the outlook - Investor Village: Stock Message Boards | Stock Quotes
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the outlook - Investor Village: Stock Message Boards | Stock Quotes
THE OUTLOOK INTELLIGENCE FOR THE INDIVIDUAL INVESTOR Oil Spillover Crude oil price declines continue to reverberate through financial markets 2 PowerPicks Portfolio 3 Focus Stock 4 ETF Strategies 5 Master List 2014 6 1.5% Observatory 8 1.0% 3.0% 2.5% 2.0% 0.5% Please see page 8 for required research analyst certification disclosures. 1 2 1/1 1/1 12/ 11/ /10 /11 1/1 /09 2/1 3/1 /07 /08 4/1 /06 5/1 /05 6/1 /04 7/1 /03 8/1 9/1 1 2 1/0 10/ 0 1/0 11/ 1/0 12/ /00 0.0% 1/1 To subscribe, call 800-523-4534 Follow us on Twitter: @spmarketscope 3 Intelligencer /14 3.5% 1/1 CONSUMER PRICE INDEX What’s Inside numerous industries. Furthermore, declining commodity prices in general will likely impart downward pressure on brewing inflation pressures arising from steadily tightening U.S. labor market conditions. To be sure, there are risks to our bullish outlook. As has been the case for many months now, we remain concerned about sustained subpar economic growth abroad. Media outlets have recently been quick to point out that exports account for slightly more than 10% of U.S. gross domestic product (GDP), suggesting that the domestic economy is relatively insulated from weakness overseas, but that statistic misses the more pertinent point that non-U.S. sources account for nearly half of S&P 500 revenues. The outlook for economic growth abroad — in Europe, China and South America in particular — remain germane to the 2015 S&P 500 earnings outlook. Consensus 2015 S&P 500 earnings have now slipped to just above $125 per share from $127 three weeks ago and $132 at mid-year 2014. We now expect forward earnings expectations to steady near current levels, which should help stabilize stock market valuations. This is not to say that major equity market indices can’t continue to edge lower near-term, especially if the European economic 9/1 West Texas Intermediate oil price fell as low as $48.02 on January 6, from $57.10 on December 19. There is much debate amongst investors about what a lower oil price foreshadows. The bulls believe falling crude oil prices are a positive development for U.S. economic growth because they act similarly to a tax cut for consumers (i.e. fiscal stimulus). The pessimists think falling commodity prices mean global deflation risks are accelerating and the monetary policy accommodation-driven bull market of the past five years has run its course. Global Markets Intelligence (GMI) Research continues to align itself with the bulls. We think the significant and largely unforeseen collapse in crude oil prices represents not just a tax cut for U.S. consumers, but for the global economy as a whole, including 10/ January 12, 2015 Volume 87 Number 1 Excluding food & energy, seasonally adjusted, year-over-year. Source: Bureau of Labor Statistics. (Continued on page 8) 2 S&P CAPITAL IQ THE OUTLOOK JANUARY 12, 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 POWERPICKS 2015: The S&P Capital IQ PowerPicks Model Portfolio 2015 (see table on page 3) represents the collective best ideas of S&P Capital IQ’s U.S. equity research staff. The portfolio is “frozen,” meaning it will undergo no changes during the year. The PowerPicks concept was launched on January 1, 1997. Since inception, the portfolio posted an average annual gain of 10.2%, outperforming the S&P 500’s annualized gain of 7.8% in the same period. In 2014, the portfolio rose 8.0%, underperforming the S&P 500’s 13.7% increase. 