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88134166 finding-the-next-apple 88134166 finding-the-next-apple Document Transcript

  • North America Equity Research 05 April 2012Circle of Life15 "Apples" not far from AAPL in TMTPlease join us for a conference call on Thursday, 4/5 at 12:00pm ET on “Finding the Portfolio StrategyNext AAPL in TMT”. Joining us will be Mark Moskowitz, J.P. Morgan IT hardware AC Thomas J Lee, CFAanalyst, Doug Anmuth, Internet analyst; Alexia Quadrani, Media analyst; and Paul (1-212) 622-6505Coster, Applied and Emerging Technologies analyst.. Dial-in details: 800-593-9988 thomas.lee@jpmorgan.com(US); +1-312-470-7406 (outside US); Passcode: Strategy. Replay through 4/12: 888- Daniel M McElligott566-0438 (US); +203-369-3047 (outside US); Passcode: 4512. Replay available (1-212) 622-5598approximately one hour after the call ends. daniel.m.mcelligott@jpmorgan.comThe S&P 500 has gained 12% YTD and reflects the favorable conditions at the start of Katherine C Khorthe year (see “2012 to be year of ‘contrarian optimism’…” dated 1/6/12) given (i) a (1-212) 622-093460-yr high in equity risk premia; (ii) challenged active manager performance; and (iii) katherine.khor@jpmorgan.cominvestors too defensive. The setup for 2Q is less favorable. After two back-to-back J.P. Morgan Securities LLCdouble-digit quarters, both investor positioning and economic momentum are at Mark Moskowitzdifferent reference points today (i) greater embracement of risk by investors; (ii) (1-415) 315-6704macro challenges are emerging such as China, European growth and gasoline. As a mark.a.moskowitz@jpmorgan.comresult, short-term risk/reward less asymmetrically favorable (particularly compared to Sterling Auty, CFAthe 1Q setup). (1-212) 622-6389 We still see more positives than negative and therefore remain overall sterling.auty@jpmorgan.com constructive for FY2012 and see this year playing out similarly to 2009 (post- Alexia S. Quadrani financial crisis period) (see Figure 1). History actually argues that market (1-212) 622-1896 momentum tends to persist after two double-digit quarters—79% of the time, the alexia.quadrani@jpmorgan.com following quarter is positive (Figure 2) with Energy leading (Figure 3) most Tien-tsin Huang, CFA instances. Cyclicals tend to be mixed, and as we noted last week, we want to avoid (1-212) 622-6632 "smoke-stack" groups right now. tien-tsin.huang@jpmorgan.com Active managers are having a decent start to 2012 (Figure 6). Worse than 2011 Philip Cusick, CFA (18% are missing by 250bp vs. 14% at this time last year) but below the seasonal (1-212) 622-1444 trend of 20% by March. Last year, the real tracking error took place after September philip.cusick@jpmorgan.com 2011. Growth managers are doing particularly well, with 25% beating by 250bp and John DiFucci only 15% missing, or a net positive diffusion of 10%. (1-212) 622-2341 john.s.difucci@jpmorgan.com Let’s turn our attention to Apple (AAPL-OW). At 8% of the Russell 1000 Growth Index, the stock is simply exceeding ownership limits for many funds Rod Hall, CFA (1-415) 315-6713 (Figure 7) and as a result, investors are asking where the next Apple is. Plus, other rod.b.hall@jpmorgan.com investors want to buy the next Apple to hold for the next few years. The company really hit its stride in the second half of its public history (Figure 10). Doug Anmuth (1-212) 622-6571 We compiled the quantitative and qualitative characteristics of AAPL (Figure douglas.anmuth@jpmorgan.com 12 and Figure 13). Among them are: (i) products that inspire a following; (ii) Paul Coster, CFA reputational excellence; (iii) lifestyle products that focus on what one can do with (1-212) 622-6425 their services/products; (iv) culture of success; and (v) prodigious growth offset by paul.coster@jpmorgan.com (vi) attractive valuations and (vii) ability to return capital. Christopher Blansett (1-415) 315-6708 christopher.r.blansett@jpmorgan.com J.P. Morgan Securities LLCSee page 73 for analyst certification and important disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware thatthe firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singlefactor in making their investment decision. www.morganmarkets.com
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com 15 Stock Ideas: Our analysts identified 15 ideas that possess qualities similar to Apple within their addressable markets. Our 11 analysts identified 15 ideas based on a comprehensive comparison of qualitative (Figure 16) and quantitative characteristics (Figure 17) and their views are summarized in this report. These companies are different stages of their maturity (Figure 15). The tickers are: BRCM, VMW, NTAP, INTU, DIS, CMCSA, QCOM, ACN, QLIK, ANSS, TIBX, CREE, LNKD, AMZN, and TRMB.. J.P. Morgan Derivatives & Delta One Strategy has also created a basket for investors who would like to leverage the theme discussed in this report. The basket can be found on Bloomberg under ticker JPUSALTB Index. This basket should be considered separately from the basket we created in late February (JPUSAAPL), which focused purely on Technology stocks with a high price correlation to AAPL and did not take an in-depth fundamental approach like this week’s basket.2
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com MARKET STRATEGY: 2Q altered risk/reward compared to 1Q… 1Q was about contrarian optimism.... The S&P 500 has gained 12% YTD and the strong performance speaks to the favorable conditions at the start of the year, which we viewed as the basis for “contrarian optimism” (see “2012 to be year of ‘contrarian optimism’…” dated 1/6/12) – then, we saw (i) a 60-yr high in equity risk premiums; (ii) challenged active manager performance; and (iii) investors too defensive. The setup for 2Q is less favorable. But 2Q is starting with less favorable conditions… After two back-to-back double-digit quarters, both investor positioning and economic momentum are at different reference points today. By several measures, we have seen greater embracement of risk by investors (but not at any pivot). As for economic & macro, some challenges are emerging at this time. The key takeaway is that we do not see the current growth scares as “thesis changers” or at extremes, but they do make the short-term risk/reward less asymmetrically favorable (particularly compared to the 1Q setup).  The first “growth scare” asserting itself is China and the potential for a hard landing. Adrian Mowat, JPM’s EM strategist, asserts “Forget the hard/soft landing debate” as he sees a plethora of data pointing to contraction from passenger vehicle sales (-1.6%), steel production (-3.5%), residential sales (-13.5%), power demand (down m/m) as signs of a contraction. But Policy makers do have room to maneuver and thus, more a growth scare.  The second short-term headwind is higher gasoline, which reached $3.92 recently, not far from the $3.985 high in 2011, when we saw weakness develop in consumer spending (granted, Japan quake, Europe, Arab spring were also dampers). If decade patterns hold, gasoline prices seasonally peak in April (most years) before declining so that this pressure will likely prove short term and fade by May/June.  Lastly, we attended an investor meeting with Terry Belton, head of JPM’s US fixed income strategy team, and one of our takeaways is that we will see an eventual rise in interest rates. The trigger is a move of the unemployment rate below 7%, leading to Fed tightening (Belton est. each 100bp of fed funds is 48bp on the 10yr). We looked at periods of rising rates since 1962, and the key takeaway is that Cyclicals outperform when rates begin to rise. Financials in the short term, surprisingly, do not perform well. 3
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Plenty of positives and negatives in 2012…but more positives Bulls and bears can cite a litany of arguments for their view. But in our recent meetings, it seems most investors generally view this as a cyclical bull market, primarily fueled by easy monetary policy. And that “relative” value is primarily viewed through the lens that bonds are “overpriced” but stocks are not necessarily cheap. But take a look below, we see more reasons to be bullish than bearish: Figure 1: Plenty of positives and negatives…but we think investors are FIXATED on the negatives Notable Positives Notable Negatives 1. US equities are in a secular bull market, in our view 1. China visibility is limited and region represents 1/3 global growth in 2012. 2. US Labor market expanding and set to add 2.5-3.0mm jobs in 2012, leading to an acceleration of household formation. 2. European sovereign markets while more stable than 2011 are not demonstrating universal recovery. 3. US housing market is recovering and we expect starts to increase in 2012. 3. US bank lending standards remain extremely high limiting credit expansion in US mortgages 4. Bank capital positions are healthy. 4. US electoral outcome is still unclear 5. Equity risk premia is still near 60-year highs and corporate profits are at all-time highs. 5. Global policy rates remain at emergency levels 6. Global Central Banks are easing. 6. Sovereign debt levels are high and will be for many years 7. US corporates are sitting on a $3.7T mountain of cash and have 7. US faces fiscal cliff in 2013 strong balance sheets and accelerating cash return in 2012. 8. Brent crude oil prices surpassed 2011 highs and are going to 8. Institutional investors are still underweight equities. deliver a notable drag to many large countries (US, China, etc). 9. Both retail and institutional investor sentiment is still not 9. Investors continue to pull money out of equities--$300b since consistent with a secular bull market. 2007 10. Credit markets remain healthy with strong demand and inflows. 11. Profit margins have not peaked and support further upside revisions to earnings. 12. HY P/E is 14X vs. S&P 500 P/E of 12.7X--only second time in history. Source: J.P. Morgan4
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com …and history says 2Q should be positive (not explosive) Two Consecutive Quarters of Double-Digit Gains on S&P 500 The S&P 500 has produced two consecutive quarters of double-digit gains (11%, 12% in 4Q/1Q). And the natural question is whether equities sustain such gains.  Take a look at Figure 2 below. Of the 14 prior instances of two consecutive double-digit quarters, 11 of the 13 saw further gains in the following quarter, or 79% of the time. Meaning, based on historical precedent, 2Q12 is likely positive.  In fact, this is also true in recent history. Take a look at 2009 and 2010 where after two consecutive double-digit quarters, the S&P 500 gained in the following quarter. The takeaway is that the S&P 500 is likely to further build on its recent gains. Figure 2: Two consecutive quarters of double-digit gains suggest strong likelihood of further gains in 2Q12 Instances of S&P 500 being up > 10% for two consecutive quarters +6Q -3% +5Q -14% 7% +4Q 5% -29% 4% +3Q negative -6% 1% 10% -1% 6% -3% -12% negative negative +2Q -4% 9% 5% 7% 11% -2% 12% 5% -8% 5% 0% 2 consecutive double-digit +1Q -3% -5% 14% 29% 4% 5% 16% 7% 2% 0% -12% 5% 5% 5% quarters… 0Q 16% 23% 22% 15% 10% 15% 13% 19% 11% 10% 14% 13% 15% 10% 12% -1Q 12% 13% 17% 11% 14% 10% 21% 10% 11% 11% 22% 16% 15% 11% 11% 1897 1898 1904 1914 1921 1928 1935 1942 1954 1958 1974 1985 2009 2010 Current Source: J.P. Morgan and Bloomberg 5
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Post 2 double-digit quarters, Energy outperforms, other Sectors are a coin-toss But what to own today? One place to start is to look at history, in particular, the instances in the past 40-years where we saw consecutive double-digit quarters (Figure 3).  There is no pronounced pattern (i.e., laggards to leaders, leaders stay leaders, etc);  But Energy is the most consistent group. And like ’75, ’86, and ’09, it has been a notable laggard in past 2 quarters. Figure 3: Sector Perf in instances of S&P 500 being up > 10% for two consecutive quarters Sector Perf in instances of S&P 500 being up > 10% for two consecutive quarters Cyclicals do Buy Buy Buy Buy badly… Energy Defensives Cyclicals Energy 1975 1986 2009 2010 Current During 2 During 2 During 2 During 2 During 2 Double- Following Double- Following Double- Following Double- Following Double- Following Digit Qtrs Qtr Digit Qtrs Qtr Digit Qtrs Qtr Digit Qtrs Qtr Digit Qtrs Qtr S&P 500 Abs Perf 39% -12% 31% 5% 32% 5% 22% 5% 24% ?? Cyclicals Materials 17% -1% 11% -5% 17% 4% 26% -1% 1% ?? Industrials 14% -3% 3% -6% 10% 0% 5% 3% 5% ?? Discretionary 20% 0% 14% 2% -2% 2% 6% -3% 2% ?? Technology -3% -1% -7% -9% 7% 6% 2% -2% 7% ?? Near-Cyclicals Energy -6% 4% -37% 0% -9% -1% 12% 10% -2% ?? Financials -3% -9% 19% -4% 21% -8% -7% -3% 7% ?? Defensives Staples -1% -2% 8% 12% -9% -1% -6% -2% -10% ?? HealthCare -9% -6% 11% 11% -14% 3% -10% 0% -5% ?? Telecom -22% 2% -3% 6% -24% 0% 5% -2% -16% ?? Utilities -4% 2% -1% -4% -16% 0% -10% -3% -19% ?? Cyclicals 12% -1% 5% -4% 8% 3% 10% -1% 4% ?? Near-Cyclicals -5% -3% -9% -2% 6% -4% 3% 4% 3% ?? Defensives -9% -1% 4% 6% -16% 0% -5% -2% -13% ?? Source: J.P. Morgan, Bloomberg, and Datastream6
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com And active managers are having an “average” year 2012 has actually been a better year for active managers, particularly compared to 2011. As of 3/31, about 20% of large-cap managers are missing their benchmark by 250bp, while 17% are ahead by a similar amount. This is a decent performance and means that while there are fewer managers slightly behind, their plurality is small. And thus, the pressure to chase is small.  Looking at “Growth” managers, specifically. This tells a story of managers ahead of their benchmarks. See below that 25% of Russell 1000 Growth funds are ahead (vs. 15% behind) and 19% of Russell 2000 Growth funds are ahead (vs. 13% behind). Again, less pressure for growth managers to chase.  The opposite is true for Russell 1000 value managers. There we can see that significantly more are trailing. Figure 4: YTD Active manager summary performance Performance of mutual funds relative to their respective benchmarks Relative Performance (2012 YTD) Growth managers are Missing Beating doing better in 2012… % % Missing Missing % Beating % Beating # of AUM by at least by at least by at least by at least Benchmark Funds ($b) 500bp 250bp 250bp 500bp Large Cap Russell 1000 491 $1,168 7% 20% 11% 4% Value doing poorly… Russell 1000 Growth 432 $861 6% 15% 25% 9% Russell 1000 Value 316 $643 8% 26% 16% 3% Large Cap Total 1,239 $2,672 7% 20% 17% 6% Small & Mid Cap Russell Midcap Growth 215 $196 6% 19% 15% 4% Russell 2000 199 $191 5% 13% 16% 7% Russell 2000 Growth 196 $121 3% 13% 19% 7% Russell Midcap Value 110 $118 5% 13% 15% 5% Russell 2000 Value 101 $85 4% 15% 18% 8% Russell 3000 11 $14 9% 18% 64% 55% Small & Mid Cap Total 832 $724 5% 15% 17% 7% MSCI / Other 682 $608 11% 20% 43% 29% All Funds 2,753 $4,004 7% 18% 24% 12% Source: J.P. Morgan and Bloomberg 7
