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North America Equity Research

05 April 2012

Circle of Life
15 "Apples" not far from AAPL in TMT
Please join us for a conference call on Thursday, 4/5 at 12:00pm ET on “Finding the Next AAPL in TMT”. Joining us will be Mark Moskowitz, J.P. Morgan IT hardware analyst, Doug Anmuth, Internet analyst; Alexia Quadrani, Media analyst; and Paul Coster, Applied and Emerging Technologies analyst.. Dial-in details: 800-593-9988 (US); +1-312-470-7406 (outside US); Passcode: Strategy. Replay through 4/12: 888566-0438 (US); +203-369-3047 (outside US); Passcode: 4512. Replay available approximately one hour after the call ends. The S&P 500 has gained 12% YTD and reflects the favorable conditions at the start of the year (see “2012 to be year of ‘contrarian optimism’…” dated 1/6/12) given (i) a 60-yr high in equity risk premia; (ii) challenged active manager performance; and (iii) investors too defensive. The setup for 2Q is less favorable. After two back-to-back double-digit quarters, both investor positioning and economic momentum are at different reference points today (i) greater embracement of risk by investors; (ii) macro challenges are emerging such as China, European growth and gasoline. As a result, short-term risk/reward less asymmetrically favorable (particularly compared to the 1Q setup).  We still see more positives than negative and therefore remain overall constructive for FY2012 and see this year playing out similarly to 2009 (postfinancial crisis period) (see Figure 1). History actually argues that market momentum tends to persist after two double-digit quarters—79% of the time, the following quarter is positive (Figure 2) with Energy leading (Figure 3) most instances. Cyclicals tend to be mixed, and as we noted last week, we want to avoid "smoke-stack" groups right now.  Active managers are having a decent start to 2012 (Figure 6). Worse than 2011 (18% are missing by 250bp vs. 14% at this time last year) but below the seasonal trend of 20% by March. Last year, the real tracking error took place after September 2011. Growth managers are doing particularly well, with 25% beating by 250bp and only 15% missing, or a net positive diffusion of 10%.  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 (Figure 7) and as a result, investors are asking where the next Apple is. Plus, other 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).  We compiled the quantitative and qualitative characteristics of AAPL (Figure 12 and Figure 13). Among them are: (i) products that inspire a following; (ii) reputational excellence; (iii) lifestyle products that focus on what one can do with their services/products; (iv) culture of success; and (v) prodigious growth offset by (vi) attractive valuations and (vii) ability to return capital.

Portfolio Strategy Thomas J Lee, CFA
AC

(1-212) 622-6505 thomas.lee@jpmorgan.com

Daniel M McElligott
(1-212) 622-5598 daniel.m.mcelligott@jpmorgan.com

Katherine C Khor
(1-212) 622-0934 katherine.khor@jpmorgan.com J.P. Morgan Securities LLC

Mark Moskowitz
(1-415) 315-6704 mark.a.moskowitz@jpmorgan.com

Sterling Auty, CFA
(1-212) 622-6389 sterling.auty@jpmorgan.com

Alexia S. Quadrani
(1-212) 622-1896 alexia.quadrani@jpmorgan.com

Tien-tsin Huang, CFA
(1-212) 622-6632 tien-tsin.huang@jpmorgan.com

Philip Cusick, CFA
(1-212) 622-1444 philip.cusick@jpmorgan.com

John DiFucci
(1-212) 622-2341 john.s.difucci@jpmorgan.com

Rod Hall, CFA
(1-415) 315-6713 rod.b.hall@jpmorgan.com

Doug Anmuth
(1-212) 622-6571 douglas.anmuth@jpmorgan.com

Paul Coster, CFA
(1-212) 622-6425 paul.coster@jpmorgan.com

Christopher Blansett
(1-415) 315-6708 christopher.r.blansett@jpmorgan.com J.P. Morgan Securities LLC

See 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 that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.morganmarkets.com

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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.

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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.

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 1. US equities are in a secular bull market, in our view Notable Negatives 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. 5. Equity risk premia is still near 60-year highs and corporate
profits are at all-time highs.

4. US electoral outcome is still unclear 5. Global policy rates remain at emergency levels 6. Sovereign debt levels are high and will be for many years 7. US faces fiscal cliff in 2013 8. Brent crude oil prices surpassed 2011 highs and are going to
deliver a notable drag to many large countries (US, China, etc).

6. Global Central Banks are easing. 7. US corporates are sitting on a $3.7T mountain of cash and have
strong balance sheets and accelerating cash return in 2012.

8. Institutional investors are still underweight equities. 9. Both retail and institutional investor sentiment is still not
consistent with a secular bull market.

9. Investors continue to pull money out of equities--$300b since
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. Morgan

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

…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 +5Q +4Q +3Q
negative negative

-3% -14% 5% -6% -4% -3% 16% 12% 1897 -5% 23% 13% 1898 14% 22% 17% 1904 9% 29% 15% 11% 1914 1% 5% 4% 10% 14% 1921 -29% 10% 7% 5% 15% 10% 1928 -1% 11% 16% 13% 21% 1935 -2% 7% 19% 10% 1942 7% 4% 6% 12% 2% 11% 11% 1954 -3% 5% 0% 10% 11% 1958 -12% 14% 22% 1974
negative

-12% -8% 5% 13% 16% 1985 5% 5% 15% 15% 2009 0% 5% 10% 11% 12% 11%

2 consecutive double-digit quarters…

+2Q +1Q 0Q -1Q

2010 Current

Source: J.P. Morgan and Bloomberg

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 Buy Energy
1975 During 2 DoubleDigit Qtrs S&P 500 Abs Perf Cyclicals Materials Industrials Discretionary Technology Near-Cyclicals Energy Financials Defensives Staples HealthCare Telecom Utilities Cyclicals Near-Cyclicals Defensives -1% -9% -22% -4% 12% -5% -9% -2% -6% 2% 2% -1% -3% -1% 8% 11% -3% -1% 5% -9% 4% 12% 11% 6% -4% -4% -2% 6% -9% -14% -24% -16% 8% 6% -16% -1% 3% 0% 0% 3% -4% 0% -6% -10% 5% -10% 10% 3% -5% -2% 0% -2% -3% -1% 4% -2% -10% -5% -16% -19% 4% 3% -13% ?? ?? ?? ?? ?? ?? ?? -6% -3% 4% -9% -37% 19% 0% -4% -9% 21% -1% -8% 12% -7% 10% -3% -2% 7% ?? ?? 39% Following Qtr -12% 1986 During 2 DoubleDigit Qtrs 31% Following Qtr 5%

Buy Defensives
2009

Buy Cyclicals
2010 During 2 DoubleDigit Qtrs 32% Following Qtr 5%

Buy Energy
Current During 2 Following Qtr 5% DoubleDigit Qtrs 24% During 2 DoubleDigit Qtrs 22%

Cyclicals do badly…

Following Qtr ??

17% 14% 20% -3%

-1% -3% 0% -1%

11% 3% 14% -7%

-5% -6% 2% -9%

17% 10% -2% 7%

4% 0% 2% 6%

26% 5% 6% 2%

-1% 3% -3% -2%

1% 5% 2% 7%

?? ?? ?? ??

Source: J.P. Morgan, Bloomberg, and Datastream

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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) Missing % % Missing Missing by at least by at least 500bp 250bp 7% 6% 8% 7% 6% 5% 3% 5% 4% 9% 5% 11% 7% 20% 15% 26% 20% 19% 13% 13% 13% 15% 18% 15% 20% 18% Beating % Beating % Beating by at least by at least 250bp 500bp 11% 25% 16% 17% 15% 16% 19% 15% 18% 64% 17% 43% 24% 4% 9% 3% 6% 4% 7% 7% 5% 8% 55% 7% 29% 12%

Growth managers are doing better in 2012…

Benchmark Large Cap Russell 1000 Russell 1000 Growth Russell 1000 Value Large Cap Total Small & Mid Cap Russell Midcap Growth Russell 2000 Russell 2000 Growth Russell Midcap Value Russell 2000 Value Russell 3000 Small & Mid Cap Total MSCI / Other All Funds
Source: J.P. Morgan and Bloomberg

# of Funds 491 432 316 1,239 215 199 196 110 101 11 832 682 2,753

AUM ($b) $1,168 $861 $643 $2,672 $196 $191 $121 $118 $85 $14 $724 $608 $4,004

Value doing poorly…

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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)
% missing by 250b

Figure 6: 2012 month-by-month comparison (2012 vs. historical avg)
% missing by 250b

2011 50 45 40 35 30 25 20 15 10 5 0

Historical Avg

Problems after Oct ‘11
48

2012 40 35 30 25 20 15 10 5 0 7 13 18

Historical Avg

47 37 40

42

14 7

14

18

22

22

25

Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec
Source: J.P. Morgan and Bloomberg

Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec
Source: J.P. Morgan and Bloomberg

Similar to 2011…slightly worse…

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

18.2%

11.7% 7.9% 4.5% 4.0%

S&P 500

Russell 1000

Russell 1000 Growth

Nasdaq 100

Nasdaq Composite

Source: J.P. Morgan.

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 4080% of volume that the top 10 stocks represent in other indices.
Figure 8: Weighting of Largest Stock in Index by Market Cap
Weighting of Largest Stock in Index by Market Cap

Figure 9: Weighting of Largest 10 Stocks in Index by Volume
Weighting of Largest 10 Stocks in Index by Volume

Nestle ENI SpA 25% 21% Samsung Vale Total HSBC SA 14% 11% 10% 9% 7% 6% Fast Retailing PetroSiemens China HSBC

AAPL much smaller than other indices

83% 76% 64% 55% 54% 50% 41% 36% 29%

AAPL much smaller than other indices

16% 15%

Total SA Apple 6% 4%

21% 20% 11%

SMI (Switzerland)

FTSE MIB (Italy)

Nikkei 225 (Japan)

CAC (France)

BOVESPA (Brazil)

Hang Seng (Hong Kong)

Shanghai (China)

DAX (Germany)

FTSE 100 (UK)

KOSPI (Korea)

Euro Stoxx 50 (Europe)

S&P 500 (US)

SMI (Switzerland)

FTSEMIB (Italy)

DAX (Germany)

CAC (France)

Euro Stoxx 50 (Europe)

BOVESPA (Brazil) Hang Seng (Hong Kong)

FTSE 100 (UK)

Nikkei 225 (Japan)

Source: J.P. Morgan and Bloomberg.

Source: J.P. Morgan and Bloomberg.