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. Officers of McGraw Hill Financial: Harold W. McGraw, III, Chairman; Douglas Peterson, President and Chief Executive Officer; Jack F. Callahan, Jr., Executive Vice President and Chief Financial Officer; Elizabeth O’Melia, Senior Vice President, Treasury Operations; Lucy Fato, Executive Vice President and General Counsel. 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. PORTFOLIO CHANGES: SM Energy (SM 36.23 ) was deleted from the Plati- num portfolio effective January 2, 2015. Corning (GLW 23.35 ) was added to, while Waddell and Reed (WDR 46.38 NR) was removed from, the Neural Fair Value 25 portfolio, effective January 5, 2015. Autonation (AN 59.86 ) and Tenet Healthcare (THC 52.16 ) were added to, while Archer-Daniel-Midland was removed from, the Industry Momentum portfolio effective January 5, 2015. Fair Isaac (FICO 72.72 ) was added to, while Qorvo (QRVO 67.69 ) was deleted from, the Small/Midcap Growth portfolio effective January 12, 2015. BUY GOOGLE WHILE THE PRICE IS LOW: GOOGLE (GOOGL 506.91 ) fell 4% in 2014, notably underperforming gains in the S&P 500 and S&P 500 IT Sector indices of 14% and 20%. We think this has contributed to an enhanced buying opportunity. Despite concerns related to the ongoing shift to mobile, European regulatory issues, and seemingly constant multi-faceted competition around the world, we see GOOGL’s growth story as intact and valuation as compelling. We also believe GOOGL could look to increasingly leverage its strong balance sheet, with $60 billion in cash/short-term investments as of September, to generate shareholder value. GILEAD SCIENCES EXCLUSIVE WITH CVS: CVS Health announced it has given Gilead Sciences (GILD 102.30 ) hepatitis C (HCV) drugs, Sovaldi and Harvoni exclusivity on its formularies. This follows AbbVie’s exclusive deal with Express Scripts, for its recently approved HCV drug, Viekira. We are not surprised by the CVS/GILD deal and believe it removes some investor concern over a potential ABBV/CVS deal. The companies have not disclosed a pricing discount, but we believe GILD will provide a discount. Express Scripts and CVS are the 2 largest PBMs in the U.S., respectively, and we do not see any more exclusive deals. BEER INVENTORIES ON THE RISE: We are raising our 12-month target price on Constellation Brands (STZ 107.64 ) $24 to $125, applying a P/E of 26X, 20% above its 3-year average, to our FY 16 (Feb.) EPS estimate of $4.80, up from $4.70. We are also increasing our FY 15 EPS estimate $0.15 to $4.35. Nov-Q adjusted EPS of $1.23 vs. $1.10 is $0.15 above our estimate. While US wine sales were weaker than we expected, beer depletion trends remained favorable, growing 8%, with distributors increasing inventory levels and consumer demand remaining strong. We see valuation (multiple expansion) supported by the potential initiation of a dividend in FY 16. 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 JANUARY 12, 2015 3 U.S. POWERPICKS PORTFOLIO 2015 STARS CURRENT PRICE ($) 12-MONTH TARGET PRICE ($) FAIR VALUE RANK QUALITY RANK COMPANY NAME / SYMBOL SUB-INDUSTRY GROUP Activision Blizzard / ATVI Home Entertainment Software 5 19.25 24 5 NR Aetna / AET Managed Health Care 5 92.39 98 4 B+ AmerisourceBergen / ABC Health Care Distributors 5 92.19 97 3 A- Applied Materials / AMAT Semiconductor Materials 5 24.21 28 2 B Berkshire Hathaway / BRK.B Multi-Sector Holdings 5 151.37 173 NR B Blackstone / BX Asset Management & Custody Banks 5 33.71 40 2 NR CBS / CBS Broadcasting 5 53.74 60 2 B Celgene / CELG Biotechnology 5 115.05 122 4 B CenturyLink / CTL Integrated Telecommunication Services 5 38.86 49 NR B Cigna / CI Managed Health Care 5 109.13 119 5 B+ Constellation Brands / STZ Distillers and Vintners 5 107.64 125 NR B Discover Financial / DFS Consumer Finance 5 64.35 74 5 NR EOG Resources / EOG Oil & Gas Exploration & Production 5 86.88 115 1 B Everest