential, an improvement after the 10% revenue decline in 2014. He estimates the gross margin will widen in 2015 and 2016, compared with a 10% margin for 2014. 8 S&P CAPITAL IQ THE OUTLOOK MARCH 30, 2015 www.spoutlook.com The Observatory Selected actions for March 23 to March 27 NEW STARS OLD STARS STARS RANKING DATE ADTRAN / ADTN 3 2 3/23/2015 18.32 Affiliated Managers / AMG 4 NR 3/25/2015 AK Steel Holding / AKS 4 5 American Airlines / AAL 4 Capital One Financial / COF 12 MONTH TARGET PRICE ($) QUALITY RANK FAIR VALUE RANK 20 B+ NR 215.14 237 B 5 3/23/2015 4.41 5 C 1 NR 3/25/2015 51.27 70 NR NR 5 4 3/23/2015 78.51 93 B+ 4 Casey’s General Stores / CASY 4 3 3/23/2015 87.20 99 A+ 3 Fiat Chrysler Automobiles / FCAU 3 NR 3/25/2015 16.08 17 NR NR HollyFrontier / HFC 3 4 3/25/2015 40.53 42 B 4 Huntington Bancshares / HBAN 5 4 3/24/2015 10.88 13 B- 2 Patterson-UTI Energy / PTEN 1 2 3/26/2015 19.10 14 B- NR Starbucks / SBUX 3 4 3/26/2015 95.08 98 B+ 1 Synovus Financial / SNV 5 3 3/23/2015 27.79 33 B- 2 COMPANY NAME / SYMBOL PRICE ($) Source: S&P Capital IQ. NR-Not ranked. For intraday STARS changes, subscribers can visit www.spoutlook.com and click on the STOCKS tab. The Observatory provides a selection of analytical actions — upgrades, downgrades, initiations — from S&P Capital IQ. Stocks featured in the Observatory are selected by The Outlook according to factors including, but not limited to, newsworthiness, capitalization, and inclusion in a portfolio published by The Outlook. 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 analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Tech Knowledge (Continued from cover) table.) Even as growth is expected to moderate in the space, the 32% discount in valuation is intriguing. Semiconductors typically have volatile movements in earnings, which was exhibited over the course of the last earnings season. When analyzing the change in 2015 earnings expectations for the S&P 500 information technology sector, we took a look at the composition of the 25% of companies with estimates moving the most upward and the most downward. The semiconductors represented more than a third of each quartile. On March 12, Intel (INTC 30.20 ) slashed its earnings guidance on the back of slowing PC demand, reminding investors that not all tech companies are created equal. Secular trends in mobility, the cloud, big data, and social media are anticipated to be key drivers of growth in the sector. However, PC-related product demand is widely expected to remain soft, storage related industries continue to face challenges, and lower carrier spending in mature markets is anticipated (China will likely be a positive but orders will probably be lumpy). S&P Capital IQ equity analysts have strong buy rankings on 13 technology stocks, and buy rankings on another 42. To obtain the complete list, please use the stock screening tool on the Stocks tab of The Outlook’s website, www.spoutlook.com. An exchange-traded fund, Technology Select Sector SPDR (XLK 41.26 Overweight) offers diversified exposure to the entire S&P 500 technology sector. —Lindsey Bell Senior Analyst Global Markets Intelligence
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