THE OUTLOOK - CFRA

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THE OUTLOOK

INTELLIGENCE FOR THE INDIVIDUAL INVESTOR

February 5, 2018 Volume 90 Number 5

What's Inside

Intelligencer

2

ETF Strategies

3

Sub-Industry Outlook

4

Focus Stock

5

Small/Mid Cap Portfolio

6

Industry Momentum

7

Observatory

8

Follow our experts on Twitter:

@cfraresearch @StovallCFRA @ToddCFRA @LBellCFRA @KesslerCFRA @GlickmanCFRA

The Consumer Tailwind

Economic data still makes the bullish case

Lindsey Bell, CFRA Investment Strategist

The pullback that started in the final days of January and into the first days of February caused even the most bullish investors to second guess (at least initially) the amount of upside left at this late stage of the bull market. Rising interest rates were held responsible for the risk-off mood, but the decline was broad based as ten of eleven S&P 500 sectors declined. Health care and energy led the decline, as opposed to the higher yielding sectors (utilities, telecom and staples), which usually underperform when bond yields are rising. Counter to these moves was strong consumer focused economic data and solid earnings reports from corporations.

The previous week ended with a fourthquarter GDP report with underlying details that outweighed the headline, with personal consumption a key highlight. The largest component of economic activity rose 3.8% in the quarter, for the fastest growth in

spending for the year and well ahead of the three-year average of 2.8%. Consumers have been spending money on motor vehicles, which increased 14.2% in the fourth quarter, and on clothing and footwear (up 13.2%). Residential investment also showed strength, increasing 11.6%.

The consumer's spending habit was reinforced with the income and spending data released on Monday. While wages still have room to improve, Tuesday we learned the spending trend has been supported by optimism regarding the future. Consumer confidence improved to 125.4, a level just under November's 17-year high of 128.6.

One important, but often overlooked, area of consideration when analyzing spending is household net worth. In the third quarter of 2017, net worth reached new highs as equity market and real estate values increased

(Continued on page 8)

5-STARS CONSUMER DISCRETIONARY STOCKS

CURRENT PRICE ($)

12-MONTH TARGET PRICE

($)

P/E RATIO*

D.R. Horton / DHI

49

59

13.6

Lear / LEA

193

220

10.0

Skechers U.S.A. / SKX

41

42

18.1

Walt Disney / DIS

109

130

17.4

Whirlpool / WHR

181

210

12.0

Yum Brands / YUM

85

90

26.7

Source: CFRA, powered by data from S&P Global. *Based on CFRA's 2018 EPS estimates.

YIELD (%)

1.0 1.0 Nil 1.6 2.4 1.7

SPGMI'S QUALITY RANKING

B NR B A+ B+ A+

2 THE OUTLOOK FEBRUARY 5, 2018



Intelligencer

The Outlook

Headlines, Highlights, and What's on our Minds

EQUITY & FUND RESEARCH SERVICES Senior Content Director Beth Piskora

Senior Editor Marc Bastow

PORTFOLIO CHANGES: Albemarle Corporation (ALB 109 *****) was added to the Platinum Portfolio on February 2, 2018. Amphenol (APH 93 ***) and Union Pacific

Associate Editor Raymond Jarvis

CEO, CFRA Peter de Boer

(UNP 135 ***) were deleted from the Industry Momentum Portfolio on January 31, 2018. Steel Dynamics, Inc. (STLD 46 *****) was added to the Platinum Portfolio on January 29, 2018, while on the same day Nutrien Ltd. (NTR 52 *****) was deleted.

Chief Investment Strategist Sam Stovall

Investment Strategist Lindsey Bell

ALPHABET HITS THE $100B MARK: CFRA upgrades opinion on Class A shares of Alphabet to Buy from Hold. Alphabet (GOOGL 1,285 ****) posted annual sales of

Director, ETF & Fund Research Todd Rosenbluth

$110B for FY 2017 (Dec.), the first time it has hit the mark in its 20-year history.

For billing queries, e-mail ordermgmt@.

AMAZON TEAM TAKES SHAPE ON HEALTH CARE: Amazon (AMZN 1,451 ****), JPMorgan Chase (JPM 116 ****) and Berkshire Hathaway (BRK.B 217 ***) are teaming up to create a new non-profit partnership that will operate independently

The Outlook (USPS 415-780, ISSN 0030-7246) is published weekly except for one issue in January, May, September, November and December by CFRA, One New York Plaza, Suite 3410, New York, NY 10004.

and focus on technology solutions with an aim to improving consumer health outcomes and reduce costs. Formation of the company is in its early stages with limited details at this point.