Re / RE Reinsurance 5 174.96 210 5 NR FedEx / FDX Air Freight & Logistics 5 175.04 240 4 B+ FMC Technologies / FTI Oil & Gas Equipment & Services 5 43.43 69 5 B+ Fossil Group / FOSL Apparel, Accessories & Luxury Goods 5 104.01 130 5 B+ Franklin Resources / BEN Asset Management & Custody Banks 5 53.99 66 5 B+ General Motors / GM Automobile Manufacturers 5 36.20 41 5 NR Gilead Sciences / GILD Biotechnology 5 102.30 135 5 B Google / GOOGL Internet Software & Services 5 506.91 650 4 B+ Helix Energy Solutions / HLX Oil & Gas Equipment & Services 5 20.31 29 NR B- Hewlett-Packard / HPQ Technology Hardware, Storage & Peripherals 5 40.68 44 2 B+ ICON / ICLR Life Sciences Tools & Services 5 53.70 72 4 NR Johnson Controls / JCI Auto Parts & Equipment 5 47.25 65 5 B+ Kroger / KR Food Retail 4 66.20 68 3 B+ Lazard / LAZ Investment Banking & Brokerage 5 48.76 60 NR NR Meritage / MTH Homebuilding 5 36.70 42 5 B- Morgan Stanley / MS Investment Banking & Brokerage 5 37.49 45 5 B- Owens-Illinois / OI Metal & Glass Containers 5 25.46 32 4 B- Qorvo / QRVO Semiconductors 5 67.69 72 NR B- Qualcomm / QCOM Communications Equipment 5 74.50 82 5 A- South Jersey Industries / SJI Gas Utilities 5 59.35 66 NR A- Sprouts Farmers Market / SFM Food Retail 5 33.75 37 NR NR SunEdison / SUNE Semiconductor Equipment 5 19.09 28 NR C Synnex / SNX Technology Distributors 5 72.91 81 5 B+ Triumph / TGI Aerospace & Defense 5 66.51 93 5 B Tyson Foods / TSN Packaged Foods & Meats 5 41.20 51 NR B+ United Continental / UAL Airlines 5 66.64 69 5 NR United Rentals / URI Trading Companies & Distributors 5 90.47 145 3 B- Source: S&P Capital IQ. NR-Not ranked. 4 S&P CAPITAL IQ THE OUTLOOK JANUARY 12, 2015 www.spoutlook.com FOCUS STOCK Joseph Agnese S&P Capital IQ Equity Analyst Tyson Foods Scale and diversification make a strong company The Focus Stock for the week ended January 11, 2015 is Tyson Foods, which carries S&P Capital IQ’s highest investment recommendation of 5-STARS or “strong buy.” Tyson Foods is one of the world’s largest suppliers of beef, chicken, pork and prepared foods. We believe the company is well positioned to benefit over the next 12 months from growing global demand for protein products and a significant reduction in corn and soybean based feed costs. Additionally, we see margins benefitting from expansion of wider-margin prepared food offerings following the company’s $8.6 billion acquisition in August 2014 of Hillshire Brands, producer of Jimmy Dean, Hillshire Farm, Ball Park, Sara Lee and other branded products. We look for the addition of $4 billion in revenues from Hillshire Brands to help support 13% sales growth in fiscal year 2015 (Sept.). We believe Hillshire’s business fits well with Tyson’s efforts to expand its wider-margin prepared foods business and believe there is a potential for significant longterm benefits following the successful completion of its integration. In fiscal year 2015, we expect the prepared foods segment to experience about $225 million in cost and production synergies from the integration of Hillshire Brands due to operational improvements, purchasing and distribution savings. We think the company’s scale and diversified product mix is a competitive advantage. Tyson produces about 20% of all chicken, beef and pork in the U.S. (on a pound basis). The company holds the top U.S. market share position in chicken production (21% share based on ready to cook pounds), beef slaughter capacity (24% based on the number of head of cattle), and is the second largest pork producer (17% share based on estimated daily U.S. slaughter capacity, and only trails Smithfield Foods’ 26% share). Products are marketed through various channels, including food service operators (33% of sales in fiscal year 2014), consumer retail