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com 2012 is starting off on a better note than 2011…. We have compared the performance of Russell 1000 managers against seasonal trends (tracking those trailing by 250bp). A couple of things stand out:  First, 2012 is tracking in line with historical patterns as 18% are trailing, compared to 20% on average.  2012 is very similar to 2011, with perhaps only slightly a greater number of managers behind.  Notice in 2011, that the massive slippage really took place between October 2011 and YE11—at that time, every investor got too defensive. Figure 5: 2011 month-by-month comparison (2011 vs. historical avg) Figure 6: 2012 month-by-month comparison (2012 vs. historical avg) % missing by 250b Problems after % missing by 250b Oct ‘11 2011 Historical Avg 2012 Historical Avg 50 48 40 45 35 47 42 40 37 30 35 40 30 25 25 20 20 25 15 18 22 22 15 18 10 13 10 14 14 5 7 5 7 0 0 Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg Similar to 2011…slightly worse…8
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com SECTOR STRATEGY: does the apple fall far from the Apple? For many active manages, they have an Apple problem, even if they own the stock. With the stock up 48% YTD, on the heels of a 3-yr cumulative gain of 474%, Apple is not only the largest stock in the world, it represents a very large share of many indexes. Take a look at Figure 7 below.  Apple is 4.5% of the S&P 500, but it is even larger share of these other indices. Why does it matter?  It is 18% of the Nasdaq 100 and more pertinently, it is 8% of the Russell 1000 Growth benchmark (see Figure 7). Many funds have individual stock constraints of 5%--meaning an individual stock can only be 5% of the portfolio, due to concentration concerns. Even if the weight in the benchmark is larger.  In other words, to own track Apple for a Russell 1000 Growth manager means to basically exceed concentration requirements. As a consequence, for those who own Apple. They probably do not own enough of it and thus, need to find other Apples to own. Figure 7: Market weighting of Apple in various indices % total 20.0% 18.2% 18.0% 16.0% 14.0% 11.7% 12.0% 10.0% 7.9% 8.0% 6.0% 4.5% 4.0% 4.0% 2.0% 0.0% S&P 500 Russell 1000 Russell 1000 Nasdaq 100 Nasdaq Growth Composite Source: J.P. Morgan. 9
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Apple’s financial market dominance is a misperception Maybe too much Ado about AAPL….There are bigger “Apples” in Europe and Asia The S&P 500 is more diversified than other global indices on both market cap weighting and volume weighting.  Based on market cap weighting, the top stock in the S&P 500 (AAPL) is only 4% of the index, well below the weightings of top stocks in other indices, such as Nestle in the SMI index or ENI SpA in the FTSEMIB index (see Figure 8).  From a volume perspective, the top 10 stocks in the S&P 500 are also a much smaller impact than in other global indices. The top 10 stocks in the S&P 500 represent only 18% of trading volume (based on avg over past 6 months), well below the 40- 80% of volume that the top 10 stocks represent in other indices. Figure 8: Weighting of Largest Stock in Index by Market Cap Figure 9: Weighting of Largest 10 Stocks in Index by Volume Weighting of Largest Stock in Index by Market Cap AAPL much Weighting of Largest 10 Stocks in Index by Volume smaller than Nestle 83% AAPL much other indices smaller than 76% ENI SpA other indices Fast 64% 25% Samsung Vale Retailing Total 55% 54% 21% HSBC SA PetroSiemens 50% China HSBC 16% 15% Total 41% 14% 36% SA 11% 10% Apple 29% 9% 7% 6% 6% 21% 20% 4% 11% FTSE MIB (Italy) SMI (Switzerland) Nikkei 225 (Japan) CAC (France) BOVESPA (Brazil) FTSE 100 (UK) Hang Seng (Hong KOSPI (Korea) Shanghai (China) DAX (Germany) Euro Stoxx 50 S&P 500 (US) SMI (Switzerland) CAC (France) FTSEMIB (Italy) DAX (Germany) Euro Stoxx 50 Nikkei 225 BOVESPA FTSE 100 (UK) Shanghai (China) Hang Seng (Hong KOSPI (Korea) S&P 500 (US) (Europe) (Japan) (Brazil) (Europe) Kong) Kong) Source: J.P. Morgan and Bloomberg. Source: J.P. Morgan and Bloomberg.10
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Apple price performance history shows transformation of company The Apple story of the past few years belies a transformation of the company in the past decade (Moskowitz has written extensively about this). But this change is apparent in price history of Apple (Figure 10) below. Apple went through several phases in its public trading history:  The last decade has seen remarkable consistency reflecting the transformation, product cycles, secular growth, and supply chain initiatives of Apple;  The earliest stages of Apple were much rockier--note that in the first decade and a half of its public trading history, the stock had more down years than up years.  And as shown on Figure 11, its price appreciation CAGR since its IPO at 19% is not substantially higher than the S&P 500 overall. Jobs iMac, iPod , iPhone returns as transformation…Figure 10: Annual price performance of Apple (relative to S&P 500) CEO Figure 11: AAPL and S&P 500 CAGRAnnual change since IPO. % performance relative to S&P 500 AAPL and S&P 500 price perf CAGR AAPL Rel Price Perf LT Avg AAPL price S&P 500 CAGR AAPL CAGR 192% 85% 79% Post-IPO Controversial period 185% $1,000 Notable 75% (Sculley, transition) performance 165% 8 of 15 yrs DOWN years.. 65% gap… Price Perf CAGR 132% 130% 123% 120% 55% 48% 45% AAPL YoY Rel Price Perf 105% AAPL price (log scale) 115% 45% $100 69% 35% 60% 21% 65% LT Avg 25% 19% 34% 27% 40% 43% 29% 23% 26% 20% 18% 15% 8% 15% 5% 1% 4% 2% $10 5% -5% 0% -35% -17% -11% -18% -25% Since IPO 10yr 5yr 3yr -36% -40% -51% -58% -52% -55% Source: J.P. Morgan, Bloomberg, and Datastream -85% -68% -61% $1 1/80 1/81 1/82 1/83 1/84 1/85 1/86 1/87 1/88 1/89 1/90 1/91 1/92 1/93 1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12Source: J.P. Morgan and Bloomberg 11
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Apple: Qualitative Differentiators Qualitative differentiators… There are many ways to identify what distinguishes Apple qualitatively. In fact, this has been well documented. We came across some commentary of a Ted Talk by Simon Sinek and found his extractions of what makes Apple unique very illustrative. We have summarized those 4 characteristics below: Figure 12: Qualitative differentiators of Apple Based on comments from a Ted Talk with Simon Sinek Customer loyalty: Products/services that inspire a following. Reputational excellence: Products are dependable. And meet customer expectations fully and beyond. Lifestyle products: Company always talks about challenging the status quo. Think differently. Does not make grand forecasts. They focus on what customers can do with the products. Not how they will “take over the world” Culture of success: The golden circle of why, how, when. Motivating and growing employee Supply chain management: This is not something other companies can replicate, but Moskowitz has extensively written about Apples investment in the supply chain. Source: J.P. Morgan. Applying these to find the next Apple We used the above as a qualitative template to identify the next Apples (talking to our analysts). Their ideas are summarized on Figure 14 to Figure 16. And those names reflect a combination of qualitative and quantitative characteristics.12
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Apple: Quantitative Differentiators The quantitative summary of Apple is below.  The obvious characteristic that stands out is Apple’s prodigious growth rates for both top line and earnings. Apple’s revenues have growth at 57% CAGR since 2010 and at 6X that of the Technology sector.  The company’s P/E and P/E to growth rate are well below that of the S&P 500 and Technology sector overall. In other words, the stock does not fully reflect its impressive growth rates.  The company remains institutionally underowned. Only 73% of the shares are held by institutions compared to 88% for the S&P 500 overall and 85% for Technology.  Finally, R&D surprisingly is not that high. This likely reflects the work Apple did on working with its supply chain partners, resulting in investment in that channel of production as a substitute for R&D. Or put another way, Apple is not as much of a "tech" company as its R&D belies. Figure 13: Quantitative differentiators of Apple S&P500 AAPL Tech ex-Fins Comments Growth Revenue Growth CAGR (10-12E) 57% 10% 9% 6X that of Technology Earnings Growth CAGR (10-12E) 72% 13% 9% Margin ex pansion delivers lev erage Investment R&D Spend as a % of Sales 2% 13% 6% Less on R&D, focus on products Valuation 2013 P/E (Current) 10.4x 12.3x 11.8x Low P/E PEG (2012 P/E vs 2013 Growth) 0.8x 1.1x 1.2x Discount to growth Cash as a % of Assets (10-11) 31% 31% 14% Conservative Cash as a % of Market Cap (10-11) 9% 20% 12% Due to price rise Ownership Current Institutional Ownership 73% 88% 85% Low ownership by institutions Source: J.P. Morgan and FactSet. 13
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Stock Strategy: 15 Next Apples We have compiled a list of 15 ideas for companies that our analysts view as having secular growth opportunities, a strong market position, and attractive valuation, which make these equities attractive to own as the potential next "Apple." As we show on the next page, these companies are at various stages of maturity (see Figure 15).  Figure 14 is a summary of the major characteristics of each company (the darker circle is better) both on qualitative and quantitative metrics. We have ranked them based on the overall score. But we emphasize the entire list is attractive.14
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comFigure 14: Summary information of Next ApplesQualitative and Quantitative metrics summarySource: J.P. Morgan and FactSet 15
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com The stocks are arguably Apple at different stages We placed the various ideas on the Apple “scale” (really the price chart) based on comparative size of the company and its growth prospects. This provides some context for where the idea sits on the spectrum.  We are placing companies “roughly” in a quadrant based on their size and overall market they are addressing. And we are hardly forecasting that their pathway would match Apple.Figure 15: At what stage is this company? Value shown is $ revs in billionsApple stock price since IPO. Log scale Early Apple Middle Apple Modern Apple $1,000 ACN $29.3B AAPL price QCOM CMCSA $15.9B DIS $55.8b $100 $40.9b BRCM TIBX $7.4B $1.0B AMZN CREE ANSS INTU $48.1b $1.0B $0.7B $4.1B VMW $10 $3.8B NTAP $6.0B LNKD TRMB QLIK $0.5B $1.6B $0.3B $1 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11Source: J.P. Morgan and FactSet16
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Comparative summary of the Next Apples Qualitative Comparative Summary Below is the qualitative summary of Apple based on the metrics that we discussed in earlier. Each analyst ranked their company based on their assessment of each characteristic.Figure 16: QUALITATIVE Grid: the next ApplesSource: J.P. Morgan and FactSet. 17
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Quantitative Comparative Summary Below is the quantitative summary of Apple based on the metrics that we discussed in earlier. Each company was force ranked based on the attractiveness of that particular metric.Figure 17: QUANTITATIVE Grid: the next ApplesSource: J.P. Morgan and FactSet.18
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comFigure 18: Coverage List NetApp — NTAP — Mark Moskowitz Ticker Rating Ticker Rating In IT Hardware, we highlight NetApp as another company developing its own unique legion of loyal customers and partners. The AAPL OW LXK UW company continues to optimize enterprise storage environments in an elegant approach, one built upon a software-driven ARX N NTAP OW architecture. NetApp offers a singular operating system with a common dashboard of storage systems management features, BRCD UW ORBK N which earn high marks from customers we speak to in the field. Overall, NetApp’s approach has resulted in a cleaner fit for its DELL OW QLGC UW storage systems in server virtualization environments running on VMware. We believe that this dynamic has been an important ELX UW STEC UW reason behind NetApp’s major market share gains over the past three years, and it is similar to the common user interface attribute EMC OW STX N that has elevated Apple in mobile devices. FIO N WDC N HPQ UW XRX UW IBM OWSource: J.P. Morgan.Figure 19: Price Performance — NTAP Figure 20: Qualitative and Quantitative Summary — NTAPTrailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPLSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg Back to NetApp, the storage competition currently offers disparate, less user-friendly system architectures. More recently, competitors such as EMC and Hewlett-Packard have been working to replicate the NetApp model of storage simplicity, i.e., a 19
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com common architecture across all price bands and workloads. We think it will take time, though, allowing NetApp to continue building out its legion of loyal customers over the next few years. Our conversations with NetApp’s storage partners and customers consistently indicate that the NetApp solutions are user-friendly and easy to manage. These differentiating attributes have helped NetApp overcome its higher-pricing structure for low-end and midrange systems versus competitive offerings, in our view. We point out that this relative premium in storage is similar to the premium price attached to Apple’s mobile devices. Despite the premium, customers continue to buy NetApp solutions, as there is less cost overage post-deployment. NetApp has had its fair share of growing pains recently. In the past 12 months, execution has been choppy, due in part to the company’s increased exposure to more demanding enterprise customers. Historically, NetApp shipped standard storage configurations into the channel, requiring less post-sale customization. In contrast, more demanding enterprise customers require both initial deployment and post-deployment customization support, which we think has been causing some fulfillment issues at NetApp. Meanwhile, the company has struggled with keeping its product cycle refreshes on schedule and also monetizing prior acquisitions. Its 2003 acquisition of Spinnaker still has not ushered in a complete scale-out NAS clustering solution. Despite these challenges, we believe that NetApp possesses the technology and market position to continue achieving above-peer revenue and earnings growth over the next five years. Below, we present an overview of how NetApp scores on certain attributes (relative to its peers) that have been attached to leading companies, such as Apple. (Best = 1, Worst = 5)  (i) Customer loyalty (Score = 1): NetApp’s easy-to-use software architecture has built a loyal following of customers over the past five years. The company’s software-driven systems are easier to scale and manage relative to the competition, based on our conversations with partners and customers in the field.  (ii) Reputational excellence (Score = 1): Despite some recent hiccups in product fulfillment, NetApp’s solutions continue to be regarded as the leading solution to support server virtualization environments. This attribute is important, as our recent CIO survey results indicate that server virtualization cycle has plenty of legs left.  (iii) Lifestyle products (Score = NA): NetApp sells only to the enterprise, not the consumer.  (iv) Culture of success (Score = 2): Employees and the channel love to work at NetApp. First, the company culture prides itself on being a Silicon Valley start-up that can compete with anyone. The company’s practice of rewarding stock options to executives and rank-and-file also helps. NetApp also consistently ranks highly in lists of “best places to work” surveys. Lastly, the channel partners enjoy working with NetApp, as the company is more willing share the margin-rich post sale of services and support.  (v) Potential to accelerate cash return to shareholders (Score = 3): On this topic, NetApp does not score as well. In our view, NetApp may have to use cash for acquisitions to fend off deeper pocketed EMC and Oracle over time in the data center. NetApp does possess a strong cash flow profile.20