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Shanghai (China)

KOSPI (Korea)

S&P 500 (US)

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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
Figure 10: Annual price performance of Apple (relative to S&P 500)
Annual change since IPO. % performance relative to S&P 500
AAPL Rel Price Perf LT Avg

returns as CEO

transformation…

Figure 11: AAPL and S&P 500 CAGR
AAPL and S&P 500 price perf CAGR

AAPL price 192% $1,000 130% 123%

S&P 500 CAGR 85% 75% Price Perf CAGR 65% 55% 45% 35% 25% 15% 5% -5% Since IPO
$1

AAPL CAGR

Post-IPO
165%

185% Controversial period (Sculley, transition) 8 of 15 yrs DOWN years.. 105% 69% LT Avg 34% 27%

79%

132%

AAPL YoY Rel Price Perf

120%

48%

Notable performance gap…
45%

115% 65% 20% 15% -35% -85% 18%

$100 60% 23% 4% -11% -55% -58% -52% -68% -61% 40% 43% 26% $10 -18%

AAPL price (log scale)

29% 5% 1% -17% -40%

19% 8% 2% 0% 5yr

21%

-25%

-36%

10yr

3yr

-51%

Source: J.P. Morgan, Bloomberg, and Datastream

Source: J.P. Morgan and Bloomberg

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 1/12

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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: Reputational excellence: Lifestyle products:

Products/services that inspire a following. Products are dependable. And meet customer expectations fully and beyond. 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” The golden circle of why, how, when. Motivating and growing employee This is not something other companies can replicate, but Moskowitz has extensively written about Apple's investment in the supply chain.

Culture of success: Supply chain management:

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.

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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
AAPL Growth Revenue Growth CAGR ('10-'12E) Earnings Growth CAGR ('10-'12E) Investment Valuation R&D Spend as a % of Sales 2013 P/E (Current) PEG (2012 P/E vs 2013 Growth) Cash as a % of Assets ('10-'11) Cash as a % of Market Cap ('10-'11) Ownership Current Institutional Ownership 57% 72% 2% 10.4x 0.8x 31% 9% 73% Tech 10% 13% 13% 12.3x 1.1x 31% 20% 88% S&P500 ex-Fins 9% 9% 6% 11.8x 1.2x 14% 12% 85% Comments 6X that of Technology Margin ex pansion delivers lev erage Less on R&D, focus on products Low P/E Discount to growth Conservative Due to price rise Low ownership by institutions

Source: J.P. Morgan and FactSet.

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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.

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Figure 14: Summary information of Next Apples
Qualitative and Quantitative metrics summary

Source: J.P. Morgan and FactSet

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 billions
Apple stock price since IPO. Log scale
$1,000

Early Apple

Middle Apple

Modern Apple
ACN $29.3B

AAPL price

$100

QCOM $15.9B TIBX $1.0B CREE $1.0B BRCM $7.4B ANSS $0.7B INTU $4.1B VMW $3.8B NTAP $6.0B TRMB $1.6B QLIK $0.3B LNKD $0.5B

DIS $40.9b AMZN $48.1b

CMCSA $55.8b

$10

$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 '11

Source: J.P. Morgan and FactSet

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 Apples

Source: J.P. Morgan and FactSet.

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 Apples

Source: J.P. Morgan and FactSet.

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Figure 18: Coverage List

NetApp — NTAP — Mark Moskowitz
Rating UW OW N UW UW N N UW

Ticker AAPL ARX BRCD DELL ELX EMC FIO HPQ IBM

Rating OW N UW OW UW OW N UW OW

Ticker LXK NTAP ORBK QLGC STEC STX WDC XRX

In IT Hardware, we highlight NetApp as another company developing its own unique legion of loyal customers and partners. The company continues to optimize enterprise storage environments in an elegant approach, one built upon a software-driven architecture. NetApp offers a singular operating system with a common dashboard of storage systems management features, which earn high marks from customers we speak to in the field. Overall, NetApp’s approach has resulted in a cleaner fit for its storage systems in server virtualization environments running on VMware. We believe that this dynamic has been an important reason behind NetApp’s major market share gains over the past three years, and it is similar to the common user interface attribute that has elevated Apple in mobile devices.

Source: J.P. Morgan.

Figure 19: Price Performance — NTAP
Trailing 1yr

Figure 20: Qualitative and Quantitative Summary — NTAP
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Source: 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
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North America Equity Research 05 April 2012

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.

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Amazon — AMZN —Doug Anmuth
Figure 21: Coverage List

Ticker Rating AMZN OW AWAY OW EBAY N EXPE UW GOOG GRPN LNKD NFLX OW N OW N

Ticker Rating P OW PCLN OW QNST N RATE N RLOC TRIP YHOO ZNGA OW N N N

(Best = 1, Worst = 5)  (i) Customer loyalty (Score = 1): Over the last 10+ years Amazon has done something we once thought was impossible online—win customer loyalty. The company’s focus on price, selection, and convenience has enabled it to cut through a very crowded physical retail and ecommerce space to earn repeat customers. Amazon is driven by strong fulfillment capabilities and an easy to navigate front-end site, and the Amazon Prime membership program encourages repeat purchasing. Amazon has also virtually created the eReader and eBook market with the Kindle.  (ii) Reputational excellence (Score = 2): Amazon has a strong reputation around shipping and fulfillment. Free Super Saver Shipping and Prime have helped Amazon differentiate versus other retailers. The company’s 3rd-party business featuring vetted and reliable sellers also accounts for ~35% of units. Amazon is also increasingly shifting this business into its own warehouses through Fulfillment by Amazon.

Source: J.P. Morgan

Figure 22: Price Performance — AMZN
Trailing 1yr

Figure 23: Qualitative and Quantitative Summary — AMZN
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg

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North America Equity Research 05 April 2012

 (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.

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 LinkedIn's 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
Trailing 1yr

Figure 25: Qualitative and Quantitative Summary — LNKD
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Disney — DIS — Alexia Quadrani
Figure 26: Coverage List

Ticker Rating DIS OW DISCA N GCI N HHS N IPG OW MNI N NYT N
Source: J.P. Morgan

Ticker Rating OMC OW SNI N SSP OW TWX OW VCI OW VIAb OW WPP.L N

These grades are relative to Disney’s peers (TWX, VIAB, CBS, etc): (Best = 1, Worst = 5)  (i) Customer loyalty (Score = 1): Theme parks (Walt Disney World and others around the world, Disneyland Shanghai in development), movies/characters (animated classics, Pixar), ESPN.  (ii) Reputational excellence (Score = 1): All three areas mentioned above are unrivaled  (iii) Lifestyle products (Score = 2): Not so much challenging the status quo, but clear leadership that has been maintained.  (iv) Culture of success (Score = 2): High level of creativity instilled in the business (Parks developers are known as Imagineers), Pixar is leader in animation, ESPN holds an ongoing dominance and is the highest valued cable network by far.  (v) Potential to accelerate cash return to shareholders (Score = 2): Company is working through a peak capex year in 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 28: Qualitative and Quantitative Summary — DIS
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Figure 27: Price Performance — DIS
Trailing 1yr

Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Figure 29: Coverage List

Comcast — CMCSA— Phil Cusick
(Best = 1, Worst = 5)  (i) Customer loyalty (Score = 2): Comcast has 22m video subscribers of which almost 11m take advanced services (such as HD or DVR service) and the company has 18m high speed internet subscribers, which is quickly becoming a necessity in the modern home. Comcast also owns 51% of NBCUniversal which has premium cable network, broadcast, film and theme park properties with a loyal following.  (ii) Reputational excellence (Score = 3): The company has an excellent service record and is continuously trying to improve its product and service offerings to its customers.  (iii) Lifestyle products (Score =3): Comcast has been innovative it trying to extend delivering entertainment services through various platforms and integrating its offerings into the everyday life of the consumer. The company’s Streampix offering could have a substantial impact on how subscribers consume media.

Ticker Rating AMT OW CCI N CHTR OW CLWR N CMCSA OW CTL OW CVC UW DISH N DTV OW FTR N LEAP OW
Source: J.P. Morgan

Ticker Rating NTLS OW PCS OW S N SBAC T N TDS N TWC N USM UW VZ N WIN N

Figure 30: Price Performance — CMCSA
Trailing 1yr

Figure 31: Qualitative and Quantitative Summary — CMCSA
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Source: J.P. Morgan and Bloomberg

Source: J.P. Morgan and Bloomberg

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

 (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.

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Figure 32: Coverage List (part 1)

Trimble — TRMB— Paul Coster
Searching for the Next Apple…. In Applied & Emerging Technologies, we highlight Trimble as a company developing some Apple-like characteristics, not least the potential for this electronic equipment company to post growth for many years to come. Trimble designs, manufactures and sells equipment that is used in engineering and construction, field agriculture, asset management and tracking, mining and exploration. The company is often equated with the GPS industry, however in recent years, a slew of hardware, software and service acquisitions re-positions the company as a full life-cycle IT-based solutions provider for the industry verticals that the company services. Trimble’s vision is to achieve the connected construction site, the connected farm, the connected mobile enterprise.. As an analogy, Trimble is beginning to do for engineering, mining, 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.
Figure 34: Qualitative and Quantitative Summary — TRMB
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Ticker Rating ACTG OW AVID OW COMV CSTR N CUB N DBD DGI DLB DTSI N OW OW N

Ticker Rating ELON N ELT OW ENOC N ESE N FLIR UW FN GEOY GRMN IRBT OW N UW UW

Source: J.P. Morgan

Figure 33: Price Performance — TRMB
Trailing 1yr

Source: J.P. Morgan and Bloomberg

Source: J.P. Morgan and Bloomberg

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Figure 35: Coverage List (part 2)

Ticker ITRI LOGI NCR NICE OVTI PLT RLD RMBS RPXC

Rating OW UW OW OW N N OW N OW

Ticker Rating SYNA N TASR N TNAV N TRMB OW TSYS N TTMI VRNT ZBRA ZIP N OW OW OW

Consider the Tekla acquisition, one of dozens of acquisitions that Trimble has made in the last few years. Tekla develops software products for use by architecture, engineering, construction, government and utilities customers, to design and construct large concrete and steel infrastructure projects and buildings, to manage workflow, assets, contractors and staff during the project and to commission the building or infrastructure for use. Combining this Tekla software with Trimble’s traditional GPS-based equipment used for precision control of machinery, or to manage the supply of concrete and other supplies to the project, in realtime, provides a holistic efficiency-oriented solution for industries that have typically been slow to adopt information technology. The company claims that its technology can improve efficiency by 30%, reduce fuel use and emissions by 30%. At the 2011 JPMorgan TMT conference, Trimble’s CEO, Steve Berglund, suggested that Trimble’s growth could endure for decades to come. Though we expect nothing less than supreme self-confidence from the typical CEO, we feel he makes a good case for Trimble to follow an Apple-like trajectory owing to the magnitude of the problems that the firm is trying to solve; megatrends relating to infrastructure, affluence and technology. In short, we live in an increasingly urbanized, over-populated, 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.

Source: J.P. Morgan

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North America Equity Research 05 April 2012

 (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.