channels (44%) and internationally (17%). While the company’s chicken operations are vertically integrated (the company raises and processes chicken), its beef and pork operations are not (the company purchases live cattle and hogs). With drought conditions in the western U.S. leading to tight industry cattle supplies and higher live cattle prices, we look for the TYSON FOODS Ticker: TSN S&P Ranking: Current Price: $40.39 12-Month Target Price: $51.00 Market Capitalization ($ Blns): $12.60 Price/Earnings Ratio: 11.81 Yield: .97 Source: S&P Capital IQ. company to raise beef pricing in fiscal year 2015 in order to provide margin support. However, we see chicken operations benefitting from increased demand for chicken as consumers shift to lower cost alternatives to beef. Additionally, we see significantly lower chicken feed costs (68% of the cost of raising a chicken) following strong corn and soybean crop harvests in calendar 2014, which should support significant margin expansion. In pork, we look for a slowly improving hog supply environment in fiscal year 2015 to support pork processing operating margins. Hog industry supplies were tight in fiscal year 2014 due to the spread of Porcine Epidemic Diarrhea Virus (PEDv). Due to an increase in debt load that was needed to fund the acquisition of Hillshire, we look for significantly higher interest expense in fiscal year 2015. While the company has been actively repurchasing shares, spending $250 million to repurchase 7.1 million shares in fiscal year 2014, we expect the near term priority for cash flow to be to deleverage its balance sheet. The Board also increased the quarterly dividend 33% to $0.10 per share in July 2014, up from the $0.075 previously reported. Our 12-month target price of $51 reflects a P/E multiple of 14.5X our calendar year 2015 EPS estimate of $3.50. All told, we see EPS rising 16% in fiscal year 2015, to $3.42, up from operating EPS of $2.94 in fiscal year 2014. www.spoutlook.com S&P CAPITAL IQ THE OUTLOOK JANUARY 12, 2015 5 ETF STRATEGIES Todd Rosenbluth S&P Capital IQ Director of ETF Research ETFs That Might Repeat Success Consider holdings before diving in It was a great year for U.S. equity ETFs in 2014, with $140 billion of inflows and another double-digit return for the S&P 500 index. However, many industry-focused ETFs climbed much higher, aided by offering exposure to some of the better performing segments of the market. So what’s ahead for some of them as we start 2015? S&P Capital IQ strongly believes that past performance is not indicative of future results and as such when providing research and rankings on more than 900 equity ETFs we believe investors need to look under the hood. While some strong sector and industry focused ETFs that shone in 2014 hold stocks that are overvalued, utilities for example, others have holdings that remain attractive to our equity research team. For example, First Trust NYSE Arca Biotechnology climbed 48% in 2014. However, the ETF’s ranking is aided by a collection of stocks viewed undervalued by S&P Capital IQ equity analysts. A strong buy opinion on small-cap NPS Pharmaceuticals (NPSP 41.90 ), a top-10 holding, reflects a positive global commercial outlook for NPSP’s rare disease focused drug portfolio. Further, the FDA action date for NPSP’s Natpara to treat hypoparathyroidism is January 24, 2015 and we think provides an additional catalyst. Meanwhile, a strong buy-ranked large-cap Celgene’s (CELG 113.05 ) Revlimid sales grew a robust 16% in the recent third quarter, benefiting from increased duration of therapy and S&P Capital IQ sees more growth drivers as CELG has registration filings for more indications in the U.S. and Europe. S&P Capital IQ is also encouraged by the Phase II data for