Periodicals postage paid at New York, NY, and additional mailing offices. POSTMASTER: Send address changes to The Outlook, CFRA, 675 Peter Jefferson Pkwy, Suite 100, Charlottesville, VA 22911.

BOEING CONTINUES TO SOAR: We raise our 12-month target to $405 from $345 on shares of Boeing (BA 355 ****), 28.9X our 2018 EPS estimate of $14.00, up from $11.77. BA reports growth across all three of its business segments at better operating margins. The company is executing well, which we expect to persist.

Copyright ? 2018 CFRA. All rights reserved. Reproduction in whole or in part prohibited except by permission. Because of the possibility of human or mechanical error by CFRA and its data sources, CFRA 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.

DR. PEPPER INVESTS IN COFFEE: Beverage giant Dr. Pepper Snapple (DPS 119 ***)

announced it will merge with single-serve coffee maker Keurig Green Mountain, with the new company to be called Keurig Dr.

Pepper. Total annual synergies of $600M are expected to be achieved by 2021, mostly from cost reductions. CFRA raises its

12-month target price on DPS by $34 to $125 on the news.

FACEBOOK EARNINGS TOP ESTIMATES: CFRA raises its 12-month target price on shares of Facebook (FB 187 ****) by $50 to $250 after the social media giant posted non-GAAP Q4 EPS of $2.21 vs. $1.41, $0.24 above the S&P Capital IQ consensus. Revenues rose 47% and we note 89% of advertising revenue came from mobile. Despite News Feed changes, we see healthy growth and an attractive valuation.

FOX AND FOOTBALL TEAM UP ON THURSDAY NIGHTS: Twenty-First Century Fox (FOXA 37 ****) announced a new 5-year, $3.3B deal to broadcast the National Football League's Thursday Night Football package from 2018 until the 2022 season. Fox will air 11 Thursday night games between weeks 4 to 15 during the season (with expanded digital rights). CFRA maintains a Buy rating on "A" shares of Twenty-First Century Fox.

MICROSOFT'S CLOUD BUSINESS CONTINUES TO GAIN SHARE: Microsoft (MSFT 95 ***) posted December-quarter ('18) operating earnings of $7.5B on $28.9B in sales, highlighted by a 98% increase in its Azure business. MSFT posted a net loss of $6.3B resulting from a $13.8B tax payment due under the Tax Cuts and Jobs Act. Without the charge, MSFT's net income would have been $7.5B. CFRA raises its 12-month target by $10 to $101 and reiterates a Hold opinion on MSFT shares.

XEROX WILL CHANGE HANDS IN 2018: Office copy machine icon Xerox (XRX 34 ****) announced that Japan's Fujifilm Holdings will take a majority (50.1%) stake in the firm in a deal reported at over $6B. Strategically, CFRA thinks the combination makes sense given the enhanced geographic reach into the Asia-Pacific region.

EVALUATION SYMBOLS

STARS Rankings

CFRA's 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

S&P Global Market Intelligence's Quality Rank

S&P Global Market Intelligence's 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:

A+ Highest

B+ Average

C Lowest

A High

B Below Avg.

D In reorganization

A- Above Avg.

B- Lower

NR Not Ranked

Quality Rankings are not intended to predict stock price movements.



THE OUTLOOK FEBRUARY 5, 2018 3

ETF STRATEGIES

New ETFs Driven By Client Demand

"Are there too many ETFs?" No.

Todd Rosenbluth CFRA

Director of ETF Research

"Are there too many ETFs?" was a frequently asked question of CFRA Research at the recent Inside ETF conference. As one of the few independent research providers part of the conference agenda, we feel confident in objectively answering, "No, there are not."

Asset managers, even those dominant in the actively-managed mutual fund business, increasingly want to offer products to meet advisor and investor demand for ETFs, which gathered over $475 billion in new money in 2017. Based on discussions CFRA had at Inside ETFs, we believe firms are receiving encouragement to further expand their lineup.

Sal Bruno, chief investment officer at Index IQ, told CFRA that last year many investors in the firm's multi-factor IQ Chaikin US Small Cap ETF (CSML 29 Underweight) asked for a large-cap version of the strategy. To that end, seven months after rolling out the $415 million CSML, IQ Chaikin Large Cap ETF came to market in December 2017. Both ETFs combine value, growth, technical and sentiment metrics through an index methodology.