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Amazon — AMZN —Doug AnmuthFigure 21: Coverage List (Best = 1, Worst = 5) Ticker Rating Ticker Rating  (i) Customer loyalty (Score = 1): Over the last 10+ years Amazon has done something we once thought was impossible AMZN OW P OW online—win customer loyalty. The company’s focus on price, selection, and convenience has enabled it to cut through a very AWAY OW PCLN OW crowded physical retail and ecommerce space to earn repeat customers. Amazon is driven by strong fulfillment capabilities EBAY N QNST N and an easy to navigate front-end site, and the Amazon Prime membership program encourages repeat purchasing. Amazon EXPE UW RATE N has also virtually created the eReader and eBook market with the Kindle. GOOG OW RLOC OW  (ii) Reputational excellence (Score = 2): Amazon has a strong reputation around shipping and fulfillment. Free Super Saver GRPN N TRIP N Shipping and Prime have helped Amazon differentiate versus other retailers. The company’s 3rd-party business featuring LNKD OW YHOO N vetted and reliable sellers also accounts for ~35% of units. Amazon is also increasingly shifting this business into its own NFLX N ZNGA N warehouses through Fulfillment by Amazon.Source: J.P. MorganFigure 22: Price Performance — AMZN Figure 23: Qualitative and Quantitative Summary — AMZNTrailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPLSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg 21
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com  (iii) Lifestyle products (Score = 3): Amazon management runs the business on a very long –term timeframe and is not afraid to make near-term investments to drive long-term share gains. Amazon has challenged the status quo by pioneering online commerce, shifting from books/media to other general merchandise, launching the Kindle eReader and eBooks, and launching AWS, Amazon’s cloud services.  (iv) Culture of success (Score = 4): Amazon employees think and operate the business for the long-term. The business is run in a very lean way. Management’s focus is on long-term share gains and FCF generation.  (v) Potential to accelerate cash return to shareholders (Score = 5): Potential is there with an estimated $8B of cash on the BS at the end of 1Q12, but we would not expect major capital returns. Amazon strategically buys shares, but I would not expect a dividend or bigger return given the competitive nature of the space and Amazon’s desire to continuously innovate to gain share.22
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com LinkedIn — LNKD — Doug Anmuth (Best = 1, Worst = 5)  (i) Customer loyalty (Score = 2): Strong user base among corporate enterprises and consumer users. More than 9200 enterprises and 100M+ users. LinkedIn has strong network effects driven by social dynamics and Internet trends. LNKD has established itself as the leading career network.  (ii) Reputational excellence (Score = 1): Strong reputation with corporate customers who place high value on LinkedIns broad network and deep information. High ROI for enterprises.  (iii) Lifestyle products (Score = 4): Not lifestyle products, but challenging the status quo by disrupting the traditional job placement and recruitment market. Conservatively run and investing for the long-term.  (iv) Culture of success (Score = 3): Strong management team with leadership and vision in the Internet space.  (v) Potential to accelerate cash return to shareholders (Score 5): Unlikely given early stage nature of company and significant growth opportunity ahead.Figure 24: Price Performance — LNKD Figure 25: Qualitative and Quantitative Summary — LNKDTrailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPLSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg 23
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Disney — DIS — Alexia QuadraniFigure 26: Coverage List These grades are relative to Disney’s peers (TWX, VIAB, CBS, etc): (Best = 1, Worst = 5) Ticker Rating Ticker Rating  (i) Customer loyalty (Score = 1): Theme parks (Walt Disney World and others around the world, Disneyland Shanghai in DIS OW OMC OW development), movies/characters (animated classics, Pixar), ESPN. DISCA N SNI N  (ii) Reputational excellence (Score = 1): All three areas mentioned above are unrivaled GCI N SSP OW HHS N TWX OW  (iii) Lifestyle products (Score = 2): Not so much challenging the status quo, but clear leadership that has been maintained. IPG OW VCI OW  (iv) Culture of success (Score = 2): High level of creativity instilled in the business (Parks developers are known as MNI N VIAb OW Imagineers), Pixar is leader in animation, ESPN holds an ongoing dominance and is the highest valued cable network by far. NYT N WPP.L N  (v) Potential to accelerate cash return to shareholders (Score = 2): Company is working through a peak capex year inSource: J.P. Morgan F2012 (Sep YE) due to several major Parks attractions opening, after which capex should come down meaningfully to allow accelerated return of cash to shareholder, mostly through buybacks.Figure 27: Price Performance — DIS Figure 28: Qualitative and Quantitative Summary — DISTrailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPLSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg24
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comFigure 29: Coverage List Comcast — CMCSA— Phil Cusick Ticker Rating Ticker Rating AMT OW NTLS OW (Best = 1, Worst = 5) CCI N PCS OW  (i) Customer loyalty (Score = 2): Comcast has 22m video subscribers of which almost 11m take advanced services (such as CHTR OW S N HD or DVR service) and the company has 18m high speed internet subscribers, which is quickly becoming a necessity in the CLWR N SBAC modern home. Comcast also owns 51% of NBCUniversal which has premium cable network, broadcast, film and theme park CMCSA OW T N properties with a loyal following. CTL OW TDS N CVC UW TWC N  (ii) Reputational excellence (Score = 3): The company has an excellent service record and is continuously trying to improve DISH N USM UW its product and service offerings to its customers. DTV OW VZ N  (iii) Lifestyle products (Score =3): Comcast has been innovative it trying to extend delivering entertainment services through FTR N WIN N various platforms and integrating its offerings into the everyday life of the consumer. The company’s Streampix offering LEAP OW could have a substantial impact on how subscribers consume media.Source: J.P. Morgan Figure 31: Qualitative and Quantitative Summary — CMCSAFigure 30: Price Performance — CMCSA Full moon indicates more like AAPL; Empty moon indicates less like AAPLTrailing 1yrSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg 25
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com  (iv) Culture of success (Score = 2): Comcast continues to lead the cable and media space with its aggressive culture and leadership.  (v) Potential to accelerate cash return to shareholders (Score = 1): We expect the company to repurchase $3.0b in stock in 2012 and issue dividends of $1.7b for a combined cash return to shareholders of $3.7bn in 2012, up 42% y/y. We could see upside if the cable business performs better than expected.26
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comFigure 32: Coverage List (part 1) Trimble — TRMB— Paul Coster Ticker Rating Ticker Rating Searching for the Next Apple…. ACTG OW ELON N In Applied & Emerging Technologies, we highlight Trimble as a company developing some Apple-like characteristics, not least AVID OW ELT OW the potential for this electronic equipment company to post growth for many years to come. COMV ENOC N CSTR N ESE N Trimble designs, manufactures and sells equipment that is used in engineering and construction, field agriculture, asset CUB N FLIR UW management and tracking, mining and exploration. The company is often equated with the GPS industry, however in recent DBD N FN OW years, a slew of hardware, software and service acquisitions re-positions the company as a full life-cycle IT-based solutions DGI OW GEOY N provider for the industry verticals that the company services. Trimble’s vision is to achieve the connected construction site, the DLB OW GRMN UW connected farm, the connected mobile enterprise.. As an analogy, Trimble is beginning to do for engineering, mining, DTSI N IRBT UW construction, and agriculture, what SAP and Oracle did for the manufacturing industry with increasingly broad-scope ERP systems in the 1990s. We think this is a powerful value proposition.Source: J.P. Morgan Figure 34: Qualitative and Quantitative Summary — TRMBFigure 33: Price Performance — TRMB Full moon indicates more like AAPL; Empty moon indicates less like AAPLTrailing 1yrSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg 27
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comFigure 35: Coverage List (part 2) Consider the Tekla acquisition, one of dozens of acquisitions that Trimble has made in the last few years. Tekla develops Ticker Rating Ticker Rating software products for use by architecture, engineering, construction, government and utilities customers, to design and construct ITRI OW SYNA N large concrete and steel infrastructure projects and buildings, to manage workflow, assets, contractors and staff during the project LOGI UW TASR N and to commission the building or infrastructure for use. Combining this Tekla software with Trimble’s traditional GPS-based NCR OW TNAV N equipment used for precision control of machinery, or to manage the supply of concrete and other supplies to the project, in real- time, provides a holistic efficiency-oriented solution for industries that have typically been slow to adopt information technology. NICE OW TRMB OW The company claims that its technology can improve efficiency by 30%, reduce fuel use and emissions by 30%. OVTI N TSYS N PLT N TTMI N At the 2011 JPMorgan TMT conference, Trimble’s CEO, Steve Berglund, suggested that Trimble’s growth could endure for RLD OW VRNT OW decades to come. Though we expect nothing less than supreme self-confidence from the typical CEO, we feel he makes a good RMBS N ZBRA OW case for Trimble to follow an Apple-like trajectory owing to the magnitude of the problems that the firm is trying to solve; RPXC OW ZIP OW megatrends relating to infrastructure, affluence and technology. In short, we live in an increasingly urbanized, over-populated,Source: J.P. Morgan resource-constrained world, characterized by housing shortages, escalating energy consumption, transportation congestion, and episodic food crises. Trimble’s solutions address many of these challenges by improving the speed with which infrastructure projects are executed, improving the yield from farmland, and optimizing asset utilization. We expect the company to continuously expand the scope of its solutions (e.g. new sensor technologies, 3D modeling, SaaS), principally through acquisition. (Best = 1, Worst = 5)  (i) Customer Loyalty (Score = 2). Trimble’s technology is an industry-standard in engineering and construction, surveying, and in agricultural field solutions. Trimble Dimensions, the firm’s international user conference, is now in its 6th year; last year it attracted nearly 3000 participants from more than 60 countries. The firm was founded over 30 years ago and has offices in 21 countries.  (ii) Reputational excellence (Score = 2). One measure of the firm’s reputation is the fact that it has entered into two JVs with Caterpillar, one of which utilizes the Caterpillar dealer network to distribute Trimble product. In 2011 Trimble was awarded a Blanket Purchase Agreement (BPA) by the Federal GSA, meaning fleet management services can be provided to 75 US federal agencies. Two Chinese government agencies have formed JVs with Trimble: CASIC-IT and CREEC. Hilti Group entered into a JV with Trimble in 2010.  (iii) Lifestyle products (Score = 4). We will abuse this category by using it as an excuse to reflect upon the role that Trimble’s products play in the building of roads, railways, airports, buildings, in the extraction and transport of energy, in improving crop yields, and in optimizing the allocation and movement of mobile workers and equipment.  (iv) Culture of success (Score = 2). Trimble has grown at a 15% CAGR since 2000, and experienced only one significant down year (-15% in 2009). The company is very focused on operating margins, with the CEO expressing the intention of achieving 15% operating margins, even during down-cycles. Trimble’s corporate culture embraces frugality; there are many paths to success. Looking forward the company aspires to 15-17% CAGR revenue growth, and over 20% operating margins in the next 5 years.28
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com  (v) Potential to accelerate cash return to shareholders (Score = 5). But not now. Trimble exited 2011 with record EBITDA margins of over 25%, and the firm generated $240 million of cash flow from operations (normalized free cash flow of just over $200 million). Trimble is however firmly committee to growth at this point in the firm’s history, and investors should expect at least 5% of y/y growth to originate in acquisitions. In this context, Trimble exited 2011 with net debt of $410 million. The company does execute share buy-backs but these have typically done little for the stock. We don’t expect significant cash to be returned to investors in the next 5 years. 29
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Qualcomm — QCOM— Rod HallFigure 36: Coverage List I would say that there is a huge amount of growth still go in smartphones and QCOM is very well tied to that. Ticker Rating Ticker Rating (Best = 1, Worst = 5) APKT N MITL N  (i) Customer Loyalty (Score = 5). Loyalty doesnt matter much for the royalty business where they make 2/3 of their CIEN N MMI N earnings. CSCO OW QCOM OW  (ii) Reputational excellence (Score = 1). Very solid product reputation on chips, again doesnt matter for royalties FFIV N RIMM N  (iii) Lifestyle products (Score = 4). GLW UW RVBD OW INFN N TLAB UW  (iv) Culture of success (Score = 2). JNPR N  (v) Potential to accelerate cash return to shareholders (Score = 2). It spins off plenty of cash but thy still think ofSource: J.P. Morgan themselves as a growth company. Returns probably depend on intl cash repatriation.Figure 37: Price Performance — QCOM Figure 38: Qualitative and Quantitative Summary — QCOMTrailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPLSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg30