GED 0301 to treat Crohn’s disease, which we believe showed better remission rates than competing drugs on the market. SPDR S&P Transportation rose 34% in 2014, but the industrial ETF earns a top ranking of Overweight. This stems in part from its holdings that S&P Capital IQ views to be attractively valued. One such holding, Swift Transportation (SWFT 27.81 ), is North America’s largest truckload carrier that is expected it to capture market share from small carriers that are struggling financially. Capacity constraints will also contribute to rising freight rates and cash flow, in our view, as the economy steadily improves. Meanwhile, for FedEx (FDX 173.27 ), we believe holi- day volumes and pricing remained strong. While FDX expects to adjust its fuel surcharge to reflect lower oil prices, we still expect a tailwind in the second half of its fiscal year from oil. S&P Capital IQ continues to believe FDX is well positioned for an improving U.S. economy. XTN’s ranking is also helped by bullish technical trends and a modest expense ratio. iShares PHLX Semiconductor ETF rose 30% in 2014, yet it also holds stocks that are generally viewed as undervalued by S&P Capital IQ. One such position is in Intel (INTC 36.45 ), which provided in November a 2015 business outlook with stronger revenue growth than S&P Capital IQ had originally expected. Further the company raised its annual dividend 7%. We found INTC’s guidance to be encouraging and indicating momentum within the PC and data center units. Another undervalued holding for SOXX is in Qualcomm (QCOM 73.74 ). At a November investor day conference, the company highlighted key growth drivers that supports 8% to 10% annualized 5-year revenue growth and with wider margins and faster EPS growth in our opinion. S&P Capital IQ believes QCOM remains well positioned for growth. SMART FUNDS FOR CAREFUL INVESTORS FUND NAME / SYMBOL RANK CURRENT PRICE ($) First Trust NYSE Arca Biotech. Index Fund / FBT iShares PHLX Semiconductor ETF / SOXX SPDR S&P Transportation ETF Trust / XTN MW MW MW 104.70 92.01 104.75 Source: S&P Capital IQ. MW - Marketweight. *Average annualized. TOTAL RETURN (%) YIELD (%) 1-YEAR 3-YEAR* 5-YEAR* EXPENSE RATIO (%) ASSETS ($ MLNS) .05 1.56 .39 48.36 29.39 29.71 44.65 23.78 32.56 29.04 14.49 NA .6 .47 .35 2,113.62 606.20 579.48 6 S&P CAPITAL IQ THE OUTLOOK JANUARY 12, 2015 www.spoutlook.com Beth Piskora S&P Capital IQ Editorial Master List 2014 Performance One portfolio beat its benchmark in 2014 In 2014, one of our three Master List groups, which are intended to be low-turnover portfolios for longterm investors, outperformed its benchmark. A second portfolio kept pace with its benchmark, while a third underperformed. The Small/Mid-Cap Growth portfolio delivered an 18.5% gain, excluding dividends, in a year when the S&P Mid Cap 400 rose by 8.2%. The HighQuality Capital Appreciation portfolio kept pace with the S&P 500; both were up 11% for the year. The Total Return Portfolio, which features stocks with higher yields, delivered a total return (including dividends) of 10.5% compared with a 13.7% total return for the S&P 500. Thirty-three new stocks entered the portfolios in 2014; 12 in Total Return, 16 in High Quality Capital Appreciation, and five in Small/Mid-Cap Growth. The Outlook is available online to subscribers on the Saturday before the cover date, but we count performance from the closing price on the Monday cover date (or next trading day when Monday is a holiday). In this way, readers have a full trading day to review our changes before we consider the stock added for performance tracking purposes. The High-Quality Capital Appreciation Portfolio was launched on May 23, 2003. To enter the High-Quality Capital Appreciation Portfolio, a stock must have