Separately, Goldman Sachs had $7 billion in ETF assets making it

the only firm to land in the top-20 providers league table on , despite none of its ETFs having yet hit their three-year anniversary. Steve Sachs, head of ETF capital markets for Goldman Sachs, remarked to CFRA that in late 2015 when the firm launched its first ETF, Goldman Sachs ActiveBeta US Large Cap ETF (GSLC 57 Overweight), there was pent up demand. GLSC earns a top rating from CFRA due to its appealing holdings and low costs. Since then, the firm has expanded its lineup to 11 ETFs, including Goldman Sachs Hedge Fund Industry VIP, which is rated favorably for the attractive value of its holdings, as well as fixed income products.

Similarly, JPMorgan started in late 2014 with its first equity ETF, JPMorgan Diversified Return Global Equity ETF (JPGE 65 Marketweight), another multi-factor offering, which garners a high-risk considerations rating input from CFRA, due to its low standard deviation as well as the high credit ratings of its underlying holdings. The firm has since expanded its lineup to 21 ETFs, including a single-factor suite that includes JPMorgan US Minimum Volatility ETF that receives favorable rating inputs for

the low risk considerations of its holdings, as well as fixed income and alternatives funds.

Vanguard is the second largest ETF provider and has been more cautious with its product launches than many other ETF providers, with just 4 of the firm's 74 offerings rolled out in the last three years. However, Vanguard Total Corporate Bond ETF came to market in November 2017 in response to strong advisor demand for the firm's investment-grade bond ETFs, according to Rich Powers, head of ETF product management at Vanguard. Unlike the firm's other investment-grade corporate lineup, including Vanguard Short-Term Corporate Bond Index (VCSH 79 Marketweight), VTC offers a onestop shop and is diversified across the yield curve including intermediate- and long-term bonds.

CFRA does not yet rate VTC, as it typically takes three months for us to establish a holdings-based rating. However, Vanguard International Dividend Appreciation Index Fund (VIGI 58 Marketweight) is rated favorably for the low risk considerations of its holdings and its modest expense ratio, despite launching in 2016.

NEW CLIENT-FOCUSED ETFS

FUND NAME / SYMBOL

INCEPTION DATE

RANK

IQ Chaikin US Large Cap ETF / CLRG

12/13/2017 Marketweight

Goldman Sachs Hedge Industry VIP / GVIP 11/1/2016 Marketweight

JPMorgan US Minimum Volatility ETF / JMIN 11/8/2017 Underweight

Vanguard Total Corporate Bond ETF / VTC 11/7/2017

Not Ranked

Source: CFRA, powered by data from S&P Global. All data are as of Thursday's close.

CURRENT PRICE ($)

26 56 26 84

YIELD (%)

NA 0.45 NA NA

EXPENSE RATIO (%)

0.26 0.45 0.52 0.07

ASSETS ($ MM's)

67.73 89.81 26.51 40.01

4 THE OUTLOOK FEBRUARY 5, 2017

SUBINDUSTRY OUTLOOK

Hypermarkets and Super Centers

Outlook: Positive



Joseph Agnese CFRA

Equity Analyst

We have a positive fundamental outlook for the hypermarkets and super centers sub-industry for the next 12 months. We viewed 2016 as a transition year, with Walmart Stores boosting wages and investment in e-commerce and digital initiatives, leading to narrower margins and a contraction in the retail giant's profits.

However, we believe sales gains for the sub-industry accelerated in 2017 and will continue to do so in 2018, reflecting a more favorable consumer spending environment in the U.S. Additionally, we see free cash flow being used for share repurchases, helping support earnings per share growth in both years. We expect foreign currency exchange rates to provide a modest tailwind to sales and earnings over the next several quarters versus headwinds experienced in 2016 and the first half of 2017. With comparisons easing and in a more favorable food inflationary environment, we see sales and margins trends improving in 2018.

We anticipate that hypermarkets and super centers will report lowsingle-digit same-store sales

growth in 2018. We see a number of positive and negative economic factors driving results going forward. Job growth appears to be steady, with the U.S. unemployment rate having improved significantly in recent years.

We believe sales gains for the sub-industry

accelerated in 2017 and will continue to do so in 2018, reflecting a more

favorable consumer spending environment

in the U.S.

However, real wage growth has been sluggish, but is expected to accelerate in 2018 as inflation remains at low levels. We see hypermarkets and super centers gaining market share given their price advantage compared to more traditional retail formats. However, rising gas prices may limit spending from middle and lower income consumers.

Meanwhile, we see club store operators posting same-store

sales growth in the mid-single digits, excluding gasoline sales and foreign exchange impacts, on increased demand from their higher-income customer bases, including small business owners, as their low-priced leadership and high-quality product offerings attract increased traffic.

