- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

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
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 S&P Global Market Intelligence’s Quality Rank
the total return of a relevant benchmark over the
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
and other companies are indicated by Quality Rankings:
 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
show a gain. A- Above Avg. B- Lower NR Not Ranked
 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
margin over the coming 12 months, with shares
falling in price on an absolute basis.
NR Not Ranked
CFRAOutlook.com
Optimistic M&A Activity in 2018
It appears that deal makers are feeling more confident
With a favorable ruling from U.S.
District Judge Richard Leon and
AT&T’s subsequent acquisition of
Time Warner on June 14, M&A has
officially been brought into the
spotlight once again. According to
CFRA Equity Analyst Tuna Amobi,
CFA, CPA, “the compelling judicial
precedent on the AT&T/Time Warner
ruling could foster a more favorable
regulatory backdrop that could open
LARGEST U.S. M&A DEALS ANNOUNCED IN Q1 2018
BUYER / SYMBOL
Cigna / CI
Brookfield Property / BPY
Dominion Energy / D
Source: S&P Global Market Intelligence, CFRA
As with many investment
strategies, to get exposure to the
mergers and acquisitions trend
without going after individual deals,
investors can look to some fund
options. However, the long-short
strategy funds that offer this
exposure typically have higher fees,
less liquidity and greater risk
compared to most other funds.
CFRA does not rate long-short
strategy funds (i.e., taking long
positions in stocks that are expected
to increase in value and short
positions in stocks that are expected
to decrease in value). However, we
still conduct research on their record,
underlying holdings, costs and
FUNDS WITH EXPOSURE TO M&A ACTIVITY
FUND NAME / SYMBOL
IQ Merger Arbitrage ETF / MNA
The Merger Fund / MERFX
Source: CFRA, powered by data from S&P Global. *Average annualized.
the floodgates of M&A activity in the
media industry in the latter part of
2018 and beyond.” However, the
media industry has not been the
only area of M&A activity so far this
year. In fact, according to S&P Global
Market Intelligence data, “fourteen
U.S. equity issuance transactions of
at least $1 billion closed in the first
quarter 2018, putting the year on
pace to exceed the 27 $1 billion-plus
CFRA CFRA TARGET
STARS TARGET / SYMBOL STARS SECTOR
3 Express Scripts / ESRX 3 Healthcare
NR GGP Inc. / GGP 3 Real Estate
4 SCANA / SCG 2 Energy & Utilities
investment approach.
Here we look at two funds in the
M&A sphere: one ETF and one mutual
fund.
The IQ Arbitrage ETF (MNA), by
MainStay Investments, has
approximately 75% country allocation
to the U.S. As of May 31, MNA’s five-
year annualized total return was
3.88%, underperforming its
underlying index by 73 basis points
due to its 0.77% expense ratio.
However, its largest holding (8.51%)
is CFRA Buy-rated Andeavor (ANDV
135 ****), which has entered into a
definitive merger agreement with
Marathon Petroleum (MPC 72 ****).
ANDV is crucially positioned in the
TOTAL RETURN (%)
RECENT INCEPTION
RANK PRICE ($) DATE 1-YEAR 3-YEAR*
NR 31 11/16/2009 1.12
NR 17 10/14/1982 6.02
THE OUTLOOK JUNE 25, 2018 3
FUND
STRATEGIES
Raymond Jarvis
CFRA
Associate Editor
deals that closed in 2017.”
In addition, the total value of
global M&A transactions has
increased year over year, with a
greater number of $5 billion-plus
transactions propelling growth in
first-quarter announced deal value.
Global M&A is also expected to rise
to a peak of $3.2 trillion in 2018,
according to a report by Baker
McKenzie and Oxford Economics.
TRANSACTION
DATE VALUE ($B)
3/8/2018 68.57
3/26/2018 27.17
1/3/2018 14.35
Permian Basin, where CFRA Equity
Analyst Stewart Glickman, CFA,
believes there are even more
consolidation opportunities.
Westchester Capital’s The Merger
Fund (MERFX) is a mutual fund that
also has about 75% regional
exposure to the U.S. Year to date
through June 15, MERFX had a
trailing total return of 5.33% versus
the 2.33% alternative event-driven
peer average. Included in its top-five
holdings is Rockwell Collins (COL 134
***), which is being acquired by
United Technologies (UTX 123 ****),
bringing together two aerospace
giants. COL is also the second largest
holding for MNA, at 8.26%. 
NET
EXPENSE ASSETS
5-YEAR* RATIO (%) ($M)
2.42 3.75 0.77 558.29
2.56 2.78 1.43 1,150.10
 4 THE OUTLOOK JUNE 25, 2018
SUB-
INDUSTRY
OUTLOOK
Investment Banking & Brokerage
Outlook: Positive