an S&P Quality Ranking of A- or better, which indicates an above-average 10-year history of earnings and dividend growth and stability. A recent S&P Capital IQ study showed that over the long term, stocks with the best Quality Rankings posted higher profit margins, higher returns on capital, and stronger cash flows than lower quality stocks. Stocks must have a four-STARS or five-STARS ranking to enter this portfolio. From inception to December 31, 2014, the portfolio had an average annual gain of 7.4% versus 7.1% for the S&P 500. The Total Return Portfolio was launched on May 23, 2003. To enter the Total Return Portfolio, which is focused on maximizing long-term total return, a stock must have a current yield at least equal to or greater than that of the S&P 500. The company must not have cut its regular dividend in the last five years at the time of entry into the portfolio, and that dividend must be secure in the opinion of the S&P analyst who follows the stock. There is no S&P Quality Ranking requirement for this portfolio. Since inception, the portfolio had an average annual gain of 12.8%, outperforming its benchmark’s average annual gain of 9.3%. The Small/Mid-Cap Portfolio was launched on May 23, 2003. To enter the Small/Mid-Cap Growth Portfolio, a stock must have a market capitalization of $4 billion or less, be ranked 4-STARS or 5-STARS, and have good long-term prospects in the opinion of the S&P analyst who follows it. From inception to December 31, 2014, the portfolio rose at an average annual rate of 12.7%, compared with 10.5% for its benchmark, the S&P Mid-Cap 400. HIGH-QUALITY CAPITAL APPRECIATION PORTFOLIO SYMBOL COMPANY NAME CNI CE COST DIS EWBC GE JBHT JNJ MCK MYL NKE QCOM RJF SJI SU Canadian Natlional Railway Celanese Costco Wholesale Disney East West General Electric Hunt Transport Johnson & Johnson McKesson Mylan NIKE Qualcomm Raymond James South Jersey Industries Suncor Energy Source: S&P Capital IQ. All data are as of Thursday’s close. ENTRY DATE ENTRY PRICE ($) CURRENT PRICE ($) 12-MONTH TARGET PRICE ($) STARS QUALITY RANK 02/24/2014 04/28/2014 02/24/2014 11/14/2011 11/10/2014 02/24/2014 07/21/2014 07/22/2013 08/16/2010 05/26/2009 10/13/2014 05/28/2013 04/28/2014 11/10/2014 01/27/2014 56.23 59.72 113.94 36.12 37.36 25.29 78.08 92.28 60.85 13.13 85.39 64.07 49.08 57.98 32.65 67.40 58.92 145.56 93.79 38.33 24.37 81.26 106.39 217.20 56.65 97.06 74.50 55.65 59.35 30.32 90.00 74.00 156.00 98.00 40.00 32.00 92.00 120.00 216.00 64.00 104.00 82.00 65.00 66.00 39.00 4 5 4 4 4 4 4 4 4 4 4 5 4 5 4 A+ AA A+ AAAA+ AAA+ AAAA- www.spoutlook.com S&P CAPITAL IQ THE OUTLOOK JANUARY 12, 2015 7 Master List 2014 Performance (Continued) S&P’s Senior Portfolio Group may replace any stock in these three portfolios with another stock at any time, for reasons that can include a downgrade in the S&P STARS and S&P Quality Ranking of the constituents or other factors. The portfolios were equally weighted at inception. When a new stock is purchased, the number of shares of the new stock is equal to the total market value of the portfolio at prior month’s end divided by the number of stocks in the portfolio at the prior month end divided by the price of the new stock at the close of the day it was added. When a stock is “sold” from a portfolio, the entire position is sold; there are no partial sales. In essence, the portfolio is equally weighted without adjustments for rebalancing. TOTAL RETURN PORTFOLIO SYMBOL COMPANY NAME ENTRY PRICE ($) T BAX BA CVX CCE COP CMI F INTC ITC KRFT LAZ LXK PSA TROW AT&T Baxter International Boeing Chevron Coca-Cola Enterprises ConocoPhillips Cummins Ford Motor Intel ITC Holdings Kraft Foods Lazard Lexmark International Public Storage T.Rowe Price 35.65 66.95 123.06 46.08 47.25 79.34 