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comFigure 39: Coverage List Accenture — ACN — Tien-Tsin Huang Ticker Rating Ticker Rating (Best = 1, Worst = 5) ACN OW GPN OW ADP N HPY N  (i) Customer loyalty (Score = 1): ACN has strong relationship with its customers; the company wins a lot of contracts on BR OW MA OW sole-sourced basis (competitors are not even invited to bid). Many clients identify ACN as a partner, instead of as a vendor. CSC UW MGI N More than 100 clients contribute $100M+ in annual revenue for the company. CTSH OW PAY OW EXLS OW PAYX UW  (ii) Reputational excellence (Score = 2): The company’s one of the most diversified IT services firms offering a full suite of FIS N V OW IT services including consulting, systems integration and outsourcing. The company also has a global delivery network of FISV N WNS UW more than 160k spread across the world at various low cost locations. The biggest advantage to clients is the tight integration FLT OW WU OW of various services and delivery locations. G OW WXS N  (iii) Lifestyle products (Score = 3): Although not as much applicable given the nature of the business, ACN is nimble and GDOT OW early to identify the changing industry trends and offer solutions/services that their clients demand. The company built andSource: J.P. Morgan expanded its offshore delivery network organically and has more employees at low cost locations than most offshore firms.Figure 40: Price Performance — ACN Figure 41: Qualitative and Quantitative Summary — ACNTrailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPLSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg 31
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com  (iv) Culture of success (Score = 1): The company focuses a lot on preserving its culture- First, ACN does not pursue any large acquisitions which might dilute its culture. ACN roots as a pure play consulting company with partnership model resulted in an army of senior partners that own a lot of stake in the company. ACN spends a lot in training its employee- spent $800M in FY11. The company pays a mix of variable and fixed compensation to motivate its employees.  (v) Potential to accelerate cash return to shareholders (Score = 1): The company has more than $5.5B in cash and no debt (net cash is 12% of market cap). Since they do not do large acquisitions and have no debt, ACN is focused on returning cash to shareholders. The company intends to return $3B in dividends and buybacks this year (7% of market cap) including 2% in dividends. ACN’s dividend per share has increased by 220% over the last three years.32
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Broadcom — BRCM— Harlan SurFigure 42: Coverage List (Best = 1, Worst = 5) Ticker Rating Ticker Rating  (i) Customer loyalty (Score = 1): Broadcom is the number one supplier in enteprise networking, broadband, and mobile BRCM OW MRVL OW connectivity semiconductors. Their leadership in digital signal processing, mixed signal/ feature/functionality integration, and CAVM OW MU N best-in-class performance has driven their success in the markets in which they compete. Their tier-1 customer base (Apple, ENTR N NVDA N Cisco, and Samsung for example) is a reflection of their success. Apple, for example, uses Broadcom silicon in every product FSL OW NXPI N they sell (iPad, iPhone, macbook air, etc) and is a reflection of the loyalty and long-standing relationship that Broadcom has IMI OW PMCS N fostered over the past decade with Apple. LSI N SNDK N  (ii) Reputational excellence (Score = 1): Similar to (i), their market segment leadership and tier-1 customer base which MLNX N includes some of the most demanding customers (Apple and Samsung) is a reflection of Broadcom’s ability to execute, itsSource: J.P. Morgan customer service/support, and its ability to provide customers with a set of products that fits their requirements now AND, more importantly, for future generations of customer platforms.Figure 43: Price Performance — BRCM Figure 44: Qualitative and Quantitative Summary — BRCMTrailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPLSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg 33
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com  (iii) Lifestyle products (Score = 1): The company’s leadership in mobile connectivity through an integrated solution (WiFi, Bluetooth, FM, GPS) was challenged several years back by competitors who were selling discrete solutions. The market thought is would be technically difficult and too cost prohibitive for Broadcom to be successful with an integrated solution. Fast forward to today where Broadcom is now the number one supplier of mobile connectivity solutions to the smartphone and tablet markets (70%+ market share) and biggest differentiator is their integrated solution where they have a three generation lead over their nearest competitors. Today, Broadcom’s platform approach (supplying as much of the silicon and software) is a key competitive differentiator and many successful semiconductor companies (like Qualcomm), have adopted a similar approach.  (iv) Culture of success (Score =1): Broadcom is based on a culture of A) engineering excellence and B) operational, strategic, and technical execution. Tthe company has a very different product development model (central engineering team with each of the business units pulling shared resources from the central team) which has driven fast-time-to-market versus competitors. The company also has a solid development infrastructure in place to re-use much of the developed IP across multiple divisions. The central engineering model also creates an atmosphere of sharing and collaboration.  (v) Potential to accelerate cash return to shareholders (Score = 2): should continue to generate 15-20% of cashflow from ops (as a perc of revenue) and expect increasing dividends over time…..34
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com VMware — VMW — John DiFucciFigure 45: Coverage List  (i) Customer Loyalty (Score = 1): The leading server virtualization vendor in the world with maintenance renewal rates of Ticker Rating Ticker Rating 95% or more. AVG OW PRO N  (ii) Reputational Excellence (Score = 1): VMware is writing the definition of what virtualization is and what it can mean BMC N QLIK OW going forward. CA OW QSFT OW CARB OW RHT UW  (iii) Lifestyle Products (Score = 5): This is not really applicable, since the user of VMware products is an IT professional. However, VMware products do reduce real estate, power, and cooling requirements, which not only save money, but CRM N SWI OW contribute to a “green” environment. CTXS UW SYMC OW LOGM OW TIBX OW  (iv) Culture of Success (Score = 2): VMware is expanding its offerings from core server virtualization, to systems MSFT N TLEO N management, application development, and end-user virtualization. ORCL OW VMW N  (v) Potential to accelerate cash return to shareholders (Score = 2): VMware is growing significantly, and is spending inSource: J.P. Morgan order to capture a material market in front of it, but it still has close to a 40% free cash flow margin (excluding acquisitions).Figure 46: Price Performance — VMW Figure 47: Qualitative and Quantitative Summary — VMWTrailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPLSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg 35
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com TIBCO — TIBX — John DiFucci  (i) Customer Loyalty (Score = 1): The last remaining pure-play integration software company with maintenance renewal rates easily in excess of 90%.  (ii) Reputational Excellence (Score = 1): The standard for low latency messaging has parlayed that success into the broader integration software, application development, grid computing, social networking, and analytics spaces. TIBCO’s solutions were built for the future in mind more than ten years ago. The future has caught up with TIBCO.  (iii) Lifestyle Products (Score = 5): This is not really applicable, since the user of TIBCO products is an IT professional.  (iv) Culture of Success (Score = 2): TIBCO has been through many trials and tribulations, not dissimilar to Apple in its youth, but has continued to persevere through the tireless determination and confidence of its founder and leader.  (v) Potential to accelerate cash return to shareholders (Score = 3): Generates free cash flow at greater than 20% margin, with 35% growth a year ago. Has reduced share count by greater than 20% over the last five years through share repurchases.Figure 48: Price Performance — TIBX Figure 49: Qualitative and Quantitative Summary — TIBXTrailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPLSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg36
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com QLIK Technologies — QLIK — John DiFucci  (i) Customer Loyalty (Score = 2): QlikTech’s strategy to “land and expand” yields increased loyalty based on products that simply get used more once they are initiated.  (ii) Reputational Excellence (Score = 1): QlikTech provides a “new” approach to the age old problem of analytics, and it does it through the unique leveraging of recent advances in computing technology.  (iii) Lifestyle Products (Score = 3): Ease of use spawns increased use, which is an important tenant of QlikTech’s success in the enterprise.  (iv) Culture of Success (Score = 2): A unique culture that values the employee as an agent of change – “to change the world.”  (v) Potential to accelerate cash return to shareholders (Score = 4): This is a relatively young company looking to continue its rapid expansion, so it is not looking to return cash to shareholders at this time, but once it builds mass and attains a steady state growth rate, it can pull back on spending and should generate significant cash flow.Figure 50: Price Performance — QLIK Figure 51: Qualitative and Quantitative Summary — QLIKTrailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPLSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg 37
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com ANSYS — ANSS — Sterling AutyFigure 52: Coverage List (Best = 1, Worst = 5)Ticker Rtg Ticker Rtg Ticker RtgADSK OW CSGS N PMTC OW  (i) Customer Loyalty (Score = 1): In the design engineering field there are dedicated simulation engineers that live andADVS UW DOX N ROVI OW breathe this technology. Making it easier, this is starting to expand out to the basic design engineer.AKAM N EQIX OW SNPS OWANSS N FTNT N SSNC  (ii) Reputational Excellence (Score = 1): When Japan went through the tragedy last year, there was an increase in demandAZPN OW GWRE OW VRSN NBLKB N IMPV OW WBSN UW for Ansys solutions to simulate outcomes and what could happen in other regions to reactors with various natural andC DNS OW INTU OW WWWW OW unnatural events.CHKP N MOTR NCMVT N NSR N  (iii) Lifestyle Products (Score = 3): The company is trying to change how products are designed fundamentally. Instead of starting with a drawing, just outline the parameters of what you want the part/product to do and let the software solve for theSource: J.P. Morgan design.Figure 53: Price Performance — ANSS Figure 54: Qualitative and Quantitative Summary — ANSSTrailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPLSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg38
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com  (iv) Culture of Success (Score = 2):- Turnover is lower than industry average and employees love working there. Now they are in Pittsburgh not silicon valley so less competition.  (v) Potential to accelerate cash return to shareholders (Score = 3): have a share repurchase program, but does not stand out, but good cash flow and could at some point decide to support a dividend. 39
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Intuit — INTU — Sterling Auty  (i) Customer Loyalty (Score = 1): TurboTax and QuickBooks have a very loyal following. Once on them it is a community. QuickBooks has 6M businesses that run on it, and you can search online and find forums dedicated to the solution.  (ii) Reputational Excellence (Score = 1): Taxes for people, and the financials for small business are a sensitive matter to users they demand accuracy and dependability; so, the growth is a testament.  (iii) Lifestyle Products (Score = 1): Company is building off of its tradition with Quicken for personal finance and has Mint.com to manage finances from any device. In India, they have a mobile solution for farmers to help lock in market prices.  (iv) Culture of Success (Score = 1): Best company in coverage at hiring, developing, promoting and inspiring talent. They are very GE like (Welch era) in this approach.  (v) Potential to accelerate cash return to shareholders (Score = 2): Currently pays a 1% dividend yield, and they grow that moderately. As the economy heats up small business creation kicks in and demand should accelerate that could provide a foundation to do even more.Figure 55: Price Performance — INTU Figure 56: Qualitative and Quantitative Summary — INTUTrailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPLSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg40
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Cree — CREE — Chris BlansettFigure 57: Coverage List One of the things that separates Cree and most of the companies under coverage from Apple is the dependency on B2B sales.Ticker Rating Ticker Rating Even though we believe Cree could have a multi-year positive outlook, the lack of direct sales to consumers and the generalAMAT N PLAB N diversification of product requirements for LED and LED based lighting applications means its unlikely to be a big winner in allBWEN N RBCN OW of them.CREE OW SPWR UWFSLR UW VECO OW We think there could be a number of Cree like LED lighting companies over the next 5 years, and I do think Cree will be a significant benefactor of the adoption of LED based lighting technology.KLAC N WFR UWLRCX N (Best = 1, Worst = 5)NVLS NSource: J.P. Morgan  (i) Customer Loyalty (Score = 4)  (ii) Reputational Excellence (Score = 5)  (iii) Lifestyle Products (Score = 5)  (iv) Culture of Success (Score = n/a): No Idea, Cree is a black box  (v) Potential to accelerate cash return to shareholders (Score = 3) 41
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comFigure 58: Price Performance — CREE Figure 59: Qualitative and Quantitative Summary — CREETrailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPLSource: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg42
