The market rallied as the news from the Federal Reserve was very positive. The FOMC Rate Decision was held at the same level, and the Fed does not appear to be pushing to end QE. With QE continuing, the market should continue to see more upside. The Fed commented that growth will be "moderate" but dropped their GDP forecast for 2013. The Fed also decreased their inflation outlook for the year, which was a positive for the market. Many fear that the constant bond buying and liquidity into the market will cause inflation.
On top of the Fed news, the market got earnings from FedEx (FDX) and sales data from Caterpillar (CAT) that was quite weak. Both companies noted global issues with demand, and as global bellwethers, the weakness in both companies should be a red flag for the market. Overall, with the Fed putting their foot on the pedal for more QE, the market has more upside or at least limited downside. The Dow increased 56 points, while the S&P 500 increased 10 points.
Stocks to Trade
Broadcom is looking very solid right now, and we believe it has some very solid upside from here. The company has a lot of potential upside over the next several months as we believe the company will benefit from several growth catalysts, value in shares, and the semiconductor cycle of growth still has more potential. First off, let's take a look at Broadcom's value. The company is currently trading with a future P/E just under 12 and price/sales at 2.5. We look for value at future PE under 15 and price/sales under 3.0. A lot of the value comes from the fact that BRCM is expected to grow 11% in earnings and revenue in 2014. The key growth opportunities for the company include Samsung and Apple.
The Samsung Galaxy S4 uses the Broadcom's NFC chip, and we believe that its a tremendous opportunity for the company as Samsung continues to grow and will prosper as phone users in emerging markets move up in class on phones from 2G to 3G and 3G to 4G. Barron's commented on Broadcom's Samsung business line:
Broadcom has a four-generation lead over its competitors and its combo connectivity solutions are considered best in class. Broadcom's NFC chip is already in production on Samsung's Galaxy Grand, Galaxy Grand Duos, and Galaxy S2+, and its inclusion on the S4 means that Broadcom has captured an additional 50 cents-75 cents of content compared to the S3. In total, we estimate that Broadcom has $4-$5 of content per phone, or about 20% more dollar content, versus the S3. Given expectations for 50% higher volumes of the S4 versus the S3, we believe it will help drive significant incremental revenue growth for Broadcom in 2013 and help the company maintain or even grow connectivity market share.
Right now, the company owns 4% of the mobile baseband and app processor market, and we believe that market will expand. Some of the moves the company has taken are very positive for its future. The company has moved its 5G Wi-Fi chips to phones and tablets, made the smallest LTE-compatible baseband chip (35% smaller than current products), and expanded other offerings. The company is developing a strong portfolio of offerings that we believe are going to give them a lot of upside. The company has for a long time been known as a play off of Apple (AAPL) and moved closely with the company. We believe that the company is a solid play on the development of the smart phone, mass-market phone, and tablet market. The smartphone market is expected to expand to 30% in 2013, while the tablet market is expected to expand grow over 60% in 2013 as well.
Look for BRCM to move higher over the next several months as it combines great value with great growth potential.
- Trade: BRCM, Long
- Entry: Break of $32
Another stock we like right now is Target. Earlier today, we published a long-term outlook for TGT for 2013. We have a $110 price target for the company, and we believe that the company has a lot of upside this year. The catalysts we like for the company are expansion into Canada, e-commerce opportunities, and believe that TGT has one of the best economic moats in the discount industry with its fashion offerings.
The first major move we like for TGT is its expansion into Canada. The company is expected to open over 100 stores in Canada over the next several years. Here is our take on that move:
TGT is expecting to open 124 stores across Canada beginning April/May of 2013. TGT plans to open stores in five cycles, creating 20 to 28 stores per cycle. TGT's CFO Mulligan noted that the company has strategically planned this expansion to transition its supply chain and determine the readiness of its distributors to ensure a smooth process. On March 5, TGT announced that its three pilot stores are open in Ontario, marking the beginning of Target's presence outside the US. The next step of the expansion will be building and opening 24 more TGT stores across Ontario. If these stores are successful, the company can tap into an otherwise completely new source of revenue.
We, additionally, believe that TGT has great e-commerce opportunities. At this time, the company has a limited e-commerce footprint, and we believe that this is probably the biggest place for TGT to improve their business. They look to be on the right track with some recent acquisitions:
Target announced on Thursday that it will acquire CHEFS Catalog and Cooking.com, two companies that sell kitchenware and cookware online. In its most recent earnings call, Target -- which is slightly larger than Amazon (AMZN), but garners only about one-third the valuation of the Web retailer -- indicated that its online revenue growth was above the industry average.
The company will need to improve this area, but we do like their economic moat when compared to other discount retailers. The company's fashion is a definite step above competitors like WMT, COST, DG, and more, and that niche does prove to attract certain customers. Target has partnered with designers like Prabal Gurung in women's fashion or Nate Berkus in home furnishings. These partnerships offer big-name products at affordable prices.
Look for TGT to continue much higher this year.
- Trade: TGT, Long
- Buy Point: Buy now
One company that could see some potential downside from here is Caterpillar. The company has not turned around business in China, and we believe that issues there could prove to be detrimental to upside from here. During bull market rallies, companies that are trending down tend to show fundamental weaknesses. The company announced February sales were quite weak. North America machine retail sales were down 12%, while Asia/Pacific was down 26%. The hit to its growth market in China is not a positive for the company. Sales are expected to decline 3% this year, overall. We believe these recent results show more weakness than has been expected. Power systems also saw a hit of 7% in February. The sequestration troubles could end up hurting infrastructure related companies like CAT over other companies.
The company has seen a 13% drop in retailer sales over the past three months, and the company is expecting a second-half comeback to power them into the end of the year. Until that turnaround happens, we believe shares stay in place. If you are a shareholder, we recommend adopting a bear call spread to make some money while shares are held in check. If you are not in a position, you should look to short the stock on a failure of $86.
- Trade: CAT, April 20, 92.50/95 Bear Call Spread
- Max Gain: 14%
Tomorrow, the market will continue to react to the Fed news. Does QE continue to keep us moving? Or, does the market start to fall flat with risk present in Cyprus and Europe? We believe that the market will stay range-bound for some time. There are catalysts like QE and positive economic data at home to keep buyers interested. At the same time, we have enough risks becoming present to grow somewhat weary. The key news to watch for tomorrow is Fed reaction, initial jobless claims report, and HSBC's Chinese Flash Manufacturing Report. The news out of China as of late has not been great, and if they are looked at as another potential risk to the market, it can hurt equities here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.