CFRA has a positive fundamental
outlook on the investment banking
and brokerage sub-industry. The
Trump administration policy raised
confidence for economic stimulus,
tax reform and private sector
investment, in our opinion. In 2018,
rising rates will likely benefit this
sub-industry with higher net
interest income from direct loans,
securities lending in trading and
wealth management areas.
Tax reform is a major catalyst
that is likely to be more of a driver
of customer activity than any direct
benefits that the investment banks
and brokerage firms will gain. At a
macroeconomic level, CFRA
forecasts a strong U.S. and global
economy that spurs higher
commercial and investment
activity. Investment banking
related to advisory services (M&A)
and underwriting will likely see
2018 growth derived from
increased business by customers.
CEO confidence is another
barometer of the business climate
that ties to corporate finance in the
capital markets, M&A activity and
capital investments. As of April 5,
2018, the Conference Board
Measure of CEO Confidence, which
rebounded in the fourth quarter of
2017, made further gains in the
first quarter of 2018. The measure
RECOMMENDED INVESTMENT BANKING & BROKERAGE STOCKS
COMPANY NAME / SYMBOL
E*TRADE Financial / ETFC
Morgan Stanley / MS
Raymond James / RJF
Stifel Financial / SF
Charles Schwab / SCHW
Goldman Sachs / GS
Source: CFRA, powered by data from S&P Global. *Based on CFRA’s 2018 EPS estimates.
now reads 65, up from 63 in the
fourth quarter of 2017 (a reading of
more than 50 points reflects more
positive than negative responses).
In 2018, we see the leading areas
for revenue growth coming from
investment banking, asset and
wealth management units and
equity trading. Principal trading
tied to high yield, foreign exchange
and select government categories
may show single-digit growth in
2018, in our view.
Underwriting and investment
banking fees are expected to
increase by single-digit
percentages or more in 2018, with
difficult comparisons to strong
2017 performance. We see equity
underwriting doing better than debt
underwriting where in many cases,
corporations used new debt
issuance to fund dividends to
shareholders.
Market volatility did hurt the IPO
market in the first quarter of 2018,
as the number of deals slowed with
market volatility experienced in
February. Announced IPOs in the
second quarter of 2018 will likely
bode well for the investment banks
ahead, barring any period of high
market volatility. Similar to 2017,
CFRA expects the second half of
2018 to show more activity for IPOs
than the first half of 2018.
12-MONTH
RECENT TARGET
STARS PRICE ($) PRICE ($)
4 65 68
5 50 65
4 97 109
4 57 73
5 55 65
4 227 260
CFRAOutlook.com
Kenneth Leon
CFRA
Equity Analyst
So far in 2018, equity trading
volumes have rebounded with solid
growth and fixed income trading is
poised for a rebound against
weaker comps in 2017. Equities
and derivative products will remain
the most attractive trading areas,
in our opinion. Client activity and
market volatility would be a boost
to trading, while custody and
security services are a steady area
of growth.
CFRA thinks the SEC will take
control of the authority to regulate
the fiduciary standard from the
Department of Labor. Indeed, most
brokerage firms are already
adapting to it. Investment firms are
spending on strict compliance
controls for advisors that would
preclude "hat-switching," whether
the fiduciary rule applies to them
for advice on retirement products
or not.
Year to date through June 15,
2018, the S&P Investment Banking
& Brokerage index was up 1.1%
versus a 4.2% advance in the S&P
1500 Index. In 2017, the sub-
industry increased 19.6%,
outperforming an increase of
18.8% for the broader market
benchmark.
The table below lists all 4-STARS
and 5-STARS stocks in the sub-
industry. 
SPGMI’S
QUALITY P/E
RANKING RATIO* YIELD (%)
B 19.5 Nil
B+ 10.6 2.0
A+ 13.9 1.2
B 11.1 0.8
B+ 22.6 0.7
B 10.0 1.4
CFRAOutlook.com
Morgan Stanley, Inc.
Boosting the wealth management business is key
The focus stock for the week ended
June 24 is Morgan Stanley, which
carries CFRA's highest investment
recommendation of 5-STARS, or
Strong Buy. MS is a global financial
services firm that provides a
comprehensive suite of products to
a diverse group of clients and
customers, including corporations,
governments, financial institutions
and individuals.
A core strategy is growing its
Global Wealth Management Group
(GWMG) business. This unit
accounted for 39.5% of total net
revenues in Q1 2018, lower than
past quarters in the mid-40%