  • Thomas J Lee, CFA North America Equity Research (1-212) 622-6505 05 April 2012 thomas.lee@jpmorgan.com Circle of Life Metrics show slightly slower momentum Figure 61: % Change Since 3/9/12 Our subjective ranking of the 10 economic sectors based on fundamentals, credit profile, valuation, investor flow, and analyst Financials 5.5% ratings is below. The net change column on the right of the table shows the accumulated delta compared to the last Circle of Life Technology 4.1% publication for each of the 10 sectors, and the net change row at the bottom shows the accumulated delta for each of the metrics. Health Care 3.3% Staples 2.4%  Overall, our Circle of Life metrics showed slowing momentum this month, with a net -3 decline overall for the ten sectors Discretionary 2.3% S&P 500 2.3% based on our ranking system. The main driver of the weakening was price performance, however, rather than any of the Industrials 1.4% fundamental criteria such as sales or earnings revisions, suggesting that the weaker momentum is likely a short-term impact. Materials 0.6% Utilities 0.1% Figure 60: Overall Subjective Ranking of Ten Economic Sectors Telecom -0.8% Fundamental, Technical, and Sentiment Metrics (Relative to S&P 500) Energy -3.1% Price Price/50d Sales Sales Earnings Earnings JULI FC Mean Short ETF Fund P/10Yr Composite Net Strategy -8% -3% 2% 7% Sectors Rating Perf mav g Rev ision Momentum Rev ision Momentum Spreads Rating Interest Flow s EPS Score Change Industrials OW N N from U  G N G G N N G G G G from N +1 Source: FactSet. Technology OW G U G G G G N G N G N G Energy OW N from G  G from N  N G N G G N from G  N N G N from G -1 M aterials OW U from N  N from U  G G U G G N from G  N G N N -1 HealthCare OW N U G from N  U N G N N G from N  N G N +2 Discretionary OW G U G N N G N N N G U N Financials OW G U N U N N from G  G G N N G N -1 Telecom N N N from G  G N U N N N G G from N  N N Staples UW U from N  U from N  G N N N N N G N G N -2Reading the Table Utilities UW U N G N N N N N N U from N  U N -1The overall rankings, as shown 10 Sectors N N from U  G N N G N N N N N Nearlier, should be viewed as a 10 Sectors -3 +1 +1 -1 -2 +1 -3“conviction” measure, separate butgenerally consistent with our Cyclicals N from G  U G G N G N N from G  N G N N“Strategy ratings.” Cyclicals -1 +2 -1 +0 Defensives U from N  U from N  G N N N N N G N N N Defensives -1 -2 +1 +1 -1 Near-Cyclicals G N from U  N N N G G G N N G N Near-Cyclicals -1 +1 -1 -1 -2 Source: J.P. Morgan. G=Good, N=Neutral, U=Unattractive. 43
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Below is a timeline for the change in the 11 metrics followed by our Circle of Life model, broken down by Cyclicals, Near- Cyclicals, and Defensives.Figure 62: Circle of Life Metrics Monthly Changes – Cyclicals, Near-Cyclicals, and Defensives Cyclicals: Materials, Industrials, Discretionary, & Tech Near-Cyclicals: Energy & Financials Defensives: Staples, HealthCare, Telecom, & Utilitiees 4/11 5/11 6/11 10/11 1/12 3/12 4/12 4/11 5/11 6/11 10/11 1/12 3/12 4/12 4/11 5/11 6/11 10/11 1/12 3/12 4/12 Price Performance -1 -1 +1 -1 -1 -1 +1 +2 -1 +4 +2 -3 -1 Price/50d mavg +2 -2 +4 -3 -2 -2 +2 +1 +1 -1 -1 +1 +1 +1 -1 -2 Sales Revision -1 +1 +1 -1 +1 Sales Momentum -1 -1 +1 Earnings Revision -3 +1 +2 -1 -1 +1 +1 -1 -2 Earnings Momentum -1 +1 -1 JULI Spreads +1 -1 +3 -3 +1 -1 -1 +1 +1 +1 +2 -1 -2 FC Mean Rating -1 +1 -1 -1 +1 -1 -1 +1 Short Interest -1 -1 +1 -1 +1 +1 ETF Fund Flows +1 +1 -2 +1 +2 +1 -1 -1 -1 P/10Yr EPS -1 +1 +1 -2 +1 Total Delta +1 -3 +2 -4 -2 +2 +1 -3 -2 -1 +3 -2 +6 +5 +3 -6 -4 -1 Composite Score 0.6 0.5 0.5 0.6 0.4 0.4 0.4 0.5 0.6 0.5 0.4 0.3 0.4 0.3 0.2 0.3 0.3 0.3 0.2 0.1 0.1Source: J.P. Morgan.44
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comCircle of Life Metrics Monthly ChangesFigure 63: Circle of Life Metrics Monthly Changes – Sectors Materials Industrials Discretionary Technology Energy 6/11 10/11 1/12 3/12 4/12 6/11 10/11 1/12 3/12 4/12 6/11 10/11 1/12 3/12 4/12 6/11 10/11 1/12 3/12 4/12 6/11 10/11 1/12 3/12 4/12 Price Performance             Price/50d mavg                Sales Revision  Sales Momentum Earnings Revision      Earnings Momentum JULI Spreads        FC Mean Rating     Short Interest    ETF Fund Flows     P/10Yr EPS  Total Delta 1 -1 -1 0 -1 -1 0 0 -2 1 0 1 -1 -1 0 0 2 -2 1 0 -1 -1 -1 0 -1 Composite Score 0.7 0.6 0.4 0.4 0.3 0.6 0.6 0.6 0.5 0.5 0.3 0.4 0.3 0.2 0.2 0.5 0.6 0.5 0.5 0.5 0.7 0.6 0.5 0.5 0.5 Financials Staples HealthCare Telecom Utilities 6/11 10/11 1/12 3/12 4/12 6/11 10/11 1/12 3/12 4/12 6/11 10/11 1/12 3/12 4/12 6/11 10/11 1/12 3/12 4/12 6/11 10/11 1/12 3/12 4/12 Price Performance          Price/50d mavg       Sales Revision    Sales Momentum   Earnings Revision      Earnings Momentum    JULI Spreads           FC Mean Rating      Short Interest     ETF Fund Flows          P/10Yr EPS    Total Delta -2 -1 0 3 -1 2 0 -1 -1 -2 1 -2 -2 -1 2 1 -1 -2 -1 0 -1 3 -1 -1 -1 Composite Score 0.3 0.2 0.0 0.3 0.2 0.5 0.5 0.4 0.3 0.1 0.5 0.4 0.1 0.0 0.2 0.5 0.5 0.3 0.2 0.2 (0.2) 0.1 0.0 (0.1) (0.2)Source: J.P. Morgan. 45
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Figure 64: Circle of Life Subjective Based on JPM Strategy ViewsThe Circle of Life: PeakingMacroThe macro picture has been strong Banks Early-stagerecently, with initial jobless claims Later-stage Tech Hardware & Equip Insurance Underweight Capital Goodscontinuing their downward trend to Overweight Media Autos & Components~350k, ISM remaining steady Dvrsfed Financials Semiconductors & Equipabove 50, and payrolls gaining Technology Consumer Durables & Apparelmomentum. Financials Industrials High GradeCredit Discretionary TIPSHG bond spreads have tightened EM GDP Treasuriesto 191bp from vs. 219bp in late Oil ISMJanuary. HY yields have risen Auto salesslightly recently to 7.5%. US GDP Retail sales Breaking Recovery CMBS ABX, ABS, CDOs Jobs Euro GDP Down Dollar HY/Lev Loans RMBS Housing HealthCareEquity Agency MBS Materials Pharma Biotech & Life SciencesThe S&P 500 has risen 3.2% over Munis Utilities Food & Staples Retailingthe past month. Cyclicals have Transportation Staplesoutperformed over the past month, Telecomrising by 2.7% vs. a 2.5% rise for UtilitiesDefensives and 1.7% rise for Near- Retailing Energy Consumer Svcs HH & Personal ProductsCyclicals… Materials Software & Svcs Food Beverage & Tobacco Energy Early-stage Real Estate Commercial & Prof Svcs Overweight Health Care Equip & Svcs Telecom Services Later-stage Underweight Bottoming Source: J.P. Morgan estimates.46
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comQuarterly Price PerformanceFigure 65: Sector Quarterly Price Performance Shaded box highlights performance of sector, Bold/Italics highlights S&P 500 performance Materials Industrials Discretionary T echnology Energy 1Q11 2Q11 3Q11 4Q11 QTD 1Q11 2Q11 3Q11 4Q11 QTD 1Q11 2Q11 3Q11 4Q11 QTD 1Q11 2Q11 3Q11 4Q11 QTD 1Q11 2Q11 3Q11 4Q11 QTD 16% 7% 0% 18% 22% 16% 7% 0% 18% 22% 16% 7% 0% 18% 22% 16% 7% 0% 18% 22% 16% 7% 0% 18% 22% 8% 5% -5% 16% 21% 8% 5% -5% 16% 21% 8% 5% -5% 16% 21% 8% 5% -5% 16% 21% 8% 5% -5% 16% 21% 5% 4% -8% 15% 15% 5% 4% -8% 15% 15% 5% 4% -8% 15% 15% 5% 4% -8% 15% 15% 5% 4% -8% 15% 15% 5% 3% -9% 12% 12% 5% 3% -9% 12% 12% 5% 3% -9% 12% 12% 5% 3% -9% 12% 12% 5% 3% -9% 12% 12% 4% 1% -11% 11% 10% 4% 1% -11% 11% 10% 4% 1% -11% 11% 10% 4% 1% -11% 11% 10% 4% 1% -11% 11% 10% 4% 0% -13% 10% 10% 4% 0% -13% 10% 10% 4% 0% -13% 10% 10% 4% 0% -13% 10% 10% 4% 0% -13% 10% 10% 4% -1% -14% 9% 8% 4% -1% -14% 9% 8% 4% -1% -14% 9% 8% 4% -1% -14% 9% 8% 4% -1% -14% 9% 8% 3% -1% -21% 9% 4% 3% -1% -21% 9% 4% 3% -1% -21% 9% 4% 3% -1% -21% 9% 4% 3% -1% -21% 9% 4% 3% -2% -22% 8% 3% 3% -2% -22% 8% 3% 3% -2% -22% 8% 3% 3% -2% -22% 8% 3% 3% -2% -22% 8% 3% 2% -5% -23% 7% 1% 2% -5% -23% 7% 1% 2% -5% -23% 7% 1% 2% -5% -23% 7% 1% 2% -5% -23% 7% 1% 2% -6% -25% 6% -3% 2% -6% -25% 6% -3% 2% -6% -25% 6% -3% 2% -6% -25% 6% -3% 2% -6% -25% 6% -3% Financials Staples HealthCare T elecom Utilities 1Q11 2Q11 3Q11 4Q11 QTD 1Q11 2Q11 3Q11 4Q11 QTD 1Q11 2Q11 3Q11 4Q11 QTD 1Q11 2Q11 3Q11 4Q11 QTD 1Q11 2Q11 3Q11 4Q11 QTD 16% 7% 0% 18% 22% 16% 7% 0% 18% 22% 16% 7% 0% 18% 22% 16% 7% 0% 18% 22% 16% 7% 0% 18% 22% 8% 5% -5% 16% 21% 8% 5% -5% 16% 21% 8% 5% -5% 16% 21% 8% 5% -5% 16% 21% 8% 5% -5% 16% 21% 5% 4% -8% 15% 15% 5% 4% -8% 15% 15% 5% 4% -8% 15% 15% 5% 4% -8% 15% 15% 5% 4% -8% 15% 15% 5% 3% -9% 12% 12% 5% 3% -9% 12% 12% 5% 3% -9% 12% 12% 5% 3% -9% 12% 12% 5% 3% -9% 12% 12% 4% 1% -11% 11% 10% 4% 1% -11% 11% 10% 4% 1% -11% 11% 10% 4% 1% -11% 11% 10% 4% 1% -11% 11% 10% 4% 0% -13% 10% 10% 4% 0% -13% 10% 10% 4% 0% -13% 10% 10% 4% 0% -13% 10% 10% 4% 0% -13% 10% 10% 4% -1% -14% 9% 8% 4% -1% -14% 9% 8% 4% -1% -14% 9% 8% 4% -1% -14% 9% 8% 4% -1% -14% 9% 8% 3% -1% -21% 9% 4% 3% -1% -21% 9% 4% 3% -1% -21% 9% 4% 3% -1% -21% 9% 4% 3% -1% -21% 9% 4% 3% -2% -22% 8% 3% 3% -2% -22% 8% 3% 3% -2% -22% 8% 3% 3% -2% -22% 8% 3% 3% -2% -22% 8% 3% 2% -5% -23% 7% 1% 2% -5% -23% 7% 1% 2% -5% -23% 7% 1% 2% -5% -23% 7% 1% 2% -5% -23% 7% 1% 2% -6% -25% 6% -3% 2% -6% -25% 6% -3% 2% -6% -25% 6% -3% 2% -6% -25% 6% -3% 2% -6% -25% 6% -3%Source: J.P. Morgan and FactSet. 47
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Update on Stocks for the 4th Year of Bull Market Trade Idea We are keeping our Stocks for the 4th Year of Bull Market trade open this month. As a reminder, we identified stocks that look well-positioned to outperform in the 4th year of the bull market. We identified 10 stocks using the following criteria: (i) Stock is in one of the top 4 sectors, namely Industrials, Financials, Energy, and Technology; (ii) Stock is in 3 or more of the current best- performing styles (Less Liked, High Div Yield, Lower Beta, High Quality, Large Cap, and High FCF Yield); (iii) Rated Overweight by J.P. Morgan; and (iv) Upside to J.P. Morgan target price. Figure 66: 10 Stocks for the 4th Year of Bull Market Initiated on 03/08/2012 03/08/2012 — 04/04/2012 (Open Trade): Stocks for 4th Year of Bull Mkt JPM Rating Trade Initiated As of 04/04/2012 Profit (Loss) Name Stock Current as of Date Price $ Value Date Price $ Value $ Chg % Chg Ticker 03/08/12 Bank of America Corp. BAC OW OW 3/08/12 $8.06 $1,000 4/04/12 $9.20 $1,141 $141 14.1% AFLAC Inc. AFL OW OW 3/08/12 $44.76 $1,000 4/04/12 $45.04 $1,006 $6 0.6% Validus Holdings Ltd. VR OW OW 3/08/12 $30.17 $1,000 4/04/12 $31.01 $1,028 $28 2.8% General Electric Co. GE OW OW 3/08/12 $19.03 $1,000 4/04/12 $19.74 $1,037 $37 3.7% Enterprise Products Partners L.P. EPD OW OW 3/08/12 $51.49 $1,000 4/04/12 $50.28 $977 ($23) -2.3% ACE Ltd. ACE OW OW 3/08/12 $71.49 $1,000 4/04/12 $73.43 $1,027 $27 2.7% International Business Machines Corp. IBM OW OW 3/08/12 $199.81 $1,000 4/04/12 $206.05 $1,031 $31 3.1% General Dy namics Corp. GD OW OW 3/08/12 $72.01 $1,000 4/04/12 $72.63 $1,009 $9 0.9% Health Care REIT Inc. HCN OW OW 3/08/12 $53.93 $1,000 4/04/12 $53.55 $993 ($7) -0.7% Annaly Capital Management Inc. NLY OW OW 3/08/12 $16.15 $1,000 4/04/12 $15.74 $975 ($25) -2.5% Sub-Total $224 2.2% S&P 500 SP50 3/08/12 1,366 $10,000 4/04/12 1,399 $10,242 $242 2.4% Long: 10 Stocks for the 4th Year of Bull Mkt 3/08/12 $10,000 4/04/12 $10,224 $224 2.2% Trade vs. S&P 500 ($18) -0.2% Source: J.P. Morgan and FactSet. Note: The table above shows the performance of a hypothetical trade assuming an investor bought and sold all the stocks shown on the dates shown.48
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Update on Financials Top Ideas from J.P. Morgan Fundamental Analysts We are keeping our Financials Top Ideas trade open this month. As a reminder, we aggregated the top stock ideas from each of J.P. Morgan’s fundamental equity analysts in the Financials space (see “Best Equity Near-Term Ideas” dated 1/24/12 for full write-ups of these analysts’ views on these stocks). Figure 67: 7 Financials Top Ideas Stocks Initiated on 01/26/2012 01/26/2012 — 04/04/2012 (Open Trade): Financials T op Ideas JPM Rating Trade Initiated As of 04/04/2012 Profit (Loss) Name Stock Current as of Date Price $ Value Date Price $ Value $ Chg % Chg Ticker 01/26/12 Citigroup Inc. C N OW 1/26/12 $30.38 $1,429 4/04/12 $35.04 $1,648 $219 15.3% Allstate Corp. ALL OW OW 1/26/12 $29.15 $1,429 4/04/12 $32.62 $1,599 $170 11.9% Och-Ziff Capital Management Group LLC. OZM OW OW 1/26/12 $9.90 $1,429 4/04/12 $9.65 $1,392 ($36) -2.5% Zions Bancorporation ZION OW OW 1/26/12 $16.58 $1,429 4/04/12 $21.08 $1,816 $388 27.1% Prudential Financial Inc. PRU OW OW 1/26/12 $55.59 $1,429 4/04/12 $62.82 $1,614 $186 13.0% Apollo Investment Corp. AINV OW OW 1/26/12 $7.53 $1,429 4/04/12 $7.34 $1,393 ($36) -2.5% SL Green Realty Corp. SLG OW OW 1/26/12 $73.82 $1,429 4/04/12 $75.35 $1,458 $30 2.1% Sub-Total $920 9.2% S&P 500 SP50 1/26/12 1,318 $10,000 4/04/12 1,399 $10,611 $611 6.1% Long: 7 Financials Top Ideas from JPM Fundamental Analysts 1/26/12 $10,000 4/04/12 $10,920 $920 9.2% Trade vs. S&P 500 $309 3.1% Source: J.P. Morgan and FactSet. Note: The table above shows the performance of a hypothetical trade assuming an investor bought and sold all the stocks shown on the dates shown. 49
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Update on Cyclical Cocktail Stocks Trade Idea We are keeping our Cyclical Cocktail Stocks trade open this month. As a reminder, this trade identified stocks in industry groups and styles that worked in both ’98 and ’08, or in offensive styles that have led since the start of the year. Specifically, we identified 26 stocks using the following criteria:  In one of the following Industry Groups: Semiconductors, Consumer Svcs, Software & Svcs, Tech Hardware & Equip, Retailing, or Diversified Financials;  In at least three of the following Styles: High P/B (>3.37x), More Liked (FC Mean Rating <2.00), High Beta (>1.69), Low Momentum (Price/200D MAVG < 80%), Low Price (<$13.85), Small Mkt Cap (<$1.2b), or Low Quality (S&P Stock Rating >= 21); and  Rated Overweight by J.P. Morgan.50
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Figure 68: 26 Cyclical Cocktail Stocks Initiated on 10/20/2011 10/20/2011 — 04/04/2012 (Open Trade): 26 Cyclical Cocktail Stocks JPM Rating Trade Initiated As of 04/04/2012 Profit (Loss) Name Stock Current as of Date Price $ Value Date Price $ Value $ Chg % Chg Ticker 10/20/11 Rubicon Technology Inc. RBCN OW OW 10/20/11 $9.70 $385 4/04/12 $9.67 $383 ($1) -0.3% RealD Inc. RLD OW OW 10/20/11 $10.10 $385 4/04/12 $12.64 $481 $97 25.1% Office Depot Inc. ODP OW OW 10/20/11 $2.15 $385 4/04/12 $3.31 $592 $208 54.0% Veeco Instruments Inc. VECO OW OW 10/20/11 $26.04 $385 4/04/12 $27.20 $402 $17 4.5% ShoreTel Inc. SHOR OW 10/20/11 $5.48 $385 4/04/12 $5.40 $379 ($6) -1.5% Bank of America Corp. BAC OW OW 10/20/11 $6.47 $385 4/04/12 $9.20 $547 $162 42.2% MGM Resorts International MGM OW OW 10/20/11 $10.01 $385 4/04/12 $13.55 $521 $136 35.4% Pinnacle Entertainment Inc. PNK OW OW 10/20/11 $11.25 $385 4/04/12 $11.55 $395 $10 2.7% Stray er Education Inc. STRA OW OW 10/20/11 $85.32 $385 4/04/12 $88.54 $399 $15 3.8% Och-Ziff Capital Management Group LLC. OZM OW OW 10/20/11 $10.00 $385 4/04/12 $9.65 $371 ($13) -3.5% OmniVision Technologies Inc. OVTI N OW 10/20/11 $16.77 $385 4/04/12 $19.94 $457 $73 18.9% Verint Sy stems Inc. VRNT OW OW 10/20/11 $27.50 $385 4/04/12 $30.72 $430 $45 11.7% Orient Express Hotels Ltd. OEH OW OW 10/20/11 $7.88 $385 4/04/12 $10.05 $491 $106 27.5% Investment Technology Group Inc. ITG OW OW 10/20/11 $11.06 $385 4/04/12 $11.41 $397 $12 3.2% American Capital Ltd. ACAS OW OW 10/20/11 $6.77 $385 4/04/12 $8.63 $490 $106 27.5% DineEquity Inc. DIN OW OW 10/20/11 $43.24 $385 4/04/12 $48.33 $430 $45 11.8% Gaylord Entertainment Co. GET N OW 10/20/11 $20.90 $385 4/04/12 $30.90 $569 $184 47.8% Las Vegas Sands Corp. LVS OW OW 10/20/11 $41.76 $385 4/04/12 $57.17 $527 $142 36.9% LogMeIn Inc. LOGM OW OW 10/20/11 $34.92 $385 4/04/12 $34.80 $383 ($1) -0.3% Aeroflex Holding Corp ARX N OW 10/20/11 $10.19 $385 4/04/12 $10.91 $412 $27 7.1% Monoty pe Imaging Holdings Inc. TYPE OW OW 10/20/11 $12.77 $385 4/04/12 $14.72 $443 $59 15.3% Cadence Design Systems Inc. CDNS OW OW 10/20/11 $9.91 $385 4/04/12 $11.76 $456 $72 18.7% ON Semiconductor Corp. ONNN OW OW 10/20/11 $6.73 $385 4/04/12 $8.57 $490 $105 27.3% Cardtronics Inc. CATM OW OW 10/20/11 $23.59 $385 4/04/12 $25.23 $411 $27 7.0% Motricity Inc. MOTR N OW 10/20/11 $1.78 $385 4/04/12 $1.40 $303 ($82) -21.3% KKR & Co. L.P. KKR OW OW 10/20/11 $11.70 $385 4/04/12 $14.73 $484 $100 25.9% Sub-Total $1,643 16.4% S&P 500 SP50 10/20/11 1,215 $10,000 4/04/12 1,399 $11,510 $1,510 15.1% Long: 26 Cy clical Cocktail Stocks 10/20/11 $10,000 4/04/12 $11,643 $1,643 16.4% Trade vs. S&P 500 $132 1.3% Source: J.P. Morgan and FactSet. Note: The table above shows the performance of a hypothetical trade assuming an investor bought and sold all the stocks shown on the dates shown. 51