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Qualcomm — QCOM— Rod Hall
Figure 36: Coverage List

Ticker Rating APKT N CIEN N CSCO OW FFIV N GLW UW INFN N JNPR N
Source: J.P. Morgan

Ticker Rating MITL N MMI N QCOM OW RIMM N RVBD OW TLAB UW

I would say that there is a huge amount of growth still go in smartphones and QCOM is very well tied to that. (Best = 1, Worst = 5)  (i) Customer Loyalty (Score = 5). Loyalty doesn't matter much for the royalty business where they make 2/3 of their earnings.  (ii) Reputational excellence (Score = 1). Very solid product reputation on chips, again doesn't matter for royalties  (iii) Lifestyle products (Score = 4).  (iv) Culture of success (Score = 2).  (v) Potential to accelerate cash return to shareholders (Score = 2). It spins off plenty of cash but thy still think of themselves as a growth company. Returns probably depend on intl cash repatriation.
Figure 38: Qualitative and Quantitative Summary — QCOM
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Figure 37: Price Performance — QCOM
Trailing 1yr

Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Figure 39: Coverage List

Accenture — ACN — Tien-Tsin Huang
(Best = 1, Worst = 5)  (i) Customer loyalty (Score = 1): ACN has strong relationship with its customers; the company wins a lot of contracts on sole-sourced basis (competitors are not even invited to bid). Many clients identify ACN as a partner, instead of as a vendor. More than 100 clients contribute $100M+ in annual revenue for the company.  (ii) Reputational excellence (Score = 2): The company’s one of the most diversified IT services firms offering a full suite of IT services including consulting, systems integration and outsourcing. The company also has a global delivery network of more than 160k spread across the world at various low cost locations. The biggest advantage to clients is the tight integration of various services and delivery locations.  (iii) Lifestyle products (Score = 3): Although not as much applicable given the nature of the business, ACN is nimble and early to identify the changing industry trends and offer solutions/services that their clients demand. The company built and expanded its offshore delivery network organically and has more employees at low cost locations than most offshore firms.
Figure 41: Qualitative and Quantitative Summary — ACN
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Ticker Rating ACN OW ADP N BR OW CSC UW CTSH OW EXLS OW FIS FISV FLT G GDOT N N OW OW OW

Ticker Rating GPN OW HPY N MA OW MGI N PAY OW PAYX UW V WNS WU WXS OW UW OW N

Source: J.P. Morgan

Figure 40: Price Performance — ACN
Trailing 1yr

Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg

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North America Equity Research 05 April 2012

 (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.

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Broadcom — BRCM— Harlan Sur
Figure 42: Coverage List

(Best = 1, Worst = 5)  (i) Customer loyalty (Score = 1): Broadcom is the number one supplier in enteprise networking, broadband, and mobile connectivity semiconductors. Their leadership in digital signal processing, mixed signal/ feature/functionality integration, and best-in-class performance has driven their success in the markets in which they compete. Their tier-1 customer base (Apple, Cisco, and Samsung for example) is a reflection of their success. Apple, for example, uses Broadcom silicon in every product they sell (iPad, iPhone, macbook air, etc) and is a reflection of the loyalty and long-standing relationship that Broadcom has fostered over the past decade with Apple.  (ii) Reputational excellence (Score = 1): Similar to (i), their market segment leadership and tier-1 customer base which includes some of the most demanding customers (Apple and Samsung) is a reflection of Broadcom’s ability to execute, its 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 44: Qualitative and Quantitative Summary — BRCM
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Ticker Rating BRCM OW CAVM OW ENTR N FSL OW IMI OW LSI N MLNX N
Source: J.P. Morgan

Ticker Rating MRVL OW MU N NVDA N NXPI N PMCS N SNDK N

Figure 43: Price Performance — BRCM
Trailing 1yr

Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg

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North America Equity Research 05 April 2012

 (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…..

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

VMware — VMW — John DiFucci
Figure 45: Coverage List

Ticker Rating AVG OW BMC N CA OW CARB OW CRM N CTXS LOGM MSFT ORCL UW OW N OW

Ticker Rating PRO N QLIK OW QSFT OW RHT UW SWI OW SYMC TIBX TLEO VMW OW OW N N

 (i) Customer Loyalty (Score = 1): The leading server virtualization vendor in the world with maintenance renewal rates of 95% or more.  (ii) Reputational Excellence (Score = 1): VMware is writing the definition of what virtualization is and what it can mean going forward.  (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 contribute to a “green” environment.  (iv) Culture of Success (Score = 2): VMware is expanding its offerings from core server virtualization, to systems management, application development, and end-user virtualization.  (v) Potential to accelerate cash return to shareholders (Score = 2): VMware is growing significantly, and is spending in 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 47: Qualitative and Quantitative Summary — VMW
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Source: J.P. Morgan

Figure 46: Price Performance — VMW
Trailing 1yr

Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg

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North America Equity Research 05 April 2012

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
Trailing 1yr

Figure 49: Qualitative and Quantitative Summary — TIBX
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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
Trailing 1yr

Figure 51: Qualitative and Quantitative Summary — QLIK
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg

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Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

ANSYS — ANSS — Sterling Auty
Figure 52: Coverage List
Ticker ADSK ADVS AKAM ANSS AZPN BLKB C DNS CHKP CMVT Rtg OW UW N N OW N OW N N Ticker CSGS DOX EQIX FTNT GWRE IMPV INTU MOTR NSR Rtg N N OW N OW OW OW N N Ticker PMTC ROVI SNPS SSNC VRSN WBSN Rtg OW OW OW N UW

(Best = 1, Worst = 5)  (i) Customer Loyalty (Score = 1): In the design engineering field there are dedicated simulation engineers that live and breathe this technology. Making it easier, this is starting to expand out to the basic design engineer.  (ii) Reputational Excellence (Score = 1): When Japan went through the tragedy last year, there was an increase in demand for Ansys solutions to simulate outcomes and what could happen in other regions to reactors with various natural and unnatural events.  (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 the design.

WWWW OW

Source: J.P. Morgan

Figure 53: Price Performance — ANSS
Trailing 1yr

Figure 54: Qualitative and Quantitative Summary — ANSS
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg

38

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

 (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 (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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
Trailing 1yr

Figure 56: Qualitative and Quantitative Summary — INTU
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg

40

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Cree — CREE — Chris Blansett
Figure 57: Coverage List

Ticker Rating AMAT N BWEN N CREE OW FSLR UW KLAC N LRCX N NVLS N
Source: J.P. Morgan

Ticker Rating PLAB N RBCN OW SPWR UW VECO OW WFR UW

One of the things that separates Cree and most of the companies under coverage from Apple is the dependency on B2B sales. Even though we believe Cree could have a multi-year positive outlook, the lack of direct sales to consumers and the general diversification of product requirements for LED and LED based lighting applications means its unlikely to be a big winner in all of them. 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. (Best = 1, Worst = 5)  (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 (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Figure 58: Price Performance — CREE
Trailing 1yr

Figure 59: Qualitative and Quantitative Summary — CREE
Full moon indicates more like AAPL; Empty moon indicates less like AAPL

Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg

42

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Circle of Life Metrics show slightly slower momentum
Figure 61: % Change Since 3/9/12
Financials Technology Health Care Staples Discretionary S&P 500 Industrials Materials Utilities Telecom Energy 5.5% 4.1% 3.3% 2.4% 2.3% 2.3% 1.4% 0.6% 0.1% -0.8% -3.1% -8%
Source: FactSet.

Our subjective ranking of the 10 economic sectors based on fundamentals, credit profile, valuation, investor flow, and analyst ratings is below. The net change column on the right of the table shows the accumulated delta compared to the last Circle of Life publication for each of the 10 sectors, and the net change row at the bottom shows the accumulated delta for each of the metrics.  Overall, our Circle of Life metrics showed slowing momentum this month, with a net -3 decline overall for the ten sectors based on our ranking system. The main driver of the weakening was price performance, however, rather than any of the fundamental criteria such as sales or earnings revisions, suggesting that the weaker momentum is likely a short-term impact.
Figure 60: Overall Subjective Ranking of Ten Economic Sectors
Fundamental, Technical, and Sentiment Metrics (Relative to S&P 500)

-3%

2%

7%

Sectors
Industrials Technology Energy M aterials HealthCare Discretionary Financials Telecom Staples

Strategy Rating
OW OW OW OW OW OW OW N UW UW

Price Perf

Price/50d mav g

Sales Rev ision

Sales Momentum

Earnings Rev ision

Earnings Momentum

JULI Spreads

FC Mean Rating

Short Interest

ETF Fund Flow s

P/10Yr EPS

Composite Net Score Change G from N G N from G N N N N N N N N -3 -2 -1 -1 -1 -1 +2 +1

N G

N from U  U

G G N G G from N  G N G G G G +1 G

N G G G U N U N N N N

G G N U N N N U N N N

G G G G G G N from G  N N N G -1

N N G G N N G N N N N

N G N from G  N from G  N N G N N N N -2

G N N N G from N  N N G G N N +1 N

G G N G N G N G from N  N U from N  N

G N G N G U G N G U N

N from G  G from N  U from N  N from U  N G G N U U U N from G 

U from N  U from N  U N -3 N from G  -1 N N from U  +1 U +2

Reading the Table The overall rankings, as shown earlier, should be viewed as a “conviction” measure, separate but generally consistent with our “Strategy ratings.”

Utilities 10 Sectors 10 Sectors Cyclicals Cyclicals Defensives Defensives Near-Cyclicals Near-Cyclicals

G

N

G

N

N from G  -1

G

N

N +0

U from N  U from N  -1 G -1 -2 N from U  +1

G +1 N

N

N

N

N

N

G +1

N

N

N -1

N

N

G -1

G

G -1

N

N

G

N -2

Source: J.P. Morgan. G=Good, N=Neutral, U=Unattractive.

43

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Below is a timeline for the change in the 11 metrics followed by our Circle of Life model, broken down by Cyclicals, NearCyclicals, and Defensives.

Figure 62: Circle of Life Metrics Monthly Changes – Cyclicals, Near-Cyclicals, and Defensives
Cyclicals: Materials, Industrials, Discretionary, & Tech 4/11 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 Composite Score
Source: J.P. Morgan.