We think hypermarkets and super centers should generally appeal to price-sensitive consumers.

Also, because hypermarkets and super centers largely sell consumer staples such as food and beverages, this should make their sales less sensitive to changing fashions and demand for other discretionary goods than those of some other retailers.

Year to date through January, the S&P HyperMarkets & Super Centers Index increased 6.8% versus a 5.3% rise in the S&P 1500. In 2017, the S&P HyperMarkets & Super Centers Index increased 34.1% versus a 18.8% rise in the S&P 1500 Index. Walmart accounts for about 70% of this index, with Costco accounting for the remainder.

The table lists all stocks in this sub-industry.

STARS-RANKED HYPERMARKETS AND SUPERCENTERS STOCKS

COMPANY NAME / SYMBOL

Walmart / WMT

Costco Wholesale / COST

Source: CFRA, powered by data from S&P Global.

STARS

5 3

CURRENT PRICE ($)

106 193

12-MONTH TARGET PRICE ($)

124

196

SPGMI'S QUALITY RANKING

A

A

P/E RATIO (FTM)

23.9

14.6

YIELD (%)

1.91 1.03



THE OUTLOOK FEBRUARY 5, 2018 5

Walmart

The name has changed but the brand remains the same

The Focus Stock for the week ended February 4 is Walmart, which carries CFRA's highest investment recommendation of 5-STARS, or Strong Buy. Walmart is the largest retailer in the world, generating about $500 billion in annual sales. The company operates over 11,000 stores in 28 countries and ecommerce sites in 11 countries. In addition to department stores, wholesale clubs, supermarkets and supercenters, e-commerce sites the company operates include , , , , and .

We expect EPS growth over the next 12 months to benefit from an acceleration in food inflation and increased store traffic due to an improved customer experience in stores and online. The company plans to increase spending through FY 19 on e-commerce and digital capabilities, improving shoppers' in-store experience as well as expanding online offerings, speeding up delivery and expanding the number of grocery pick-up locations.

E-commerce growth is expected to be experienced over the next several years through an expansion of assortment (with online stock keeping units [SKUs] increasing to over 70 million in November 2017 from 10 million in May 2016), faster delivery service (e.g. two-day free delivery on orders over $35 offering initiated in January 2017) and expanded online grocery service (including site-to-store and

grocery pick-up services). The company announced in

January 2018 the closing of 63 Sam's Club locations, about 10% of the Sam's Club store base, as it continues a review of operations intended to identify non-core operations. The company plans to convert up to 12 of the closed locations to e-commerce fulfillment centers, which we see supporting its efforts to speed delivery of product to consumers' homes.

We see net sales in fiscal year 2018 (ending January) rising 2.8%, driven by an estimated 2.1% Walmart U.S. comparable store sales gain and an acceleration in ecommerce sales, partially offset by store closures, in our view. Key drivers of comparable store sales growth include improved in-stock levels, a more aggressive pricing strategy, better customer service and increased customer convenience from growth in e-commerce product offerings,

Walmart

Ticker: WMT

Ranking:

Current Price: $106

12-Month Target Price: $124

Market Capitalization ($ BB's): $315.79

Price/Earnings Ratio: 23.93

Yield: 1.91%

Source: CFRA, powered by data from S&P Global.

FOCUS STOCK

Joseph Agnese CFRA

Equity Analyst

including grocery pick-up capability. We expect global e-commerce sales to rise significantly to over $17.5 billion in FY 18 ($11.5 billion in the U.S.) and become a key source for long-term growth.

We believe tax reform will be supportive of EPS growth in FY 19. We estimate lower taxes on U.S. operations could benefit FY 19 EPS by about $0.60. We also see indirect benefits as higher take home pay for consumers supports an acceleration in demand through the year. We project EPS of $4.43 in FY 18, up from operating EPS of $4.32 in FY 17, excluding special items from both periods. We see EPS growth accelerating 17% to $5.17 in FY 19.

Applying a P/E of 24.0X, near the high end of WMT's three-year trading range of 12.7X to 27.1X, applied to our FY 19 EPS estimate of $5.17 results in our 12-month target of $124. We think a valuation at the high end of its historical range is warranted by an improving growth profile as the company shifts investments toward store remodeling and e-commerce, away from new store development. We see WMT gaining market share due to expanded product offerings, quicker delivery options and its low-price offerings.

Risks to our recommendation and target price include greaterthan-expected economic pressures, which would negatively affect the company's core customers; unfavorable foreign currency exchange rates; and legal and regulatory issues.

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