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Update on Cyclicals Summer Bounce Trade Idea We are keeping our Cyclicals Summer Bounce trade open this month. As a reminder, this trade identified Cyclicals stocks that were likely to outperform over the next few months as stocks were expected to rebound last summer led by Cyclicals. Specifically, we used the following criteria: 1) stock is in a Cyclical sector (Technology, Materials, Industrials, Discretionary); 2) Price < 50D MAVG; 3) RSI < 33; 4) rated Overweight by J.P. Morgan; 5) upside to J.P. Morgan target price; 6) market cap > $3B; and 7) P/B < 2.0x. Figure 69: 13 Stocks for a Summer Bounce Led by Cyclicals Initiated on 6/16/2011 6/16/2011 — 04/04/2012 (Open Trade): 13 Summer of Cyclicals Stocks JPM Rating Trade Initiated As of 04/04/2012 Profit (Loss) Name Stock Current as of Date Price $ Value Date Price $ Value $ Chg % Chg Ticker 6/16/11 ManpowerGroup MAN OW OW 6/16/11 $52.60 $769 4/04/12 $46.21 $676 ($93) -12.1% Nucor Corp. NUE OW OW 6/16/11 $39.46 $769 4/04/12 $42.10 $821 $51 6.7% Alcoa Inc. AA OW OW 6/16/11 $14.79 $769 4/04/12 $9.81 $510 ($259) -33.7% Staples Inc. SPLS OW OW 6/16/11 $15.05 $769 4/04/12 $16.07 $821 $52 6.8% Royal Caribbean Cruises Ltd. RCL N OW 6/16/11 $33.70 $769 4/04/12 $28.03 $640 ($129) -16.8% CA Inc. CA OW OW 6/16/11 $21.35 $769 4/04/12 $27.16 $979 $209 27.2% Textron Inc. TXT N OW 6/16/11 $21.57 $769 4/04/12 $28.38 $1,012 $243 31.6% Jacobs Engineering Group Inc. JEC OW OW 6/16/11 $41.14 $769 4/04/12 $43.93 $821 $52 6.8% Sy nopsy s Inc. SNPS OW OW 6/16/11 $24.91 $769 4/04/12 $30.47 $941 $172 22.3% Mohawk Industries Inc. MHK N OW 6/16/11 $57.91 $769 4/04/12 $66.60 $885 $115 15.0% Ingersoll-Rand Plc IR OW OW 6/16/11 $43.63 $769 4/04/12 $41.21 $727 ($43) -5.5% General Electric Co. GE OW OW 6/16/11 $18.44 $769 4/04/12 $19.74 $823 $54 7.0% Republic Serv ices Inc. RSG N OW 6/16/11 $30.29 $769 4/04/12 $30.45 $773 $4 0.5% Sub-Total $429 4.3% S&P 500 SP50 6/16/11 1,268 $10,000 4/04/12 1,399 $11,036 $1,036 10.4% Long: 13 Summer of Cyclicals Stocks 6/16/11 $10,000 4/04/12 $10,429 $429 4.3% Trade vs. S&P 500 ($607) -6.1% Source: J.P. Morgan and FactSet. Note: The table above shows the performance of a hypothetical trade assuming an investor bought and sold all the stocks shown on the dates shown.52
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Update on HealthCare Trade Idea We are keeping our HealthCare trade open this month. As a reminder, this trade identified 18 top HealthCare stock ideas from J.P. Morgan’s fundamental research analysts. Figure 70: 18 HealthCare Top Ideas from J.P. Morgan Analysts Initiated on 5/12/2011 5/12/2011 — 04/04/2012 (Open Trade): 18 HealthCare Top Ideas JPM Rating Trade Initiated As of 04/04/2012 Profit (Loss) Name Stock Current as of Date Price $ Value Date Price $ Value $ Chg % Chg Ticker 5/12/11 Dendreon Corp. DNDN OW OW 5/12/11 $37.80 $556 4/04/12 $10.26 $151 ($405) -72.9% United Therapeutics Corp. UTHR N OW 5/12/11 $67.40 $556 4/04/12 $45.23 $373 ($183) -32.9% Allscripts Healthcare Solutions Inc. MDRX N OW 5/12/11 $20.31 $556 4/04/12 $16.39 $448 ($107) -19.3% Pfizer Inc. PFE OW OW 5/12/11 $20.89 $556 4/04/12 $22.39 $595 $40 7.2% Mylan Inc. MYL OW OW 5/12/11 $24.09 $556 4/04/12 $23.16 $534 ($21) -3.9% McKesson Corp. MCK OW OW 5/12/11 $85.02 $556 4/04/12 $87.89 $574 $19 3.4% Ex press Scripts Holding Co ESRX OW OW 5/12/11 $59.79 $556 4/04/12 $56.88 $529 ($27) -4.9% Life Technologies Corp. LIFE OW OW 5/12/11 $56.35 $556 4/04/12 $47.51 $468 ($87) -15.7% Cigna Corporation CI OW 5/12/11 $48.05 $556 4/04/12 $48.80 $564 $9 1.6% Accretiv e Health Inc. AH OW OW 5/12/11 $26.36 $556 4/04/12 $20.02 $422 ($134) -24.1% Covidien PLC COV OW OW 5/12/11 $56.13 $556 4/04/12 $53.82 $533 ($23) -4.1% Gilead Sciences Inc. GILD OW OW 5/12/11 $41.29 $556 4/04/12 $47.19 $635 $79 14.3% St. Jude Medical Inc. STJ OW OW 5/12/11 $52.17 $556 4/04/12 $41.67 $444 ($112) -20.1% WellPoint Inc. WLP OW 5/12/11 $80.00 $556 4/04/12 $72.12 $501 ($55) -9.8% Illumina Inc. ILMN OW OW 5/12/11 $75.23 $556 4/04/12 $52.28 $386 ($169) -30.5% Onyx Pharmaceuticals Inc. ONXX OW OW 5/12/11 $43.60 $556 4/04/12 $39.28 $501 ($55) -9.9% UnitedHealth Group Inc. UNH OW 5/12/11 $50.08 $556 4/04/12 $59.06 $655 $100 17.9% Alkermes PLC ALKS OW OW 5/12/11 $17.02 $556 4/04/12 $18.47 $603 $47 8.5% Sub-Total ($1,084) -10.8% S&P 500 SP50 5/12/11 1,349 $10,000 4/04/12 1,399 $10,373 $373 3.7% Long: 18 HealthCare Top Ideas 5/12/11 $10,000 4/04/12 $8,916 ($1,084) -10.8% Trade vs. S&P 500 ($1,457) -14.6% Source: J.P. Morgan and FactSet. Note: The table above shows the performance of a hypothetical trade assuming an investor bought and sold all the stocks shown on the dates shown. 53
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Figure 71: Circle of Life Trades Since Launch of Publication Performance of trades Publication Dates Pair Trade Re-Cap Long/Short Performance Sector rating changes Short REL Perf Long REL Perf vs S&P 500 vs S&P 500 Trade Upgrade/ Trade Open Close Long Short Sector Perf + or - % chg Downgrade Sector 3/8/2012 - Open Long: 10 Stocks for 4th Year of Bull Market 2.2% x +100.0% 2.2% -0.2% 1/26/2012 - Open Long: 7 Financials Top Ideas 9.2% x +100.0% 9.2% 3.1% 10/20/2011 - Open Long: 26 Cyclical Cocktail Stock Ideas 16.4% x +100.0% 16.4% 1.3% 12/9/2011 Upgrade Discretionary N ---> OW 6/16/2011 - Open Long: 13 Summer of Cy clicals Stocks 4.3% x +100.0% 4.3% -6.1% 5/12/2011 - Open Long: 18 HealthCare Top Ideas -10.8% x +100.0% -10.8% -14.6% Upgrade HealthCare N ---> OW 3/31/2011 - 6/16/2011 Long: 18 Stocks post-Oil spike -4.8% x +100.0% -4.8% -0.4% Downgrade Discretionary OW ---> N Avoid: 6 Stocks post-Oil spike -3.6% x -100.0% 3.6% 8.0% 2/3/2011 - 10/20/2011 Long: 15 Street Momentum Ideas -13.4% x +100.0% -13.4% -6.3% 11/11/2010 - 1/26/2012 Long: 5 Energy Top Ideas -8.9% x +100.0% -8.9% -17.6% Upgrade Energy N ---> OW 10/7/2010 - 2/3/2011 Long: 25 Stocks Attractive on Circle of Life Metrics 15.7% x +100.0% 15.7% 2.9% 8/19/2010 - 1/26/2012 Long: 19 Stocks Correlated with Res. Constr. or Inv entory 26.3% x +100.0% 26.3% 3.7% 6/3/2010 - 10/7/2010 Long 25 Clobbered Stocks with FCF Yld > BY 3.7% x +100.0% 3.7% -1.3% Downgrade Energy OW ---> N 4/22/2010 - 10/7/2010 Long 25 Employment Demographics Stocks -12.0% x +100.0% -12.0% -7.8% 3/25/2010 - 10/7/2010 Long 23 Price Target Upgrade Stocks 4.2% x +100.0% 4.2% 4.8% 2/11/2010 - 3/25/2010 Long 24 Correction Stocks 11.4% x +100.0% 11.4% 3.3% 1/14/2010 - 10/7/2010 Long 19 Financials Stocks 5.8% x +100.0% 5.8% 5.0% 11/19/2009 - 1/26/2012 Long 25 Pro-Cyclical Stocks 60.0% x +100.0% 60.0% 39.6% Source: J.P. Morgan and FactSet. Note: The table above shows the performance of hypothetical trades assuming an investor bought and sold on the dates shown above, according to the trade parameters highlighted in each of our past Circle of Life reports.54
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Figure 72: Circle of Life Trades Since Launch of Publication (Continued) Performance of trades Publication Dates Pair Trade Re-Cap Long/Short Performance Sector rating changes Short REL Perf Long REL Perf vs S&P 500 vs S&P 500 Trade Upgrade/ Trade Open Close Long Short Sector Perf + or - % chg Downgrade Sector 12/11/2009 Upgrade Health Care UW ---> N 10/22/2009 - 11/19/2009 Long 25 High Debt Stocks -2.0% x +100.0% -2.0% -2.2% 9/18/2009 - 10/22/2009 Long 26 Cyclical Stocks for the Next Leg of the Recovery -1.4% x +100.0% -1.4% -3.7% 8/5/2009 - 1/14/2010 Long Top 15 Energy Stks (Composite Score) 28.8% x +100.0% 28.8% 14.2% Upgrade Energy N ---> OW Downgrade Health Care N ---> UW 7/1/2009 - 8/5/2009 Long 15 Top Smoke Stackey Industries 14.7% x +100.0% 14.7% 6.1% 6/25/2009 Upgrade Industrials N ---> OW Upgrade Materials N ---> OW 6/4/2009 - 7/1/2009 Long 6 Sub-Industries -1.9% x +100.0% -1.9% 0.1% Short 5 Sub-Industries -6.6% x -100.0% 6.6% 4.6% 4/29/2009 - 6/4/2009 Long Consumer Ideas -0.3% x +100.0% -0.3% -8.2% Short Consumer Ideas -1.2% x -100.0% 1.2% 9.1% 4/29/2009 - 6/4/2009 Long Discretionary 4.5% x +100.0% 4.5% -3.4% Upgrade Energy UW ---> N Short Staples 8.0% x -100.0% -8.0% -0.1% 3/30/2009 - 4/29/2009 Long Materials 12.6% x +100.0% 12.6% 1.7% Upgrade Industrials UW ---> N Long Industrials 18.2% x +100.0% 18.2% 7.3% Downgrade Health Care OW ---> N Short Utilities 2.4% x -100.0% -2.4% 8.6% 2/19/2009 - 3/30/2009 Long Materials 8.0% x +100.0% 8.0% 6.9% Upgrade Materials UW ---> N Short Telecom Svcs 8.4% x -100.0% -8.4% -7.3% Downgrade Telecom OW ---> N 1/16/2009 - 2/19/2009 Long Health Care 0.0% x +100.0% 0.0% 8.3% Upgrade Health Care N ---> OW Short Energy -7.3% x -100.0% 7.3% -1.1% Downgrade Energy N ---> UW Source: J.P. Morgan and FactSet. Note: The table above shows the performance of hypothetical trades assuming an investor bought and sold on the dates shown above, according to the trade parameters highlighted in each of our past Circle of Life reports. 55
  • Thomas J Lee, CFA North America Equity Research (1-212) 622-6505 05 April 2012 thomas.lee@jpmorgan.com Sector Comparative Relative Price Performance Price vs. 50-Day Moving Avg Monthly Relative Sales Revision Relative Sales Growth (vs. S&P 500) Monthly Relative Earnings Revision Relative Earnings Momentum JULI Spreads (Relative to All Industries’ Average) First Call Mean Rating (Relative to S&P 500) Short Interest (Relative to S&P 500) ETF Fund Flows Price/10-Yr EPS (Relative to S&P 500)Sector Comparative 56
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comTrailing One-Month Relative Price Performance – Sectors Figure 73: Energy Figure 74: Materials Figure 75: Industrials Figure 76: Technology Recession Trailing 1-mos Relative Perf. MAVG past 12mos Recession Trailing 1-mos Relative Perf. MAVG past 12mos Recession Trailing 1-mos Relative Perf. MAVG past 12mos Recession Trailing 1-mos Relative Perf. MAVG past 12mos 20% 10% 10% 15% N from G U from N 7% N G 10% 5% 5% 5% 2% 0% 0% 0% -5% -5% -3% -5% -10% -15% -10% -8% -10% 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/05 12/06 12/07 12/08 12/09 12/10 12/11 Figure 77: Staples Figure 78: Health Care Figure 79: Telecom Figure 80: Utilities Recession Trailing 1-mos Relative Perf. MAVG past 12mos Recession Trailing 1-mos Relative Perf. MAVG past 12mos Recession Trailing 1-mos Relative Perf. MAVG past 12mos Recession Trailing 1-mos Relative Perf. MAVG past 12mos 10% 15% 15% U from N N N U 8% 10% 10% 5% 3% 5% 5% 0% -2% 0% 0% -5% -7% -5% -5% -10% -12% -10% -10% 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/05 12/06 12/07 12/08 12/09 12/10 12/11 Figure 81: Discretionary Figure 82: FinancialsRelative Price Performance: Recession Trailing 1-mos Relative Perf. MAVG past 12mos Recession Trailing 1-mos Relative Perf. MAVG past 12mos 10% 15%Trailing one-month price G 10% Gperformance of sector minus 5% 5%trailing one-month price 0%performance of S&P 500. 0% -5% -5% -10% -15% -10% 12/05 12/06 12/07 12/08 12/09 12/10 12/11 -20% 12/05 12/06 12/07 12/08 12/09 12/10 12/11 Source: J.P. Morgan and Datastream. 57
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comPrice vs. 50-Day Moving Avg – Sectors (best is low and rising) Figure 83: Energy Figure 84: Materials Figure 85: Industrials N from U Figure 86: Technology % of stocks above mavg G from N % of stocks above mavg N from U % of stocks above mavg % of stocks above mavg U 100% Caution 100% Caution 100% Caution 100% Zone Caution 90% Zone 90% 90% Zone 90% Zone 80% 80% 80% 80% 80% 70% 70% 70% 70% 60% 60% 60% 60% 57% 59% 50% 50% 50% 50% 40% 40% 40% 40% 30% 30% 30% 30% 20% 23% Buy 20% 20% 20% 10% Buy Buy Buy Zone 10% Zone 10% Zone 10% Zone 0% 0% 0% 0% 8/02 8/03 8/04 8/05 8/06 8/07 8/08 8/09 8/10 8/11 8/02 8/03 8/04 8/05 8/06 8/07 8/08 8/09 8/10 8/11 8/02 8/03 8/04 8/05 8/06 8/07 8/08 8/09 8/10 8/11 8/02 8/03 8/04 8/05 8/06 8/07 8/08 8/09 8/10 8/11 Figure 87: Staples U from N Figure 88: Health Care Figure 89: Telecom N from G Figure 90: Utilities N 100% Caution % of stocks above mavg 100% U % of stocks above mavg 100% % of stocks above mavg 100% % of stocks above mavg Zone Caution Caution Caution 90% 90% Zone 88% 90% Zone 90% Zone 86% 80% 80% 80% 80% 70% 70% 70% 70% 60% 60% 60% 60% 50% 50% 50% 50% 50% 40% 40% 40% 43% 40% 30% 30% 30% 30% 20% 20% 20% 20% Buy Buy Buy Buy 10% Zone 10% Zone 10% Zone 10% Zone 0% 0% 0% 0% 8/02 8/03 8/04 8/05 8/06 8/07 8/08 8/09 8/10 8/11 8/02 8/03 8/04 8/05 8/06 8/07 8/08 8/09 8/10 8/11 8/02 8/03 8/04 8/05 8/06 8/07 8/08 8/09 8/10 8/11 8/02 8/03 8/04 8/05 8/06 8/07 8/08 8/09 8/10 8/11 Figure 91: Discretionary Figure 92: Financials U UPrice Momentum: % of stocks above mavg % of stocks above mavg 100% Caution 100% Caution 90% Zone 90% Zone% of stocks in sector above 50-day 80% 78% 80% 84%moving average. 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% Buy 20% 10% Buy Zone 10% Zone 0% 0% 8/02 8/03 8/04 8/05 8/06 8/07 8/08 8/09 8/10 8/11 8/02 8/03 8/04 8/05 8/06 8/07 8/08 8/09 8/10 8/11 Source: J.P. Morgan and FactSet.58
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comMonthly Sales Revision – Sectors Figure 93: Energy Figure 94: Materials Figure 95: Industrials Figure 96: Technology 20.0% 6.0% 3.0% 6.0% 15.0% 4.0% 2.0% 4.0% 10.0% 1.0% 2.0% 2.0% 5.0% 0.0% 0.0% 0.0% 0.0% -2.0% -1.0% -5.0% -2.0% -2.0% -10.0% -4.0% -15.0% N: Mixed revisions -6.0% G: Consistently -3.0% G: Consistently -4.0% G: Upward revisions -20.0% -8.0% positive -4.0% positive -6.0% continue -25.0% -5.0% -10.0% -8.0% 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11 Figure 97: Staples Figure 98: Health Care Figure 99: Telecom Figure 100: Utilities 2.5% 6.0% 6.0% G: Consistently 4.5% 2.0% G: Consistently positive G: Positive revisions 5.0% G from N: Positive 3.5% recently 1.5% 4.0% 1.0% 4.0% Positive 2.5% 0.5% 3.0% 1.5% 2.0% 0.0% 2.0% 0.5% -0.5% -1.0% 1.0% 0.0% -0.5% -1.5% 0.0% -1.5% -2.0% -2.0% -1.0% -2.5% 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11Sales Revisions: Figure 101: Discretionary Figure 102: Financials 5.0% 15.0% N: Mixed revisions G: ConsistentlyChange in sales NTM (current vs. positive 10.0% 3.0%one month ago) divided by sector 5.0%sales (one month ago). 1.0% 0.0%Based on bottom-up consensus -1.0% -5.0%sales of current S&P 500 -3.0% -10.0%constituents. -5.0% -15.0% 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11 Source: J.P. Morgan and Datastream. Change in Sales (NTM) as compared to one month ago divided by total sales of the sector. 59