Near-Cyclicals: Energy & Financials 4/11 5/11 +1 6/11 -1 +1 10/11 -1 1/12 +1 -1 -1 -1 3/12 +2 -1 4/12 -1 +1 -1

Defensives: Staples, HealthCare, Telecom, & Utilitiees 4/11 +4 +1 +1 -1 +1 -1 +1 +1 -1 +1 -1 +2 -1 -1 -1 +1 +1 +1 -1 +1 -6 0.3 0.2 -4 0.1 -1 0.1 -2 -2 5/11 6/11 +2 +1 +1 10/11 1/12 -3 -1 -1 3/12 4/12 -1 -2 +1

5/11 -2

6/11 -1 +4

10/11 +1 -3

1/12 -2

3/12 -2

4/12 +2

-1 +2

-3

+1

+2

-1

-1

+1 -1

+1

+1

-1 -1 -1 -1

+3

-3 +1 -1

+1

-1

-1

+1

+1

+1

-1 +1 +1 -2 +1 +1 -2 0.4 0.4 +2 0.5 +1 0.6 -3 0.5 -2 0.4 -1 0.3 +3 0.4 -2 0.3 +6 0.2 +5 0.3 +3 0.3 +2 +1 -1 -2

-1

-1 +1 0.6 -3 0.5 0.5 +2 0.6

+1 -4 0.4

44

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Circle of Life Metrics Monthly Changes
Figure 63: Circle of Life Metrics Monthly Changes – Sectors
Materials 6/11 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 Composite Score 1 0.7 -1 0.6    -1 0.4 0 0.4 -1 0.3 -1 0.6
Staples 1/12   3/12  4/12 6/11  10/11 1/12  3/12 4/12  

Industrials 10/11  1/12  3/12 4/12   6/11    10/11 1/12   3/12   4/12

Discretionary 6/11  10/11    1/12 3/12 4/12

Technology 6/11  10/11   1/12  3/12   4/12

Energy 6/11 10/11  1/12 3/12    4/12  

 

 

  

 

  

0 0.6

0 0.6

-2 0.5

1 0.5

0 0.3

1 0.4

-1 0.3

-1 0.2

0 0.2

0 0.5
Telecom

2 0.6

-2 0.5

1 0.5

0 0.5

-1 0.7
Utilities

-1 0.6

-1 0.5

0 0.5

-1 0.5

Financials 6/11 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 Composite Score -2 0.3 -1 0.2 0 0.0 3 0.3 -1 0.2           10/11

HealthCare 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

       

     2 0.5 0 0.5 -1 0.4 

   -1 0.3 -2 0.1 1 0.5 -2 0.4

       

-2 0.1

-1 0.0

2 0.2

1 0.5

-1 0.5

-2 0.3

-1 0.2

0 0.2

-1 (0.2)

3 0.1

-1 0.0

-1 (0.1)

-1 (0.2)

Source: J.P. Morgan.

45

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Figure 64: Circle of Life
Subjective Based on JPM Strategy Views The Circle of Life: Macro The macro picture has been strong recently, with initial jobless claims continuing their downward trend to ~350k, ISM remaining steady above 50, and payrolls gaining momentum.

Peaking
Banks Tech Hardware & Equip Media Dvrsfed Financials Technology Financials Industrials Insurance Capital Goods Autos & Components Semiconductors & Equip Consumer Durables & Apparel

Later-stage Overweight

Early-stage Underweight

High Grade

Credit HG bond spreads have tightened to 191bp from vs. 219bp in late January. HY yields have risen slightly recently to 7.5%.

Discretionary

TIPS EM GDP Oil ISM Treasuries

Auto sales

Recovery
Equity The S&P 500 has risen 3.2% over the past month. Cyclicals have outperformed over the past month, rising by 2.7% vs. a 2.5% rise for Defensives and 1.7% rise for NearCyclicals…

CMBS ABX, ABS, CDOs HY/Lev Loans RMBS

US GDP Retail sales Jobs Dollar Housing Euro GDP HealthCare

Breaking Down
Materials Pharma Biotech & Life Sciences Utilities Staples Telecom Utilities Food & Staples Retailing Transportation

Agency MBS Munis

Retailing Software & Svcs

Energy

Consumer Svcs HH & Personal Products Materials

Early-stage Overweight

Real Estate Health Care Equip & Svcs

Food Beverage & Tobacco Energy Commercial & Prof Svcs Telecom Services

Later-stage Underweight

Bottoming
Source: J.P. Morgan estimates.

46

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Quarterly Price Performance
Figure 65: Sector Quarterly Price Performance
Shaded box highlights performance of sector, Bold/Italics highlights S&P 500 performance
Materials 1Q11 16% 8% 5% 5% 4% 4% 4% 3% 3% 2% 2% 2Q11 7% 5% 4% 3% 1% 0% -1% -1% -2% -5% -6% 3Q11 0% -5% -8% -9% -11% -13% -14% -21% -22% -23% -25% 4Q11 18% 16% 15% 12% 11% 10% 9% 9% 8% 7% 6% QTD 22% 21% 15% 12% 10% 10% 8% 4% 3% 1% -3% Industrials 1Q11 16% 8% 5% 5% 4% 4% 4% 3% 3% 2% 2% Staples 3Q11 0% -5% -8% -9% -11% -13% -14% -21% -22% -23% -25% 4Q11 18% 16% 15% 12% 11% 10% 9% 9% 8% 7% 6% QTD 22% 21% 15% 12% 10% 10% 8% 4% 3% 1% -3% 1Q11 16% 8% 5% 5% 4% 4% 4% 3% 3% 2% 2% 2Q11 7% 5% 4% 3% 1% 0% -1% -1% -2% -5% -6% 3Q11 0% -5% -8% -9% -11% -13% -14% -21% -22% -23% -25% 4Q11 18% 16% 15% 12% 11% 10% 9% 9% 8% 7% 6% QTD 22% 21% 15% 12% 10% 10% 8% 4% 3% 1% -3% 2Q11 7% 5% 4% 3% 1% 0% -1% -1% -2% -5% -6% 3Q11 0% -5% -8% -9% -11% -13% -14% -21% -22% -23% -25% 4Q11 18% 16% 15% 12% 11% 10% 9% 9% 8% 7% 6% QTD 22% 21% 15% 12% 10% 10% 8% 4% 3% 1% -3% Discretionary 1Q11 16% 8% 5% 5% 4% 4% 4% 3% 3% 2% 2% 2Q11 7% 5% 4% 3% 1% 0% -1% -1% -2% -5% -6% 3Q11 0% -5% -8% -9% -11% -13% -14% -21% -22% -23% -25% 4Q11 18% 16% 15% 12% 11% 10% 9% 9% 8% 7% 6% QTD 22% 21% 15% 12% 10% 10% 8% 4% 3% 1% -3% T echnology 1Q11 16% 8% 5% 5% 4% 4% 4% 3% 3% 2% 2% T elecom 3Q11 0% -5% -8% -9% -11% -13% -14% -21% -22% -23% -25% 4Q11 18% 16% 15% 12% 11% 10% 9% 9% 8% 7% 6% QTD 22% 21% 15% 12% 10% 10% 8% 4% 3% 1% -3% 1Q11 16% 8% 5% 5% 4% 4% 4% 3% 3% 2% 2% 2Q11 7% 5% 4% 3% 1% 0% -1% -1% -2% -5% -6% 3Q11 0% -5% -8% -9% -11% -13% -14% -21% -22% -23% -25% 4Q11 18% 16% 15% 12% 11% 10% 9% 9% 8% 7% 6% QTD 22% 21% 15% 12% 10% 10% 8% 4% 3% 1% -3% 2Q11 7% 5% 4% 3% 1% 0% -1% -1% -2% -5% -6% 3Q11 0% -5% -8% -9% -11% -13% -14% -21% -22% -23% -25% 4Q11 18% 16% 15% 12% 11% 10% 9% 9% 8% 7% 6% QTD 22% 21% 15% 12% 10% 10% 8% 4% 3% 1% -3% Energy 1Q11 16% 8% 5% 5% 4% 4% 4% 3% 3% 2% 2% Utilities 1Q11 16% 8% 5% 5% 4% 4% 4% 3% 3% 2% 2% 2Q11 7% 5% 4% 3% 1% 0% -1% -1% -2% -5% -6% 3Q11 0% -5% -8% -9% -11% -13% -14% -21% -22% -23% -25% 4Q11 18% 16% 15% 12% 11% 10% 9% 9% 8% 7% 6% QTD 22% 21% 15% 12% 10% 10% 8% 4% 3% 1% -3% 2Q11 7% 5% 4% 3% 1% 0% -1% -1% -2% -5% -6% 3Q11 0% -5% -8% -9% -11% -13% -14% -21% -22% -23% -25% 4Q11 18% 16% 15% 12% 11% 10% 9% 9% 8% 7% 6% QTD 22% 21% 15% 12% 10% 10% 8% 4% 3% 1% -3%

Financials 1Q11 16% 8% 5% 5% 4% 4% 4% 3% 3% 2% 2% 2Q11 7% 5% 4% 3% 1% 0% -1% -1% -2% -5% -6%

HealthCare 1Q11 16% 8% 5% 5% 4% 4% 4% 3% 3% 2% 2% 2Q11 7% 5% 4% 3% 1% 0% -1% -1% -2% -5% -6%

Source: J.P. Morgan and FactSet.

47

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 bestperforming 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 Name Bank of America Corp. AFLAC Inc. Validus Holdings Ltd. General Electric Co. Enterprise Products Partners L.P. ACE Ltd. International Business Machines Corp. General Dy namics Corp. Health Care REIT Inc. Annaly Capital Management Inc. Stock Ticker BAC AFL VR GE EPD ACE IBM GD HCN NLY OW OW OW OW OW OW OW OW OW OW JPM Rating Current as of 03/08/12 OW OW OW OW OW OW OW OW OW OW 3/08/12 $8.06 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 4/04/12 $9.20 $1,141 $1,006 $1,028 $1,037 $977 $1,027 $1,031 $1,009 $993 $975 Sub-Total S&P 500 Long: 10 Stocks for the 4th Year of Bull Mkt Trade vs. S&P 500
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.

Trade Initiated Date Price

$ Value

As of 04/04/2012 Date Price

$ Value

Profit (Loss) $ Chg % Chg $141 $6 $28 $37 ($23) $27 $31 $9 ($7) ($25) $224 $242 $224 ($18) 14.1% 0.6% 2.8% 3.7% -2.3% 2.7% 3.1% 0.9% -0.7% -2.5% 2.2% 2.4% 2.2% -0.2%

3/08/12 $44.76 3/08/12 $30.17 3/08/12 $19.03 3/08/12 $51.49 3/08/12 $71.49 3/08/12 $199.81 3/08/12 $72.01 3/08/12 $53.93 3/08/12 $16.15

4/04/12 $45.04 4/04/12 $31.01 4/04/12 $19.74 4/04/12 $50.28 4/04/12 $73.43 4/04/12 $206.05 4/04/12 $72.63 4/04/12 $53.55 4/04/12 $15.74

SP50

3/08/12 3/08/12

1,366

$10,000 $10,000

4/04/12 4/04/12

1,399

$10,242 $10,224

48

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 Name Citigroup Inc. Allstate Corp. Och-Ziff Capital Management Group LLC. Zions Bancorporation Prudential Financial Inc. Apollo Investment Corp. SL Green Realty Corp. Stock Ticker C ALL OZM ZION PRU AINV SLG N OW OW OW OW OW OW JPM Rating Current as of 01/26/12 OW OW OW OW OW OW OW 1/26/12 $30.38 1/26/12 $29.15 1/26/12 $9.90 1/26/12 $16.58 1/26/12 $55.59 1/26/12 $7.53 1/26/12 $73.82 $1,429 $1,429 $1,429 $1,429 $1,429 $1,429 $1,429 4/04/12 $35.04 4/04/12 $32.62 4/04/12 $9.65 4/04/12 $21.08 4/04/12 $62.82 4/04/12 $7.34 4/04/12 $75.35 $1,648 $1,599 $1,392 $1,816 $1,614 $1,393 $1,458 Sub-Total S&P 500 SP50 Long: 7 Financials Top Ideas from JPM Fundamental Analysts Trade vs. S&P 500
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.