range. Institutional Securities, with
strong trading, came in at 55.1%.
The remainder is Investment
Management (6.5%), for corporate
and pension investors, as well as
Other (-1.1%). GWMG provides
management services to clients
through a network of 15,712 global
representatives. The business
provides higher recurring fee
revenue, low client turnover and
available funds to realize
interest income.
Morgan's Institutional
Securities Group (ISG) includes
capital raising, financial
advisory services, corporate
lending, financing and market-
making activities for equity and
fixed-income securities. MS is
well positioned to realize fee
growth, often ranking #1 or #2
in M&A or equity underwriting.
We see market share gains with
many of the large European
banks retrenching their
investment bank and trading
operations to home markets.
The 2018 outlook for trading
looks promising, with strong
Morgan Stanley has
transformed its
corporate profile to a
more reliable, steady
growth company. Asset
and wealth management
units along with investor
services contribute to
high recurring revenue
and anchor the firm’s
more cyclical investment
banking and trading
areas.
equities reported in Q1 2018, while
increased customer activity
spurred higher trading in other
areas. Compared to direct peers,
MS has one of the highest ratios of
total sales and trading revenue to
total net revenue in Q1 2018, and
the firm had a higher contribution
Morgan Stanley
Ticker: MS
Ranking: 
Recent Price: $50
12-Month Target Price: $65
Market Capitalization ($B): 88.14
P/E Ratio: 10.6
Yield: 2.0%
Source: CFRA, powered by data from
S&P Global.
THE OUTLOOK JUNE 25, 2018 5
FOCUS
STOCK
Kenneth Leon
CFRA
Equity Analyst
from equities (57.7% of total
trading revenue) compared to fixed
income, currency, commodities
(FICC) revenue at 43.3% in Q1 2018.
We like that MS has downsized its
FICC trading platform in the last 18
months, which may limit exposure
to large trading losses.
Regulatory reform tied to Dodd-
Frank Stress Tests or the Volcker
Rule could be a plus for MS trading
revenue, in our view. While it may
be too early to tell on proposed
changes to the Volcker Rule issued
on May 30 by the Federal Reserve
Bank, we expect greater clarity on
the activities tied to market making
versus proprietary trading.
We look to return of capital as the
next major catalyst for MS, which is
subject to the Fed stress tests to
be released in late June. We are
confident MS will get approval of its
plan and the consensus is
estimating a 24% dividend increase
in Q3 2018.
Our 12-month target is $65,
applying a forward P/E of 13.8X our
2018 EPS estimate and a price to
net tangible book value at 1.9X,
both metrics at a premium to
direct peers. Our risk premium is
supported by strong execution and
consistency in performance, even
with uncertainties regarding
market volatility and customer
activity.
Risks to our recommendation
and target price include weaker
client trading activity in equity and
fixed income markets, a slower
release of underwriting deals from
the investment bank's pipeline and
geopolitical risks. 
6 THE OUTLOOK JUNE 25, 2018 CFRAOutlook.com

High-Quality Capital Appreciation Portfolio

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

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

Top Ten Model Portfolio

The Top Ten Model Portfolio comprises
stocks that CFRA thinks are well
positioned for total return over the
next 12 months.
The goal of the Top Ten Model
Portfolio is to outperform the S&P 500
index on a total return basis. CFRA’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. 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. For the 10-year
period ended April 30, 2018, the model
portfolio rose at an average annualized
rate of 6.75%, compared with the Equal
Weight S&P 500’s 10.28% average
annualized advance over that time.
Last year, the model portfolio rose by
25.37%, compared with 17.84% for the
Equal Weight S&P 500.
Past performance is not a reliable
indicator of future results. 

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

S&P GLOBAL™ is used under license. The owner of this trademark is S&P Global Inc. or its affiliate, which are not affiliated with CFRA Research or the author of this content.
The Observatory provides a selection of analytical actions — upgrades, downgrades, initiations — from CFRA Equity Research Services. Stocks featured in the Observatory are
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
analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

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. 