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comRelative Sales Growth (vs. S&P 500) – Sectors (best if tail is rising) Figure 103: Energy Figure 104: Materials Figure 105: Industrials Figure 106: Technology 40% 12% 8% 10% N: Trend turning 9% 30% G: Positive 8% 5.7% G: Improving growth 5.3% positive 8% 20% growth 4% 4% 7% 0% 6% 6.0% 10% 3.8% 0% 5% 0% -4% 4% -10% -8% 3% G: Positive -4% 2% -20% -12% 1% -30% -16% -8% 0% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13 Figure 107: Staples Figure 108: Health Care Figure 109: Telecom Figure 110: Utilities 12% 16% 30% 8% U: Negative N: Momentum turning 8% N 12% 20% positive 4% 4.1% 8% 4% 0% 3.2% 4% 10% 0% -4% 0% -0.4% 2.4% 0% -4% -4% -8% N: Improving -8% -12% momentum -8% -10% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13 Figure 111: Discretionary Figure 112: FinancialsRelative Sales Growth NTM: 4% 30% 3.4%Sales growth NTM of sector less 2% N: Outlook for 20% U: Negative consumer improvingsales growth NTM of S&P 500. 0% 10% -2% 0%Based on bottom-up results of -4%current S&P 500 constituents. -6% -10% -8% -20% -21.4%Historical data reflect actual -10% -30%growth. 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13 Source: J.P. Morgan and Datastream.Dashed line reflects First Callbottom-up consensus.Up or down trend of line is mostimportant indicator for determiningsector momentum.60
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comMonthly Earnings Revision – Sectors Figure 113: Energy Figure 114: Materials Figure 115: Industrials Figure 116: Technology 2.0% 1.5% 1.0% 0.8% 1.0% 1.0% 0.5% 0.4% 0.5% 0.0% 0.0% 0.0% -1.0% 0.0% -0.5% -0.5% -2.0% -1.0% -0.4% -1.5% -1.0% G -3.0% N: Mixed U G: Positive -2.0% -0.8% -4.0% revisions recently -2.5% -1.5% revisions recently -5.0% -3.0% -2.0% -1.2% 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11 Figure 117: Staples Figure 118: Health Care Figure 119: Telecom Figure 120: Utilities 0.3% 0.5% 1.2% 0.6% 0.2% 0.4% N 0.8% 0.4% 0.1% 0.3% 0.4% 0.2% 0.2% 0.0% 0.0% 0.0% 0.1% -0.4% -0.1% -0.2% 0.0% -0.8% -0.2% U -0.4% N -0.1% -1.2% N: Mixed -0.3% -0.2% -1.6% -0.6% revisions -0.4% -0.3% -2.0% -0.8% 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11Earnings Revisions: Figure 121: Discretionary Figure 122: Financials 1.0% 2.0%Change in net income NTM 0.5% 1.0%(current vs. one month ago) dividedby sector market cap. 0.0% 0.0%Based on bottom-up consensus net -0.5% -1.0%income of current S&P 500 N: Mixed N -1.0% -2.0%constituents. revisions -1.5% -3.0% 8/06 8/07 8/08 8/09 8/10 8/11 8/06 8/07 8/08 8/09 8/10 8/11 Source: J.P. Morgan and Datastream. Change in Net Income (NTM) as compared to one month ago divided by market cap. 61
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comRelative Earnings Momentum – Sectors (best if tail is rising) Figure 123: Energy Figure 124: Materials Figure 125: Industrials Figure 126: Technology 6% 6% 6% 8% 4% G: Positive G: In positive 6% 4% 4% 2% territory 4% 0.6% 2% 2% 0% 0.7% 2% -2% 0% 0.2% 0% 1.4% -4% 0% G: Positive -2% -2% -6% growth -2% -4% -4% G: Strong in -8% -4% near term -10% -6% -6% -6% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13 Figure 127: Staples Figure 128: Health Care Figure 129: Telecom Figure 130: Utilities 6% 6% 6% 6% 4% 4% 4% 4% 2% 2% 2% 2% 0% 0.3% 0% 0% 0.0% 0% -0.1% -0.3% -2% -2% -2% -2% N: Flat earnings N: Flat earnings N: Flat earnings G: Positive -4% momentum -4% -4% momentum -4% momentum -6% -6% -6% -6% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13Relative Earnings Momentum: Figure 131: Discretionary Figure 132: Financials 6% 15%Contribution of growth by sector to G: Positive 10% 4%S&P 500 EPS. Change in net 5%income (NTM vs. year ago) divided 2% 2.3%by S&P 500 net income. 0.5% 0% 0% -5%Based on bottom-up results of -2% N from G: Flat earnings -10%current S&P 500 constituents. momentum -4% -15%Historical data reflect actual -6% -20%growth. 7/07 6/08 5/09 4/10 3/11 2/12 1/13 7/07 6/08 5/09 4/10 3/11 2/12 1/13Dashed line reflects First Call Source: J.P. Morgan and Datastream. Area portion of the chart is actual relative earnings and the line is based on consensus NTM.bottom-up consensus.62
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comJULI Spreads (Relative to All Industries’ Averages) – Sectors (best is high and narrowing) Figure 133: Energy Figure 134: Materials Figure 135: Industrials Figure 136: Technology 250 250 G: Tightening 250 250 Widening Widening Widening G: Tightening Widening N N 150 150 150 150 50 50 50 50 (50) (50) (50) (50) Narrowing Narrowing Narrowing Narrowing (150) (150) (150) (150) (250) (250) (250) (250) 03 05 07 09 11 03 05 07 09 11 03 05 07 09 11 03 05 07 09 11 Energy Avg 1 STD Materials Avg 1 STD Industrials Avg 1 STD Technology Avg 1 STD Figure 137: Staples Figure 138: Health Care Figure 139: Telecom Figure 140: Utilities 250 250 250 Widening 250 N Widening N: Spreads stable N: Spreads stable Widening Widening 150 N 150 150 150 50 50 50 50 (50) (50) (50) (50) Narrowing Narrowing Narrowing (150) Narrowing (150) (150) (150) (250) (250) (250) (250) 03 05 07 09 11 03 05 07 09 11 03 05 07 09 11 03 05 07 09 11 HealthCare Avg 1 STD Staples Avg 1 STD Telecom Avg 1 STD Utilities Avg 1 STD Figure 141: Discretionary Figure 142: FinancialsRelative JULI Spreads: 250 Widening 250 WideningCalculated as spread of sector less N Gavg. spread of ten sectors. 150 150A figure above zero means sector 50 50has higher yields (relative). (50) (50) NarrowingWhen line is falling, it means (150) Narrowing (150)spreads are tightening on a relative (250)basis. (250) 03 05 07 09 11 03 05 07 09 11 Discretionary Avg 1 STD Financials Avg 1 STD Source: J.P. Morgan and Datastream. 63
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comFirst Call Mean Rating (Relative to S&P 500) – Sectors (best is low and rising) Figure 143: Energy Figure 144: Materials Figure 145: Industrials Figure 146: Technology Recession Avg Rel Rating LT Avg 1 Std Dev Recession Avg Rel Rating LT Avg 1 Std Dev Recession Avg Rel Rating LT Avg 1 Std Dev Recession Avg Rel Rating LT Avg 1 Std Dev More More More More (0.55) Liked (0.55) Liked (0.55) Liked (0.55) Liked N from G: Upgrades (0.30) (0.30) peaking (0.30) (0.30) (0.05) (0.05) (0.05) (0.05) 0.20 0.20 0.20 0.20 Less N from G: Upgrades LessN: Flat recently Less G Liked Less Liked Liked 0.45 flattening 0.45 Liked 0.45 0.45 6/97 8/99 10/0112/03 2/06 4/08 6/10 6/97 8/99 10/0112/03 2/06 4/08 6/10 6/97 8/99 10/0112/03 2/06 4/08 6/10 6/97 8/99 10/0112/03 2/06 4/08 6/10 Figure 147: Staples Figure 148: Health Care Figure 149: Telecom Figure 150: Utilities Recession Avg Rel Rating LT Avg 1 Std Dev Recession Avg Rel Rating LT Avg 1 Std Dev Recession Avg Rel Rating LT Avg 1 Std Dev Recession Avg Rel Rating LT Avg 1 Std Dev More More More More (0.55) Liked (0.55) Liked (0.55) Liked (0.55) Liked N: Downgraded too much N: Flat recently N: Flat recently (0.30) (0.30) (0.30) (0.30) (0.05) (0.05) (0.05) (0.05) 0.20 0.20 N:Less recently Flat 0.20 0.20 Less Liked Less Less Liked Liked Liked 0.45 0.45 0.45 0.45 6/97 8/99 10/0112/03 2/06 4/08 6/10 6/97 8/99 10/0112/03 2/06 4/08 6/10 6/97 8/99 10/0112/03 2/06 4/08 6/10 6/97 8/99 10/0112/03 2/06 4/08 6/10Relative FC Mean Rating: Figure 151: Discretionary Figure 152: Financials Recession Avg Rel Rating LT Avg 1 Std Dev Recession Avg Rel Rating LT Avg 1 Std DevBottom-up FC mean rating of More MoreStreet for sector less S&P 500 (0.55) Liked (0.55) Liked G: Upgrades recentlyoverall. (0.30) (0.30)Negative "relative" value meansStreet has more Buys on sector vs. (0.05) (0.05)S&P 500. 0.20 0.20When line is rising, it means Street Less N: Leveled off Less Liked Likedis upgrading…. 0.45 0.45 6/97 8/99 10/01 12/03 2/06 4/08 6/10 6/97 8/99 10/0112/03 2/06 4/08 6/10 Source: J.P. Morgan and FactSet.64
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comShort Interest (Relative to S&P 500) – Sectors (best is high and falling) Figure 153: Energy Figure 154: Materials Figure 155: Industrials Figure 156: Technology Energy LT Avg 1 Std Dev Materials LT Avg 1 Std Dev Industrials LT Avg 1 Std Dev Technology LT Avg 1 Std Dev N 1.5% -0.1% 0.4% 0.5% 1.0% -0.5% 0.5% -0.6% -0.1% N: Volatile recently G: High short 0.0% N: Volatile recently interest -0.6% -1.5% -0.5% -1.1% 12/02 12/04 12/06 12/08 12/10 12/02 12/04 12/06 12/08 12/10 12/02 12/04 12/06 12/08 12/10 12/02 12/04 12/06 12/08 12/10 Figure 157: Staples Figure 158: Health Care Figure 159: Telecom Figure 160: Utilities Staples LT Avg 1 Std Dev Health Care LT Avg 1 Std Dev Telecom LT Avg 1 Std Dev Utilities LT Avg 1 Std Dev 0.0% 1.0% -0.4% 0.4% -0.5% -0.6% 0.0% -0.9% G -1.0% G from N G: Declining N: In line with S&P 500 recently -1.5% -1.6% -1.0% -1.4% 12/02 12/04 12/06 12/08 12/10 12/02 12/04 12/06 12/08 12/10 12/02 12/04 12/06 12/08 12/10 12/02 12/04 12/06 12/08 12/10 Figure 161: Discretionary Figure 162: FinancialsRelative Short Interest: 3.0% N: Has declined Discretionary LT Avg 1 Std Dev Financials LT Avg 1 Std DevCalculated as sector short interest significantly N: Has declined(as % shares outstanding) less 1.3% significantlyaverage for S&P 500. 2.0%Calculated bi-weekly. 0.3% 1.0%At extremes, we see short interestas a useful potential contrarian -0.8% 0.0%indicator, i.e., if relative short 12/02 12/04 12/06 12/08 12/10 12/02 12/04 12/06 12/08 12/10interest is high, we see the sectoras vulnerable to any Source: J.P. Morgan and FactSet. Note: Calculated as shares sold short as % of shares outstanding in each sector minus shares sold short as % of shares outstanding for S&P 500.disappointments…. 65
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comETF Fund Flows – Sectors Figure 163: Energy Figure 164: Materials Figure 165: Industrials Figure 166: Technology $5,000 Energy $600 Materials $1,500 Industrials $1,200 G: Inflows recentlyTechnology $400 $1,000 $4,000 $1,000 $800 $3,000 N: Mixed flows $200 $600 $2,000 recently $0 $500 $400 -$200 $200 $1,000 $0 $0 -$400 $0 -$200 -$600 G: Inflows recently -$500 -$400 -$1,000 -$800 -$600 -$2,000 -$1,000 -$1,000 G: Inflows recently -$800 3/08 7/08 11/08 3/09 7/09 11/09 3/10 7/10 11/10 3/11 7/11 11/11 3/12 3/08 7/08 11/08 3/09 7/09 11/09 3/10 7/10 11/10 3/11 7/11 11/11 3/12 3/08 7/08 11/08 3/09 7/09 11/09 3/10 7/10 11/10 3/11 7/11 11/11 3/12 3/08 7/08 11/08 3/09 7/09 11/09 3/10 7/10 11/10 3/11 7/11 11/11 3/12 Figure 167: Staples Figure 168: HealthCare Figure 169: Telecom Figure 170: Utilities U from N: Outflows $1,500 Staples $800 HealthCare $150 Telecom $2,000 recently Utilities N: Mixed flows $600 $1,000 $100 $1,500 recently $400 $200 $500 $50 $1,000 $0 $0 -$200 $0 $500 -$400 -$500 -$50 $0 -$600 N: Mixed flows -$1,000 -$800 recently -$100 G from N: Inflows -$500 -$1,000 -$1,500 -$1,200 -$150 recently -$1,000 3/08 7/08 11/08 3/09 7/09 11/09 3/10 7/10 11/10 3/11 7/11 11/11 3/12 3/08 7/08 11/08 3/09 7/09 11/09 3/10 7/10 11/10 3/11 7/11 11/11 3/12 3/08 7/08 11/08 3/09 7/09 11/09 3/10 7/10 11/10 3/11 7/11 11/11 3/12 3/08 7/08 11/08 3/09 7/09 11/09 3/10 7/10 11/10 3/11 7/11 11/11 3/12ETF Fund Flows: Figure 171: Discretionary G Figure 172: Financials $1,000 Discretionary $7,000 FinancialsMonthly fund flows for five largest $800 $6,000ETFs (based on AUM) in each $600 $5,000 N: Mixed flows $400 $4,000sector. $200 $3,000 recently $2,000 $0 $1,000 -$200 $0 -$400 -$1,000 -$600 -$2,000 -$800 -$3,000 3/08 7/08 11/08 3/09 7/09 11/09 3/10 7/10 11/10 3/11 7/11 11/11 3/12 3/08 7/08 11/08 3/09 7/09 11/09 3/10 7/10 11/10 3/11 7/11 11/11 3/12 Source: J.P. Morgan and EPFR Global.66
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comRelative Price/10-Yr EPS (# std dev from long-term avg) – Sectors (best if low and rising) Figure 173: Energy Figure 174: Materials Figure 175: Industrials Figure 176: Technology Recession # Std Dev from LT Avg STD+1 STD-1 Recession # Std Dev from LT Avg STD+1 STD-1 Recession G: Attractive level STD+1 # Std Dev from LT Avg STD-1 Recession # Std Dev from LT Avg STD+1 STD-1 4.00 G: Attractive level 4.00 4.00 4.00 N: At long-term N: Has declined average… 2.00 2.00 significantly 2.00 2.00 0.00 0.00 0.00 0.00 -2.00 -2.00 -2.00 -2.00 -4.00 -4.00 -4.00 -4.00 84 88 92 96 00 04 08 12 84 88 92 96 00 04 08 12 84 88 92 96 00 04 08 12 84 88 92 96 00 04 08 12 Figure 177: Staples Figure 178: Health Care Figure 179: Telecom Figure 180: Utilities Recession # Std Dev from LT Avg STD+1 STD-1 Recession G: Below long- # Std Dev from LT Avg STD+1 STD-1 Recession # Std Dev from LT Avg STD+1 STD-1 Recession # Std Dev from LT Avg STD+1 STD-1 4.00 4.00 4.00 4.00 term average U: Coming off G extreme levels… 2.00 2.00 2.00 2.00 0.00 0.00 0.00 0.00 -2.00 -2.00 -2.00 N -2.00 -4.00 -4.00 -4.00 -4.00 84 88 92 96 00 04 08 12 84 88 92 96 00 04 08 12 84 88 92 96 00 04 08 12 84 88 92 96 00 04 08 12Relative P/10-Yr EPS # std dev Figure 181: Discretionary Figure 182: Financialsfrom long-term avg: Recession U: Expensive # Std Dev from LT Avg STD+1 STD-1 Recession # Std Dev from LT Avg STD+1 STD-1 4.00 4.00Relative P/10yr EPS calculated as G: Extreme lowsector P/10-yr EPS divided by S&P 2.00 2.00500 P/10-yr EPS. The line shown 0.00 0.00in charts is current value minuslong-term avg divided by long-term -2.00 -2.00standard deviation. -4.00 -4.00The lower the line, the greater the 84 88 92 96 00 04 08 12relative discount. 84 88 92 96 00 04 08 12 Source: J.P. Morgan and Datastream. 67