Trade Initiated Date Price

$ Value

As of 04/04/2012 Date Price

$ Value

Profit (Loss) $ Chg % Chg $219 $170 ($36) $388 $186 ($36) $30 $920 $611 $920 $309 15.3% 11.9% -2.5% 27.1% 13.0% -2.5% 2.1% 9.2% 6.1% 9.2% 3.1%

1/26/12 1/26/12

1,318

$10,000 $10,000

4/04/12 4/04/12

1,399

$10,611 $10,920

49

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 Name Rubicon Technology Inc. RealD Inc. Office Depot Inc. Veeco Instruments Inc. ShoreTel Inc. Bank of America Corp. MGM Resorts International Pinnacle Entertainment Inc. Stray er Education Inc. Och-Ziff Capital Management Group LLC. OmniVision Technologies Inc. Verint Sy stems Inc. Orient Express Hotels Ltd. Investment Technology Group Inc. American Capital Ltd. DineEquity Inc. Gaylord Entertainment Co. Las Vegas Sands Corp. LogMeIn Inc. Aeroflex Holding Corp Monoty pe Imaging Holdings Inc. Cadence Design Systems Inc. ON Semiconductor Corp. Cardtronics Inc. Motricity Inc. KKR & Co. L.P. Stock Ticker RBCN RLD ODP VECO SHOR BAC MGM PNK STRA OZM OVTI VRNT OEH ITG ACAS DIN GET LVS LOGM ARX TYPE CDNS ONNN CATM MOTR KKR OW OW OW OW OW N OW OW OW OW OW N OW OW N OW OW OW OW N OW OW OW OW OW Current as of 10/20/11 OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW 10/20/11 $9.70 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 $385 4/04/12 $9.67 $383 $481 $592 $402 $379 $547 $521 $395 $399 $371 $457 $430 $491 $397 $490 $430 $569 $527 $383 $412 $443 $456 $490 $411 $303 $484 Sub-Total S&P 500 Long: 26 Cy clical Cocktail Stocks Trade vs. S&P 500 SP50 10/20/11 10/20/11 1,215 $10,000 $10,000 4/04/12 4/04/12 1,399 $11,510 $11,643 ($1) $97 $208 $17 ($6) $162 $136 $10 $15 ($13) $73 $45 $106 $12 $106 $45 $184 $142 ($1) $27 $59 $72 $105 $27 ($82) $100 $1,643 $1,510 $1,643 $132 -0.3% 25.1% 54.0% 4.5% -1.5% 42.2% 35.4% 2.7% 3.8% -3.5% 18.9% 11.7% 27.5% 3.2% 27.5% 11.8% 47.8% 36.9% -0.3% 7.1% 15.3% 18.7% 27.3% 7.0% -21.3% 25.9% 16.4% 15.1% 16.4% 1.3% 10/20/11 $10.10 10/20/11 $2.15 10/20/11 $26.04 10/20/11 10/20/11 $5.48 $6.47 4/04/12 $12.64 4/04/12 $3.31 4/04/12 $27.20 4/04/12 4/04/12 $5.40 $9.20 Trade Initiated Date Price $ Value As of 04/04/2012 Date Price $ Value Profit (Loss) $ Chg % Chg

10/20/11 $10.01 10/20/11 $11.25 10/20/11 $85.32 10/20/11 $10.00 10/20/11 $16.77 10/20/11 $27.50 10/20/11 $7.88 10/20/11 $11.06 10/20/11 $6.77 10/20/11 $43.24 10/20/11 $20.90 10/20/11 $41.76 10/20/11 $34.92 10/20/11 $10.19 10/20/11 $12.77 10/20/11 10/20/11 10/20/11 $9.91 $6.73 $1.78

4/04/12 $13.55 4/04/12 $11.55 4/04/12 $88.54 4/04/12 $9.65 4/04/12 $19.94 4/04/12 $30.72 4/04/12 $10.05 4/04/12 $11.41 4/04/12 $8.63 4/04/12 $48.33 4/04/12 $30.90 4/04/12 $57.17 4/04/12 $34.80 4/04/12 $10.91 4/04/12 $14.72 4/04/12 $11.76 4/04/12 4/04/12 $8.57 $1.40 4/04/12 $25.23 4/04/12 $14.73

10/20/11 $23.59 10/20/11 $11.70

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 (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 Name ManpowerGroup Nucor Corp. Alcoa Inc. Staples Inc. Royal Caribbean Cruises Ltd. CA Inc. Textron Inc. Jacobs Engineering Group Inc. Sy nopsy s Inc. Mohawk Industries Inc. Ingersoll-Rand Plc General Electric Co. Republic Serv ices Inc. Stock Ticker MAN NUE AA SPLS RCL CA TXT JEC SNPS MHK IR GE RSG Current OW OW OW OW N OW N OW OW N OW OW N as of 6/16/11 OW OW OW OW OW OW OW OW OW OW OW OW OW Trade Initiated Date Price $ Value $769 $769 $769 $769 $769 $769 $769 $769 $769 $769 $769 $769 $769 As of 04/04/2012 Date Price $ Value $676 $821 $510 $821 $640 $979 $1,012 $821 $941 $885 $727 $823 $773 Sub-Total S&P 500 Long: 13 Summer of Cyclicals Stocks Trade vs. S&P 500
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.

Profit (Loss) $ Chg ($93) $51 ($259) $52 ($129) $209 $243 $52 $172 $115 ($43) $54 $4 $429 $1,036 $429 ($607) % Chg -12.1% 6.7% -33.7% 6.8% -16.8% 27.2% 31.6% 6.8% 22.3% 15.0% -5.5% 7.0% 0.5% 4.3% 10.4% 4.3% -6.1%

6/16/11 $52.60 6/16/11 $39.46 6/16/11 $14.79 6/16/11 $15.05 6/16/11 $33.70 6/16/11 $21.35 6/16/11 $21.57 6/16/11 $41.14 6/16/11 $24.91 6/16/11 $57.91 6/16/11 $43.63 6/16/11 $18.44 6/16/11 $30.29

4/04/12 $46.21 4/04/12 $42.10 4/04/12 $9.81 4/04/12 $16.07 4/04/12 $28.03 4/04/12 $27.16 4/04/12 $28.38 4/04/12 $43.93 4/04/12 $30.47 4/04/12 $66.60 4/04/12 $41.21 4/04/12 $19.74 4/04/12 $30.45

SP50

6/16/11 6/16/11

1,268

$10,000 $10,000

4/04/12 4/04/12

1,399

$11,036 $10,429

52

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 Name Dendreon Corp. United Therapeutics Corp. Allscripts Healthcare Solutions Inc. Pfizer Inc. Mylan Inc. McKesson Corp. Ex press Scripts Holding Co Life Technologies Corp. Cigna Corporation Accretiv e Health Inc. Covidien PLC Gilead Sciences Inc. St. Jude Medical Inc. WellPoint Inc. Illumina Inc. Onyx Pharmaceuticals Inc. UnitedHealth Group Inc. Alkermes PLC Stock Ticker DNDN UTHR MDRX PFE MYL MCK ESRX LIFE CI AH COV GILD STJ WLP ILMN ONXX UNH ALKS OW N N OW OW OW OW OW OW OW OW OW OW OW OW JPM Rating Current as of 5/12/11 OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW 5/12/11 $37.80 5/12/11 $67.40 5/12/11 $20.31 5/12/11 $20.89 5/12/11 $24.09 5/12/11 $85.02 5/12/11 $59.79 5/12/11 $56.35 5/12/11 $48.05 5/12/11 $26.36 5/12/11 $56.13 5/12/11 $41.29 5/12/11 $52.17 5/12/11 $80.00 5/12/11 $75.23 5/12/11 $43.60 5/12/11 $50.08 5/12/11 $17.02 $556 $556 $556 $556 $556 $556 $556 $556 $556 $556 $556 $556 $556 $556 $556 $556 $556 $556 4/04/12 $10.26 4/04/12 $45.23 4/04/12 $16.39 4/04/12 $22.39 4/04/12 $23.16 4/04/12 $87.89 4/04/12 $56.88 4/04/12 $47.51 4/04/12 $48.80 4/04/12 $20.02 4/04/12 $53.82 4/04/12 $47.19 4/04/12 $41.67 4/04/12 $72.12 4/04/12 $52.28 4/04/12 $39.28 4/04/12 $59.06 4/04/12 $18.47 $151 $373 $448 $595 $534 $574 $529 $468 $564 $422 $533 $635 $444 $501 $386 $501 $655 $603 Sub-Total S&P 500 Long: 18 HealthCare Top Ideas Trade vs. S&P 500 SP50 5/12/11 5/12/11 1,349 $10,000 $10,000 4/04/12 4/04/12 1,399 $10,373 $8,916 ($405) ($183) ($107) $40 ($21) $19 ($27) ($87) $9 ($134) ($23) $79 ($112) ($55) ($169) ($55) $100 $47 ($1,084) $373 ($1,084) ($1,457) -72.9% -32.9% -19.3% 7.2% -3.9% 3.4% -4.9% -15.7% 1.6% -24.1% -4.1% 14.3% -20.1% -9.8% -30.5% -9.9% 17.9% 8.5% -10.8% 3.7% -10.8% -14.6% Trade Initiated Date Price $ Value As of 04/04/2012 Date Price $ Value Profit (Loss) $ Chg % Chg

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 (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Figure 71: Circle of Life Trades Since Launch of Publication
Performance of trades
Publication Dates Pair Trade Re-Cap Long/Short Performance Short REL Perf vs S&P 500 Long REL Perf vs S&P 500 Sector rating changes

Trade Open 3/8/2012 -

Trade Close Open Open Open

Long Short Sector Long: 10 Stocks for 4th Year of Bull Market Long: 7 Financials Top Ideas Long: 26 Cyclical Cocktail Stock Ideas

Perf

+ or -

% chg 2.2% 9.2% 16.4%

Upgrade/ Downgrade

Sector

2.2% x +100.0% 9.2% x +100.0% 16.4% x +100.0%

-0.2% 3.1% 1.3% Upgrade Discretionary N ---> OW

1/26/2012 10/20/2011 12/9/2011 6/16/2011 5/12/2011 -

Open Open

Long: 13 Summer of Cy clicals Stocks Long: 18 HealthCare Top Ideas Long: 18 Stocks post-Oil spike Avoid: 6 Stocks post-Oil spike

4.3% x +100.0% -10.8% x +100.0% -4.8% x +100.0% -3.6% x -100.0%

4.3% -10.8% -4.8% 3.6% -13.4% -8.9% 15.7% 26.3% 3.7% -12.0% 4.2% 11.4% 5.8% 60.0%