142.17 15.18 34.23 22.42 55.12 45.05 42.97 175.49 61.01 ENTRY DATE CURRENT PRICE ($) 12-MONTH TARGET PRICE ($) STARS YIELD (%) 07/28/2014 01/22/2013 07/28/2014 06/07/2004 02/24/2014 08/18/2014 08/18/2014 02/24/2014 07/28/2014 02/14/2011 02/24/2014 12/30/2013 03/17/2014 07/28/2014 04/23/2012 33.50 73.30 131.80 110.41 44.07 64.93 145.82 15.42 36.69 41.78 63.99 48.76 40.53 197.90 84.51 41.00 90.00 162.00 135.00 49.00 81.00 180.00 17.00 39.00 45.00 68.00 60.00 51.00 203.00 92.00 4 4 4 4 4 4 5 4 4 4 4 5 5 4 4 5.67 2.91 2.81 3.97 2.29 4.61 2.18 3.32 2.50 1.56 3.48 2.50 3.65 2.87 2.11 ENTRY DATE CURRENT PRICE ($) 12-MONTH TARGET PRICE ($) STARS QUALITY RANK 12/19/2011 04/07/2014 12/03/2008 01/12/2015 03/25/2013 07/28/2014 01/22/2013 06/24/2013 03/25/2013 09/15/2008 12/30/2013 10/21/2013 06/24/2013 11/03/2014 11/03/2014 27.32 72.67 48.19 72.72 101.79 20.31 53.70 15.70 42.92 111.24 25.72 79.25 19.09 28.33 77.42 39.00 80.00 50.00 83.00 124.00 29.00 72.00 18.00 50.00 125.00 32.00 130.00 28.00 33.00 83.00 4 4 5 4 4 5 5 4 5 4 4 4 5 5 4 B+ NR NR B+ B BNR B C C BNR C NR B+ Source: S&P Capital IQ. All data are as of Thursday’s close. SMALL/MID-CAP GROWTH PORTFOLIO SYMBOL COMPANY NAME ENTRY PRICE ($) ATW CLW DAL FICO HAR HLX ICLR KELYA NPSP SBAC SBGI SSYS SUNE SWFT UNFI Atwood Oceanics Clearwater Paper Delta Air Lines Fair Isaac Harman Intl Helix Energy Solutions Grp ICON Plc Kelly Services'A' NPS Pharmaceuticals SBA Communications'A' Sinclair Broadcast Group'A' Stratasys Ltd SunEdison Inc Swift Transportation United Natural Foods 37.21 61.89 8.03 NA 44.48 26.79 28.51 17.03 9.88 29.62 34.71 111.38 7.52 24.75 67.99 Source: S&P Capital IQ. All data are as of Thursday’s close. 8 S&P CAPITAL IQ THE OUTLOOK JANUARY 12, 2015 www.spoutlook.com The Observatory Selected actions for December 22 to January 9 NEW STARS OLD STARS STARS RANKING DATE Apollo Global Management / APO 3 NR CommVault Systems / CVLT 3 E-TRADE Financial / ETFC PRICE ($) 12 MONTH TARGET PRICE ($) 1/8/2015 23.82 4 12/23/2014 3 4 eBay / EBAY 4 Monsanto / MON QUALITY RANK FAIR VALUE RANK 25.00 NR NR 48.95 57.00 NR 2 12/29/2014 23.58 25.00 B- 3 5 12/29/2014 56.41 61.00 B 4 3 4 1/7/2015 119.19 122.00 A 4 Neurocrine Biosciences / NBIX 3 5 1/8/2015 27.48 30.00 C NR Nissan Motor / NSANY 4 3 12/24/2014 17.93 20.00 NR 5 PulteGroup / PHM 3 4 12/29/2014 22.39 22.00 B- 2 RPM International / RPM 3 2 1/8/2015 46.87 47.00 B+ 2 Transocean / RIG 3 4 1/8/2015 16.27 18.00 NR NR Walgreens Boots Alliance / WBA 3 2 12/23/2014 77.55 75.00 A- 4 COMPANY NAME / SYMBOL 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. Oil Spillover (Continued from cover) outlook further deteriorates, but the lower stock prices go, the more attractive the S&P 500 index will appear to us. Meanwhile, the U.S. inflation outlook has now been compounded by the rapid decline in crude oil prices and, by extension, its potential influence on household energy expenditures. As the U.S. unemployment rate continues to fall, financial markets will be sensitive to the net macro influence on core inflation arising from rising household discretionary income vs. the deflationary side effects of falling energy prices. We are interested to see if ascending disposable income due to the “energy tax cut” can produce even a slight increase in the velocity of money flowing through the domestic U.S. economy, leading to an accelerated pace of improvement in household discretionary spending patterns. This prospective change would likely reinforce support within the Fed for a mid-year 2015 hike in the Fed funds target rate. This debate will of course be held within the context of the underlying trend in core inflation, which at the moment remains quite benign (see cover chart). —Robert Keiser Vice President Global Markets Intelligence