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comUS Equity Strategy Recent PublicationsUS Strategy Special ReportsGrowth Scares Emerge about China, Europe and US; Short-Term Headwinds, But Not SLIDES: See “Cyclical Summer” (S&P 500 rally led by Cyclicals) plus S&P 500 1475 byThesis Changers; 28 Ideas — 03/29/12 YE11 – 7/7/11Est. $670b Excess Cash on Balance Sheets, Apples $10b Dividend Only a Start; 28 Housing Food Chain: Part III: Six key metrics point to housing improving in mid-/late-Ideas — 03/27/12 2011. 18 ideas – 4/8/11Why are pullbacks so shallow? Stick with Financials and Cyclicals. 17 ideas. — 2011 Outlook: YE 2011 Target 1425; Raise 11E EPS to $94 from $91; Introduce 12E03/15/12 EPS of $102 – 12/10/10Circle of Life: Despite ST Headwinds, Upside to 1430 YE Target; Macro and History US Equity Strategy Slide Deck: July 2010 : 10 Reasons to remain long equities:Favor Industrals, Financials, Tech & Energy; 10 Ideas — 03/09/12 S&P 500 YE Target of 1300 – 7/15/10Mostly Positive Developments This Week, Including Taking Out 2011 Highs. But Watch Positive on Housing Food Chain: Homebuilders most attractive, but also MortgageTransports and Materials. 20 Ideas – 03/02/12 Insurers, Suppliers, Timber. 12 Ideas – 4/9/10Too Early to Fade on AAPL - A Cyclical Sector unto Itself and Still Underowned – 3PointsTV – Video02/24/12 (Click the links below for 3PointsTV and to view the required video, click on theInvestors Need to Get Cyclical. 42% of Funds UW Cyclicals. 21 Ideas – 02/17/12 “PLAYLIST” option in the video screen.)S&P 500 Always Had Outliers Like AAPL. Focus on Laggards Within Leaders. 24 Ideas Short term headwinds emerge into 2Q with China and oil — 03/30/12– 02/10/12 At least $670b in excess corp cash…see more divs — 03/23/124 More Considerations for a "Pause" - Use to Add Cyclicals/Financials; 20 Ideas –02/02/12 Bull enters its 4th year. Stick with Cyclicals/Financials. — 03/09/12Circle of Life: 6 Signs of a Healthy Market; History Shows Pause After 20% Good news this week but watch transports and materials – 03/02/12Rally...Expect Further Cyclical Rotation – 01/26/12 Too early to fade AAPL. A sector unto itself. – 02/24/12History Shows High Equity Risk Premiums = Strong Equity Gains Despite Weak GDP; Bullish fundamentals strengthening even as pause expected – 02/17/1230 Ideas – 01/19/12 AAPL is not unusual – outliers have driven S&P 500 – 02/10/124Q11 Preview: A Tough Earnings Season, But Some Positives; Raising FY11E to $98,FY12E Still $105; 9 Stock Ideas for 4Q EPS – 01/12/12 With pause anticipated, rotate into Cyclicals/Financials – 02/03/122012 to be year of "contrarian optimism" plus update on active mgr performance – Signs of a healthy market…but first a pause – 01/27/1201/6/12 Global risk on makes this different from 2011 – 01/20/1268
  • Thomas J Lee, CFA North America Equity Research (1-212) 622-6505 05 April 2012 thomas.lee@jpmorgan.comDerivatives & Delta One StrategyAdam RuddAC The J.P.Morgan Apple-Like Tech Basket(1-212) 272-1215adam.ch.rudd@jpmorgan.com Basket Methodology and Composition ACMarko Kolanovic The J.P. Morgan Apple-Like Tech Basket, JPUSALTB <Index> on Bloomberg,(1-212) 272-1438 comprises 15 US listed stocks highlighted in this note. The basket comprises stocksMarko.kolanovic@jpmorgan.com that are perceived to have qualitative characteristics that are similar to Apple. The basket is equally weighted, but with the constraint that no stock should require moreJ.P. Morgan Securities LLC than 10% of its average daily volume to be traded (based on a basket size of $50 million). The sector and capitalization breakdown and the current composition of the basket are shown in the figures below. Figure 183: Sector and Capitalization Breakdown of the J.P. Morgan Apple-Like Tech Basket – JPUSALTB <Index>, as of April 3, 2012(close). Retail, 7% Media, 14% Tech, 59%Basket DetailsBloomberg Ticker JPUSALTB<Index> Industrials,Benchmark SPX Index 20%Number of Components 15Weighting Scheme Equally weightedSource: J.P. Morgan.Bloomberg subscribers can use theticker JPUSALTB to accesstracking information on a basketcreated by the J.P. Morgan Delta Market Cap > Market Cap <One desk to leverage the theme $30bn, 42% $10bn, 37%discussed in this report. Over time,the performance of JPUSALTBcould diverge from returns quotedin this report, because ofdifferences in methodology. J.P.Morgan Research does not provideresearch coverage of this basketand investors should not expectcontinuous analysis or additional Market Capreports relating to it. For $10bn-$30bn,information on JPUSALTB, please 21%contact your J.P. Morgansalesperson or the Delta One Source: J.P. Morgan Derivatives & Delta One Strategy, S&P, Bloomberg.Desk. 69
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comFigure 184: Composition of the J.P. Morgan Apple-Like Tech Basket – JPUSALTB <Index>, as of April 3, 2012 (close) Ticker Name Sector Analyst Wgt(% ) Mkt. Cap ($Bn) ADV ($M) QCOM US Qualcomm Technology Rod Hall 7% 114.0 773.3 AMZN US Amazon Retail Doug Anmuth 7% 88.3 1,023.7 CMCSA US Comcast Media Phil Cusick 7% 79.0 342.3 DIS US Walt Disney Co Media Alexia Quadrani 7% 76.9 372.4 VMW US Vmware Inc-Class A Technology John DiFucci 7% 47.7 153.1 ACN US Accenture Industrial Goods & Services Tien-Tsin Huang 7% 45.4 227.4 BRCM US Broadcom Technology Harlan Sur 7% 20.5 310.0 INTU US Intuit Technology Sterling Auty 7% 17.5 118.2 NTAP US Netapp Technology Mark Moskowitz 7% 16.2 271.5 LNKD US Linkedin Industrial Goods & Services Doug Anmuth 7% 9.8 372.8 TIBX US Tibco Software Inc Technology John DiFucci 7% 5.2 92.1 CREE US Cree Technology Chris Blansett 7% 3.4 77.7 TRMB US Trimble Navigation Industrial Goods & Services Paul Coster 6% 6.7 31.5 QLIK US Qlik Technologies Inc Technology John DiFucci 6% 2.7 33.6 ANSS US Ansys Technology Sterling Auty 4% 6.0 21.4 Source: J.P. Morgan Derivatives & Delta One Strategy, Bloomberg. Basket Performance The following charts show the hypothetical price performance of the J.P. Morgan US Apple-Like Tech Basket over the last year. The realized volatility, beta and correlation of this basket vs. that of the S&P 500 Index are also shown in the charts below. The J.P. Morgan US Apple-Like Tech Basket would have returned ~7.6% compared to a ~8.6% return for the S&P 500 index and ~83% return for Apple. The basket would have had a beta of ~1.2, and a ~90% correlation to S&P 500 index. The recent 3M realized volatility of the basket would have been ~17.2%, compared to ~9.5% for the S&P 500 index and ~25.5% for Apple. The basket price returns are also ~+62% correlated with daily changes in Apple. The beta of basket daily returns with daily changes in Apple is ~0.69. Figure 185: Price Performance of the J.P. Morgan US Apple-like Tech Figure 186: Daily Returns of the J.P. Morgan US Apple-like Tech Basket and S&P 500 Index (over the past year) Basket vs. Daily changes in the S&P 500 Index 8% 110 Apple-Like Tech Basket S&P 500 6% y = 1.18x 105 R² = 81% 4% Basket Daily Returrn 100 2% 95 0% 90 -2% 85 -4% 80 -6% -8% 75 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 -10% -10% -5% 0% 5% 10% Source: J.P. Morgan Derivatives & Delta One Strategy, Bloomberg. Note: All price performance S&P 500 Daily Return excludes commissions and fees. Past Performance is not indicative of future returns. Source: J.P. Morgan Derivatives & Delta One Strategy, Bloomberg. Note: All price performance excludes commissions and fees. Past Performance is not indicative of future returns.70
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Figure 187: 3M Realized Volatility of the J.P. Morgan US Apple-Like Figure 188: Dividend Yield of the J.P. Morgan US Apple-Like Tech Tech Basket vs. S&P 500 Index Basket vs. S&P 500 Index 50% Apple-Like Tech Basket 3-month volatility 3.0% Apple-Like Tech Basket dividend yield 45% S&P 500 dividend yield S&P 500 3-month volatility 40% 2.5% 35% 30% 2.0% 25% 1.5% 20% 15% 1.0% 10% 0.5% 5% 0% 0.0% Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Source: J.P. Morgan Derivatives & Delta One Strategy, Bloomberg. Note: All price performance Source: J.P. Morgan Derivatives & Delta One Strategy, Bloomberg. Note: All price performance excludes commissions and fees. Past Performance is not indicative of future returns. excludes commissions and fees. Past Performance is not indicative of future returns. 71
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.com Additional Basket Methodology In order to keep the basket relevant to the investment theme, J.P. Morgan reserves the right to review the following at any time:  Basket methodology. This is to ensure the rules of the basket remain relevant following any structural changes to the theme. This may include ensuring that the sector exposure of the basket remains broadly consistent with the investment theme.  Basket change implementation. J.P. Morgan will consider extending the implementation of changes to the basket composition from one trading session to any period up to five trading sessions in the event that a material increase in the liquidity or capacity of the basket is required to minimize market impact. Corporate actions may affect the J.P. Morgan US Rising Treasury Yield Basket. The composition of a custom basket is typically adjusted in the following manner: Cash Merger. The divisor is adjusted, and we remove the merging company from the basket on the day of merger and redistribute gains into remaining companies according to recalculated market cap weights of surviving constituents in the basket. Stock Merger. If the acquirer is a member of the basket, then the weight allocated to the acquired will transfer to the surviving entity on the close of the last day it trades. If the acquirer is not a part of the basket, then proceeds (losses) from the acquired company will be redistributed to the surviving basket constituents based on the recalculated weighting on the close of its last trading day. Spinoffs. The spinoff company and parent will be included in the basket, and both the spinoff and parent company weights will be readjusted according to new market capitalizations after the spinoff date. Tender Offers and Share Buybacks. The company remains in the basket and its weight is adjusted according to the impact the tender/buyback has on the stock’s market value. Delisting/Insolvency/Bankruptcy. The company is removed from the basket as of the close of the last trading day, and the proceeds (losses) will be redistributed into remaining companies according to re-calculated weights of remaining companies in the basket. If a stock trades on “pink sheets” it will not be included in the basket.72
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comCompanies Recommended in This Report (all prices in this report as of market close on 04 April 2012)ANSYS, Inc. (ANSS/$64.41/Neutral), Accenture plc (ACN/$64.44/Overweight), Amazon.com(AMZN/$193.99/Overweight), Broadcom Corporation (BRCM/$37.54/Overweight), Comcast(CMCSA/$29.32/Overweight), Cree (CREE/$29.56/Overweight), Disney (DIS/$42.93/Overweight), Intuit(INTU/$59.38/Overweight), LinkedIn Corp (LNKD/$99.38/Overweight), NetApp (NTAP/$44.71/Overweight),QUALCOMM (QCOM/$67.39/Overweight), Qlik Technologies Inc. (QLIK/$31.66/Overweight), TIBCO Software Inc(TIBX/$31.45/Overweight), Trimble Navigation (TRMB/$54.08/Overweight), VMware (VMW/$112.97/Neutral)DisclosuresThis report is a product of the research departments Global Equity Derivatives and Delta One Strategy group. Views expressed may differfrom the views of the research analysts covering stocks or sectors mentioned in this report. Structured securities, options, futures andother derivatives are complex instruments, may involve a high degree of risk, and may be appropriate investments only for sophisticatedinvestors who are capable of understanding and assuming the risks involved. Because of the importance of tax considerations to manyoption transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome ofcontemplated option transactions.Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple researchanalysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the documentindividually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the viewsexpressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part ofany of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or viewsexpressed by the research analyst(s) in this report.Important DisclosuresCompany-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailingresearch.disclosure.inquiries@jpmorgan.com with your request.Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform theaverage total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months,we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverageuniverse.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocksin the analysts (or the analysts teams) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, eachstock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe canbe found on J.P. Morgan’s research website, www.morganmarkets.com.J.P. Morgan Equity Research Ratings Distribution, as of April 3, 2012 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 45% 43% 12% IB clients* 51% 45% 34% JPMS Equity Research Coverage 43% 48% 9% IB clients* 70% 61% 53%*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a holdrating category; and our Underweight rating falls into a sell rating category.Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for coveredcompanies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analystor your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com.Equity Analysts Compensation: The equity research analysts responsible for the preparation of this report receive compensation basedupon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues,which include revenues from, among other business units, Institutional Equities and Investment Banking. 73
  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.comOther DisclosuresJ.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketingname for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.Options related research: If the information contained herein regards options related research, such information is available only to persons who havereceived the proper option risk disclosure documents. For a copy of the Option Clearing Corporations Characteristics and Risks of Standardized Options,please contact your J.P. Morgan Representative or visit the OCCs website at http://www.optionsclearing.com/publications/risks/riskstoc.pdfLegal Entities DisclosuresU.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. 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  • Thomas J Lee, CFA North America Equity Research(1-212) 622-6505 05 April 2012thomas.lee@jpmorgan.compublic offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province orterritory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file aprospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively,pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. Theinformation contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored tothe needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under thelaws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securitiescommission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained hereinor the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regardedas professional clients as defined under the DFSA rules.General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co.or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative toJPMS and/or its affiliates and the analysts involvement with the issuer that is the subject of the research. All pricing is as of the close of market for thesecurities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to changewithout notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of anyfinancial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are notintended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its ownindependent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S.affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments orannouncements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P.Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise."Other Disclosures" last revised January 6, 2012.Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold orredistributed without the written consent of J.P. Morgan. #$J&098$#*P 75