-6.1% -14.6% -0.4% 8.0% -6.3% -17.6% 2.9% 3.7% -1.3% -7.8% 4.8% 3.3% 5.0% 39.6% Downgrade Energy OW ---> N Upgrade Energy N ---> OW Upgrade Downgrade HealthCare Discretionary N ---> OW OW ---> N

3/31/2011 - 6/16/2011

2/3/2011

- 10/20/2011

Long: 15 Street Momentum Ideas Long: 5 Energy Top Ideas Long: 25 Stocks Attractive on Circle of Life Metrics Long: 19 Stocks Correlated with Res. Constr. or Inv entory Long 25 Clobbered Stocks with FCF Yld > BY Long 25 Employment Demographics Stocks Long 23 Price Target Upgrade Stocks Long 24 Correction Stocks Long 19 Financials Stocks Long 25 Pro-Cyclical Stocks

-13.4% x +100.0% -8.9% x +100.0% 15.7% x +100.0% 26.3% x +100.0% 3.7% x +100.0% -12.0% x +100.0% 4.2% x +100.0% 11.4% x +100.0% 5.8% x +100.0% 60.0% x +100.0%

11/11/2010 - 1/26/2012 10/7/2010 2/3/2011

8/19/2010 - 1/26/2012 6/3/2010 - 10/7/2010

4/22/2010 - 10/7/2010 3/25/2010 - 10/7/2010 2/11/2010 - 3/25/2010 1/14/2010 - 10/7/2010 11/19/2009 - 1/26/2012

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 (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Figure 72: Circle of Life Trades Since Launch of Publication (Continued)
Performance of trades
Publication Dates Pair Trade Re-Cap Long/Short Performance Short REL Perf vs S&P 500 Long REL Perf vs S&P 500 Sector rating changes

Trade Open 12/11/2009

Trade Close

Long Short Sector

Perf

+ or -

% chg

Upgrade/ Downgrade Upgrade

Sector Health Care UW ---> N

10/22/2009 - 11/19/2009 9/18/2009 - 10/22/2009 8/5/2009 7/1/2009 6/25/2009 6/4/2009 7/1/2009 - 1/14/2010 8/5/2009

Long 25 High Debt Stocks Long 26 Cyclical Stocks for the Next Leg of the Recovery Long Top 15 Energy Stks (Composite Score) Long 15 Top Smoke Stackey Industries

-2.0% x +100.0% -1.4% x +100.0% 28.8% x +100.0% 14.7% x +100.0%

-2.0% -1.4% 28.8% 14.7%

-2.2% -3.7% 14.2% 6.1% Upgrade Upgrade Industrials Materials N ---> OW N ---> OW Upgrade Downgrade Energy Health Care N ---> OW N ---> UW

Long 6 Sub-Industries Short 5 Sub-Industries Long Consumer Ideas Short Consumer Ideas Long Discretionary Short Staples Materials Industrials Short Utilities Materials Short Telecom Svcs Health Care Short Energy

-1.9% x +100.0% -6.6% x -100.0% -0.3% x +100.0% -1.2% x -100.0% 4.5% x +100.0% 8.0% x -100.0% 12.6% x +100.0% 18.2% x +100.0% 2.4% x -100.0% 8.0% x +100.0% 8.4% x -100.0% 0.0% x +100.0% -7.3% x -100.0%

-1.9% 6.6% -0.3% 1.2% 4.5% -8.0% 12.6% 18.2% -2.4% 8.0% -8.4% 0.0% 7.3%

0.1% 4.6% -8.2% 9.1% -3.4% -0.1% 1.7% 7.3% 8.6% 6.9% -7.3% 8.3% -1.1% Upgrade Downgrade Upgrade Downgrade Materials Telecom Health Care Energy UW ---> N OW ---> N N ---> OW N ---> UW Upgrade Downgrade Industrials Health Care UW ---> N OW ---> N Upgrade Energy UW ---> N

4/29/2009 -

6/4/2009

4/29/2009 -

6/4/2009

3/30/2009 - 4/29/2009

Long Long

2/19/2009 - 3/30/2009

Long

1/16/2009 - 2/19/2009

Long

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 (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

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 (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Trailing One-Month Relative Price Performance – Sectors
Figure 73: Energy
Recession Trailing 1-mos Relative Perf. MAVG past 12mos

Figure 74: Materials
Recession Trailing 1-mos Relative Perf. MAVG past 12mos

Figure 75: Industrials
Recession Trailing 1-mos Relative Perf. MAVG past 12mos

Figure 76: Technology
Recession Trailing 1-mos Relative Perf. MAVG past 12mos

20% 15% 10% 5% 0% -5% -10% -15% 12/05 12/06 12/07 12/08 12/09 12/10 12/11

N from G

10% 5% 0% -5% -10% 12/05

U from N

7% 2% -3% -8% 12/05

N

10% 5% 0% -5% -10% 12/05

G

12/06

12/07

12/08

12/09

12/10

12/11

12/06

12/07

12/08

12/09

12/10

12/11

12/06

12/07

12/08

12/09

12/10

12/11

Figure 77: Staples
Recession Trailing 1-mos Relative Perf. MAVG past 12mos

Figure 78: Health Care
Recession Trailing 1-mos Relative Perf. MAVG past 12mos

Figure 79: Telecom
Recession Trailing 1-mos Relative Perf. MAVG past 12mos

Figure 80: Utilities
15% 10% 5% 0% -5%
Recession Trailing 1-mos Relative Perf. MAVG past 12mos

10% 5% 0% -5% -10% 12/05

U from N

8% 3% -2% -7% -12% 12/05

N

15% 10% 5% 0% -5%

N

U

12/06

12/07

12/08

12/09

12/10

12/11

12/06

12/07

12/08

12/09

12/10

12/11

-10% 12/05

12/06

12/07

12/08

12/09

12/10

12/11

-10% 12/05

12/06

12/07

12/08

12/09

12/10

12/11

Figure 81: Discretionary
Relative Price Performance: Trailing one-month price performance of sector minus trailing one-month price performance of S&P 500.
Recession Trailing 1-mos Relative Perf. MAVG past 12mos

Figure 82: Financials
Recession Trailing 1-mos Relative Perf. MAVG past 12mos

10% 5% 0% -5% -10% 12/05

G

15% 10% 5% 0% -5% -10% -15%

G

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 (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Price vs. 50-Day Moving Avg – Sectors (best is low and rising)
Figure 83: Energy
% of stocks above mavg

G from N

Figure 84: Materials
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8/02
Caution Zone
% of stocks above mavg

N from U

Figure 85: Industrials
% of stocks above mavg

N from U

Figure 86: Technology
% of stocks above mavg

U
80%

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8/02

Caution Zone

57%

Buy Zone

23%

Buy Zone

8/03

8/04

8/05

8/06

8/07

8/08

8/09

8/10

8/11

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8/02

Caution Zone

59%

Buy Zone

8/03

8/04

8/05

8/06

8/07

8/08

8/09

8/10

8/11

8/03

8/04

8/05

8/06

8/07

8/08

8/09

8/10

8/11

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8/02

Caution Zone

Buy Zone

8/03

8/04

8/05

8/06

8/07

8/08

8/09

8/10

8/11

Figure 87: Staples
% of stocks above mavg

U from N
86%

Figure 88: Health Care
% of stocks above mavg

Figure 89: Telecom
U
88% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8/02
Caution Zone

N from G
% of stocks above mavg

Figure 90: Utilities
% of stocks above mavg

N

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8/02

Caution Zone

Buy Zone

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8/02

Caution Zone

43%
Buy Zone

Buy Zone

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8/02

Caution Zone

50%

Buy Zone

8/03

8/04

8/05

8/06

8/07

8/08

8/09

8/10

8/11

8/03

8/04

8/05

8/06

8/07

8/08

8/09

8/10

8/11

8/03

8/04

8/05

8/06

8/07

8/08

8/09

8/10

8/11

8/03

8/04

8/05

8/06

8/07

8/08

8/09

8/10

8/11

Figure 91: Discretionary
Price Momentum: % of stocks in sector above 50-day moving average.
% of stocks above mavg

U
78%

Figure 92: Financials
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8/02
Caution Zone

% of stocks above mavg

U

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8/02

Caution Zone

84%

Buy Zone

Buy Zone

8/03

8/04

8/05

8/06

8/07

8/08

8/09

8/10

8/11

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 (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Monthly Sales Revision – Sectors
Figure 93: Energy
20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% 8/06 8/07 8/08

Figure 94: Materials
6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% 8/06

Figure 95: Industrials
3.0% 2.0% 1.0% 0.0% -1.0%

Figure 96: Technology
6.0% 4.0% 2.0% 0.0% -2.0%

N: Mixed revisions
8/09 8/10 8/11

G: Consistently positive
8/07 8/08 8/09 8/10 8/11

-2.0% -3.0% -4.0% -5.0% 8/06

G: Consistently positive
8/07 8/08 8/09 8/10 8/11

-4.0% -6.0% -8.0% 8/06

G: Upward revisions continue
8/07 8/08 8/09 8/10 8/11

Figure 97: Staples
2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% 8/06

Figure 98: Health Care
6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% 8/06 8/07 8/08 8/09 8/10 8/11

Figure 99: Telecom
6.0% 4.0% 2.0% 0.0% -2.0% 8/06 8/07 8/08 8/09 8/10 8/11

Figure 100: Utilities
G: Consistently Positive
4.5% 3.5% 2.5% 1.5% 0.5% -0.5% -1.5% -2.5% 8/06 8/07 8/08 8/09 8/10 8/11

G: Consistently positive

G from N: Positive

G: Positive revisions recently

8/07

8/08

8/09

8/10

8/11

Sales Revisions: Change in sales NTM (current vs. one month ago) divided by sector sales (one month ago). Based on bottom-up consensus sales of current S&P 500 constituents.

Figure 101: Discretionary
5.0% 3.0% 1.0% -1.0% -3.0% -5.0% 8/06 8/07 8/08 8/09 8/10 8/11

Figure 102: Financials
15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% 8/06 8/07 8/08

G: Consistently positive

N: Mixed revisions

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 (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Relative Sales Growth (vs. S&P 500) – Sectors (best if tail is rising)
Figure 103: Energy
40% 30% 20% 10% 0% -10% -20% -30% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 3.8%

Figure 104: Materials
12% 8% 4% 0% -4% -8% -12% -16% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 5.3%

Figure 105: Industrials
8% 4% 0%

Figure 106: Technology
5.7%
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 7/07

G: Positive growth

N: Trend turning positive

G: Improving growth
6.0%

G: Positive

-4% -8% 7/07 6/08 5/09 4/10 3/11 2/12 1/13

6/08

5/09

4/10

3/11

2/12

1/13

Figure 107: Staples
12% 8% 4% 0% -4% -8% 7/07 6/08 5/09 4/10 3/11 2/12 1/13

Figure 108: Health Care
16%

Figure 109: Telecom
U: Negative
30% 20% 10%

Figure 110: Utilities
N: Momentum turning positive
8% 4% 0% -4% 4.1%

N
3.2%

12% 8% 4% 0% -4% -8% 7/07 6/08 5/09 4/10

-0.4%

0% -10% 7/07 6/08 5/09 4/10 3/11 2/12

2.4%
-8% -12%

N: Improving momentum
7/07 6/08 5/09 4/10 3/11 2/12 1/13

3/11

2/12

1/13

1/13

Relative Sales Growth NTM: Sales growth NTM of sector less sales growth NTM of S&P 500. Based on bottom-up results of current S&P 500 constituents. Historical data reflect actual growth. Dashed line reflects First Call bottom-up consensus. Up or down trend of line is most important indicator for determining sector momentum.

Figure 111: Discretionary
4% 2% 0% -2% -4% -6% -8% -10% 7/07 6/08 5/09 4/10 3/11 2/12 1/13

Figure 112: Financials
3.4% 30% 20% 10% 0% -10% -20% -30% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 -21.4%

N: Outlook for consumer improving

U: Negative

Source: J.P. Morgan and Datastream.

60

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Monthly Earnings Revision – Sectors
Figure 113: Energy
2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% 8/06 8/07 8/08 8/09 8/10 8/11

Figure 114: Materials
1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% 8/06 8/07 8/08 8/09

Figure 115: Industrials
1.0% 0.5% 0.0% -0.5%

Figure 116: Technology
0.8% 0.4% 0.0% -0.4%

N: Mixed revisions recently

U

-1.0% -1.5% -2.0% 8/10 8/11 8/06

G: Positive revisions recently
8/07 8/08 8/09 8/10 8/11

-0.8% -1.2% 8/06 8/07 8/08

G

8/09

8/10

8/11

Figure 117: Staples
0.3% 0.2% 0.1% 0.0% -0.1% -0.2% -0.3% -0.4% 8/06 8/07 8/08 8/09 8/10 8/11

Figure 118: Health Care
0.5% 0.4% 0.3% 0.2% 0.1% 0.0%

Figure 119: Telecom
1.2% 0.8% 0.4% 0.0% -0.4% -0.8% -1.2% -1.6% -2.0%

Figure 120: Utilities
0.6% 0.4% 0.2% 0.0% -0.2%

N

N

-0.1% -0.2% -0.3% 8/06 8/07 8/08 8/09 8/10 8/11

U

-0.4% -0.6% -0.8%

N: Mixed revisions
8/06 8/07 8/08 8/09 8/10 8/11

8/06

8/07

8/08

8/09

8/10

8/11

Earnings Revisions: Change in net income NTM (current vs. one month ago) divided by sector market cap. Based on bottom-up consensus net income of current S&P 500 constituents.

Figure 121: Discretionary
1.0% 0.5% 0.0% -0.5% -1.0% -1.5% 8/06 8/07 8/08 8/09 8/10 8/11

Figure 122: Financials
2.0% 1.0% 0.0% -1.0%

N: Mixed revisions

-2.0% -3.0% 8/06 8/07 8/08 8/09

N

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 (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Relative Earnings Momentum – Sectors (best if tail is rising)
Figure 123: Energy
6% 4% 2% 0% -2% -4% -6% -8% -10% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 0.6%

Figure 124: Materials
6% 4% 2% 0% 0.2%

Figure 125: Industrials
6% 4% 2% 0% -2% -4% -6% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 0.7%

Figure 126: Technology
8% 6% 4% 2% 0% -2% -4% -6% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 1.4%

G: Positive

G: In positive territory

G: Positive growth

-2% -4% -6% 7/07 6/08 5/09 4/10 3/11 2/12 1/13

G: Strong in near term

Figure 127: Staples
6% 4% 2% 0% -2% -4% -6% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 0.3%

Figure 128: Health Care
6% 4% 2% 0% -2% -4% -6% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 -0.1%

Figure 129: Telecom
6% 4% 2% 0% -2% 0.0%

Figure 130: Utilities
6% 4% 2% 0% -2% -4%
1/13

-0.3%

N: Flat earnings momentum

G: Positive

-4% -6% 7/07 6/08 5/09

N: Flat earnings momentum
4/10 3/11 2/12

N: Flat earnings momentum
7/07 6/08 5/09 4/10 3/11 2/12 1/13

-6%

Relative Earnings Momentum: Contribution of growth by sector to S&P 500 EPS. Change in net income (NTM vs. year ago) divided by S&P 500 net income. Based on bottom-up results of current S&P 500 constituents. Historical data reflect actual growth. Dashed line reflects First Call bottom-up consensus.

Figure 131: Discretionary
6% 4% 2% 0% -2% -4% -6% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 0.5%

Figure 132: Financials
15% 10% 5% 0% -5% -10% -15% -20% 7/07 6/08 5/09 4/10 3/11 2/12 1/13 2.3%

G: Positive

N from G: Flat earnings momentum

Source: J.P. Morgan and Datastream. Area portion of the chart is actual relative earnings and the line is based on consensus NTM.

62

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

JULI Spreads (Relative to All Industries’ Averages) – Sectors (best is high and narrowing)
Figure 133: Energy
250 150 50 (50) (150) (250) '03 '05
Energy

Figure 134: Materials
250

Figure 135: Industrials
Widening

Figure 136: Technology
Widening

G: Tightening

G: Tightening

250 150 50 (50)

250 150 50 (50)

Widening

Widening

150 50 (50)
Narrowing

N

N

Narrowing

(150) '07
Avg

(150) (250) '07
Avg

Narrowing

(150) '07
Avg

Narrowing

'09

'11
1 STD

(250) '03 '05
Materials

'09
1 STD

'11

'03

'05
Industrials

'09
1 STD

'11

(250) '03 '05
Technology

'07
Avg

'09

'11
1 STD

Figure 137: Staples
250 150 50 (50) (150) (250) '03 '05
Staples

Figure 138: Health Care
250
Widening

Figure 139: Telecom
Widening

Figure 140: Utilities
Widening

N

250 150 50 (50)

150 50 (50)

N

N: Spreads stable

250 150 50 (50)

N: Spreads stable

Widening

Narrowing

(150) (250)

Narrowing

(150)
'07
Avg

Narrowing

(150) (250) '07
Avg

Narrowing

'07
Avg

'09
1 STD

'11

'03

'05
HealthCare

'09

'11
1 STD

(250) '03 '05
Telecom

'09
1 STD

'11

'03

'05
Utilities

'07
Avg

'09
1 STD

'11

Relative JULI Spreads: Calculated as spread of sector less avg. spread of ten sectors. A figure above zero means sector has higher yields (relative). When line is falling, it means spreads are tightening on a relative basis.

Figure 141: Discretionary
250 150 50 (50) (150) (250) '03 '05
Discretionary

Figure 142: Financials
Widening

N

250 150 50 (50)

G

Widening

Narrowing

(150)
'07
Avg

Narrowing

'09

'11
1 STD

(250) '03 '05
Financials

'07
Avg

'09
1 STD

'11

Source: J.P. Morgan and Datastream.

63

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

First Call Mean Rating (Relative to S&P 500) – Sectors (best is low and rising)
Figure 143: Energy
Recession Avg Rel Rating LT Avg 1 Std Dev

Figure 144: Materials
Recession Avg Rel Rating LT Avg 1 Std Dev

Figure 145: Industrials
Recession Avg Rel Rating LT Avg 1 Std Dev

Figure 146: Technology
Recession Avg Rel Rating LT Avg 1 Std Dev

(0.55) (0.30) (0.05) 0.20 0.45
Less Liked

More Liked

(0.55) (0.30) (0.05)
N from G: Upgrades peaking

More Liked

(0.55) (0.30) (0.05) 0.20
LessN: Liked

More Liked

(0.55) (0.30) (0.05)

More Liked

N from G: Upgrades flattening

0.20 0.45
Less Liked

Flat recently

0.20 0.45

0.45

Less Liked

G

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
Recession Avg Rel Rating LT Avg 1 Std Dev

Figure 148: Health Care
Recession Avg Rel Rating LT Avg 1 Std Dev

Figure 149: Telecom
Recession Avg Rel Rating LT Avg 1 Std Dev

Figure 150: Utilities
Recession Avg Rel Rating LT Avg 1 Std Dev

(0.55) (0.30) (0.05) 0.20 0.45

N: Downgraded too much

More Liked

(0.55) (0.30) (0.05)

More Liked

(0.55) (0.30) (0.05)

N: Flat recently

More Liked

(0.55) (0.30) (0.05)
N: Flat recently

More Liked

Less Liked

0.20 0.45

N:Less recently Flat
Liked

0.20 0.45

Less Liked

0.20 0.45

Less Liked

6/97 8/99 10/0112/03 2/06 4/08 6/10
Relative FC Mean Rating: Bottom-up FC mean rating of Street for sector less S&P 500 overall. Negative "relative" value means Street has more Buys on sector vs. S&P 500. When line is rising, it means Street is upgrading….

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 151: Discretionary
Recession Avg Rel Rating LT Avg 1 Std Dev

Figure 152: Financials
Recession Avg Rel Rating LT Avg 1 Std Dev

(0.55) (0.30) (0.05) 0.20 0.45
Less Liked

More Liked

(0.55) (0.30) (0.05)

G: Upgrades recently

More Liked

N: Leveled off

0.20 0.45

Less Liked

6/97 8/99 10/01 12/03 2/06 4/08 6/10
Source: J.P. Morgan and FactSet. 64

6/97 8/99 10/0112/03 2/06 4/08 6/10

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Short Interest (Relative to S&P 500) – Sectors (best is high and falling)
Figure 153: Energy
Energy LT Avg 1 Std Dev

Figure 154: Materials
Materials LT Avg 1 Std Dev

Figure 155: Industrials
Industrials LT Avg 1 Std Dev

Figure 156: Technology
Technology LT Avg

N

1 Std Dev

0.5% -0.5%

1.5% 1.0%
N: Volatile recently

-0.1% -0.6%
N: Volatile recently

0.4% -0.1% -0.6% 12/02

0.5% 0.0% 12/08 12/10 -0.5% 12/02

G: High short interest

-1.5% 12/02

12/04

12/06

12/04

12/06

12/08

12/10

-1.1% 12/02

12/04

12/06

12/08

12/10

12/04

12/06

12/08

12/10

Figure 157: Staples
Staples LT Avg 1 Std Dev

Figure 158: Health Care
Health Care LT Avg 1 Std Dev

Figure 159: Telecom
Telecom LT Avg 1 Std Dev

Figure 160: Utilities
Utilities LT Avg 1 Std Dev

0.0%

-0.4% -0.9% -1.4% 12/02
G

0.4% -0.6% -1.6% 12/02

1.0% 0.0%
G: Declining recently

-0.5% -1.0% -1.5% 12/02
G from N N: In line with S&P 500

12/04

12/06

12/08

12/10

12/04

12/06

12/08

12/10

12/04

12/06

12/08

12/10

-1.0% 12/02

12/04

12/06

12/08

12/10

Relative Short Interest: Calculated as sector short interest (as % shares outstanding) less average for S&P 500. Calculated bi-weekly. At extremes, we see short interest as a useful potential contrarian indicator, i.e., if relative short interest is high, we see the sector as vulnerable to any disappointments….

Figure 161: Discretionary
3.0% 2.0% 1.0% 0.0% 12/02
Discretionary N: Has declined significantly LT Avg 1 Std Dev

Figure 162: Financials
Financials LT Avg 1 Std Dev

1.3% 0.3% -0.8% 12/02

N: Has declined significantly

12/04

12/06

12/08

12/10

12/04

12/06

12/08

12/10

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.

65

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

ETF Fund Flows – Sectors
Figure 163: Energy
$5,000 $4,000 $3,000 $2,000 $1,000 $0 -$1,000 -$2,000 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
Energy

Figure 164: Materials
$600 $400 $200 $0 -$200 -$400 -$600 -$800 -$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
Materials

Figure 165: Industrials
$1,500 $1,000 $500 $0
Industrials

Figure 166: Technology
$1,200 $1,000 $800 $600 $400 $200 $0 -$200 -$400 -$600 -$800

G: Inflows recentlyTechnology

N: Mixed flows recently

G: Inflows recently

-$500 -$1,000

G: Inflows recently
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
$1,500 $1,000 $500 $0 -$500 -$1,000 -$1,500 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 168: HealthCare
Staples

Figure 169: Telecom
HealthCare

Figure 170: Utilities
Telecom

N: Mixed flows recently

$800 $600 $400 $200 $0 -$200 -$400 -$600 -$800 -$1,000 -$1,200

$150 $100 $50 $0

$2,000 $1,500 $1,000 $500 $0

Utilities

U from N: Outflows recently

N: Mixed flows recently
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

-$50 -$100 -$150

G from N: Inflows recently
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

-$500 -$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

ETF Fund Flows: Monthly fund flows for five largest ETFs (based on AUM) in each sector.

Figure 171: Discretionary
$1,000 $800 $600 $400 $200 $0 -$200 -$400 -$600 -$800
Discretionary

G

Figure 172: Financials
$7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 -$1,000 -$2,000 -$3,000
Financials

N: Mixed flows recently

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 (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Relative Price/10-Yr EPS (# std dev from long-term avg) – Sectors (best if low and rising)
Figure 173: Energy
4.00 2.00 0.00 -2.00 -4.00 '84 '88 '92 '96 '00 '04 '08 '12
Recession # Std Dev from LT Avg STD+1 STD-1

Figure 174: Materials
4.00 2.00 0.00 -2.00 -4.00 '84 '88 '92 '96 '00 '04 '08 '12
Recession # Std Dev from LT Avg STD+1 STD-1

Figure 175: Industrials
4.00 2.00 0.00 -2.00 -4.00 '84 '88 '92 '96 '00 '04 '08 '12
Recession

Figure 176: Technology
STD-1

G: Attractive level STD+1 # Std Dev from LT Avg

G: Attractive level

4.00 2.00 0.00 -2.00 -4.00

Recession

N: Has declined significantly

N: At long-term average…

# Std Dev from LT Avg

STD+1

STD-1

'84

'88

'92

'96

'00

'04

'08

'12

Figure 177: Staples
4.00 2.00 0.00 -2.00 -4.00 '84 '88 '92 '96 '00 '04 '08 '12
Recession # Std Dev from LT Avg STD+1 STD-1

Figure 178: Health Care
4.00 2.00 0.00 -2.00 -4.00 '84 '88 '92 '96 '00 '04 '08 '12
Recession # Std Dev from LT Avg

Figure 179: Telecom
G: Below longSTD+1 term average
STD-1

Figure 180: Utilities
STD+1 STD-1

4.00 2.00 0.00 -2.00 -4.00

Recession

# Std Dev from LT Avg

4.00 2.00 0.00

Recession

# Std Dev from LT Avg

STD+1

STD-1

G

U: Coming off extreme levels…

N
'84 '88 '92 '96 '00 '04 '08 '12

-2.00 -4.00 '84 '88 '92 '96 '00 '04 '08 '12

Relative P/10-Yr EPS # std dev from long-term avg: Relative P/10yr EPS calculated as sector P/10-yr EPS divided by S&P 500 P/10-yr EPS. The line shown in charts is current value minus long-term avg divided by long-term standard deviation. The lower the line, the greater the relative discount.

Figure 181: Discretionary
4.00 2.00 0.00 -2.00 -4.00 '84 '88 '92 '96 '00 '04 '08 '12
Recession # Std Dev from LT Avg

Figure 182: Financials
STD+1 STD-1

U: Expensive

4.00 2.00 0.00 -2.00 -4.00

Recession

# Std Dev from LT Avg

STD+1

STD-1

G: Extreme low

'84

'88

'92

'96

'00

'04

'08

'12

Source: J.P. Morgan and Datastream.

67

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

US Equity Strategy Recent Publications
US Strategy
Growth Scares Emerge about China, Europe and US; Short-Term Headwinds, But Not Thesis Changers; 28 Ideas — 03/29/12 Est. $670b Excess Cash on Balance Sheets, Apple's $10b Dividend Only a Start; 28 Ideas — 03/27/12 Why are pullbacks so shallow? Stick with Financials and Cyclicals. 17 ideas. — 03/15/12 Circle of Life: Despite ST Headwinds, Upside to 1430 YE Target; Macro and History Favor Industrals, Financials, Tech & Energy; 10 Ideas — 03/09/12 Mostly Positive Developments This Week, Including Taking Out 2011 Highs. But Watch Transports and Materials. 20 Ideas – 03/02/12 Too Early to Fade on AAPL - A Cyclical Sector unto Itself and Still Underowned – 02/24/12 Investors Need to Get Cyclical. 42% of Funds UW Cyclicals. 21 Ideas – 02/17/12 S&P 500 Always Had Outliers Like AAPL. Focus on Laggards Within Leaders. 24 Ideas – 02/10/12 4 More Considerations for a "Pause" - Use to Add Cyclicals/Financials; 20 Ideas – 02/02/12 Circle of Life: 6 Signs of a Healthy Market; History Shows Pause After 20% Rally...Expect Further Cyclical Rotation – 01/26/12 History Shows High Equity Risk Premiums = Strong Equity Gains Despite Weak GDP; 30 Ideas – 01/19/12 4Q11 Preview: A Tough Earnings Season, But Some Positives; Raising FY11E to $98, FY12E Still $105; 9 Stock Ideas for 4Q EPS – 01/12/12 2012 to be year of "contrarian optimism" plus update on active mgr performance – 01/6/12

Special Reports
SLIDES: See “Cyclical Summer” (S&P 500 rally led by Cyclicals) plus S&P 500 1475 by YE11 – 7/7/11 Housing Food Chain: Part III: Six key metrics point to housing improving in mid-/late2011. 18 ideas – 4/8/11 2011 Outlook: YE 2011 Target 1425; Raise '11E EPS to $94 from $91; Introduce '12E EPS of $102 – 12/10/10 US Equity Strategy Slide Deck: July 2010 : 10 Reasons to remain long equities: S&P 500 YE Target of 1300 – 7/15/10 Positive on Housing Food Chain: Homebuilders most attractive, but also Mortgage Insurers, Suppliers, Timber. 12 Ideas – 4/9/10

3PointsTV – Video
(Click the links below for 3PointsTV and to view the required video, click on the “PLAYLIST” option in the video screen.) Short term headwinds emerge into 2Q with China and oil — 03/30/12 At least $670b in excess corp cash…see more divs — 03/23/12 Bull enters its 4th year. Stick with Cyclicals/Financials. — 03/09/12 Good news this week but watch transports and materials – 03/02/12 Too early to fade AAPL. A sector unto itself. – 02/24/12 Bullish fundamentals strengthening even as pause expected – 02/17/12 AAPL is not unusual – outliers have driven S&P 500 – 02/10/12 With pause anticipated, rotate into Cyclicals/Financials – 02/03/12 Signs of a healthy market…but first a pause – 01/27/12 Global risk on makes this different from 2011 – 01/20/12

68

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Derivatives & Delta One Strategy Adam RuddAC
(1-212) 272-1215 adam.ch.rudd@jpmorgan.com

The J.P.Morgan Apple-Like Tech Basket
Basket Methodology and Composition
The J.P. Morgan Apple-Like Tech Basket, JPUSALTB <Index> on Bloomberg, comprises 15 US listed stocks highlighted in this note. The basket comprises stocks 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 more 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%

Marko Kolanovic

AC

(1-212) 272-1438 Marko.kolanovic@jpmorgan.com

J.P. Morgan Securities LLC

Basket Details
Bloomberg Ticker Benchmark Number of Components Weighting Scheme
Source: J.P. Morgan.

JPUSALTB<Index> SPX Index 15 Equally weighted

Industrials, 20%

Bloomberg subscribers can use the ticker JPUSALTB to access tracking information on a basket created by the J.P. Morgan Delta One desk to leverage the theme discussed in this report. Over time, the performance of JPUSALTB could diverge from returns quoted in this report, because of differences in methodology. J.P. Morgan Research does not provide research coverage of this basket and investors should not expect continuous analysis or additional reports relating to it. For information on JPUSALTB, please contact your J.P. Morgan salesperson or the Delta One Desk.

Market Cap < $10bn, 37%

Market Cap > $30bn, 42%

Market Cap $10bn-$30bn, 21%
Source: J.P. Morgan Derivatives & Delta One Strategy, S&P, Bloomberg.

69

Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com

North America Equity Research 05 April 2012

Figure 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
110 105 100 95 90 85 80 75 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12
Apple-Like Tech Basket S&P 500

8% 6% Basket Daily Returrn 4% 2% 0% -2% -4% -6% -8% -10% -10% -5% 0% 5% S&P 500 Daily Return 10% y = 1.18x R² = 81%

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.

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.

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North America Equity Research 05 April 2012

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 dividend yield Apple-Like Tech Basket 3-month volatility 3.0% 45% S&P 500 dividend yield S&P 500 3-month volatility 40% 2.5% 35% 2.0% 30% 25% 1.5% 20% 1.0% 15% 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 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.

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North America Equity Research 05 April 2012

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.

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North America Equity Research 05 April 2012

Companies 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)
Disclosures This report is a product of the research department's Global Equity Derivatives and Delta One Strategy group. Views expressed may differ from the views of the research analysts covering stocks or sectors mentioned in this report. Structured securities, options, futures and other derivatives are complex instruments, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Because of the importance of tax considerations to many option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated option transactions. Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

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Company-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 emailing research.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 the average total return of the stocks in the analyst's (or the analyst's team's) 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 analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stock’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 can be found on J.P. Morgan’s research website, www.morganmarkets.com. J.P. Morgan Equity Research Ratings Distribution, as of April 3, 2012
J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients* Overweight (buy) 45% 51% 43% 70% Neutral (hold) 43% 45% 48% 61% Underweight (sell) 12% 34% 9% 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 hold rating 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 covered companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst or 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 based upon 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.
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North America Equity Research 05 April 2012

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