Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Monday June 28.
The S&P (SPX) is trading at 12.7 times earnings, compared to the average 5 year multiple of 14.2%. Does that mean stocks are cheap? Although Cramer apologized for sounding like a party pooper, he said the answer is "absolutely not." Why?
Because of the palpable and justifiable fear that earnings for all kinds of companies will be crimped by… you got it… Washington… There is a crushing recognition going on behind the scenes that you cannot afford to pay up for earnings when those earnings may be under attack… or even wiped out by meddling.
Cramer lamented the fact that the "activist anti-business Federal government" is going to raise capital gains taxes and continue its drive toward reforms that may seriously interfere with the performance of stocks. Healthcare stocks were down during the discussion of healthcare reform in March, and many financials have received a "haircut...and in some cases a beheading" from financial reform. Cap-and-trade and reforms that will facilitate unionization only further fears that the government is not a friend to business or stocks.
The proposed ban on offshore drilling will be a huge blow to oil companies. In fact, Cramer says he is hard put to think of a single sector that is benefitting from the Obama Administration, now that the tax credit for first-time homeowners has ended.
In addition to the C.A.N.D.I.E.S. stocks he has been discussing regularly lately (see below) Cramer also thinks it is safe to buy Hershey (HSY), Campbell's Soup (CPB), and General Mills (GIS). Beyond those, there aren't many stocks that look attractive right now.
Why pay up for earnings when the government seems to want to either punish companies or are indifferent to their fate, asks Cramer; "We haven't had this kind of trouble since the 1970s."
The Secret Ingredient to C.A.N.D.I.E.S.: Chipotle Mexican Grill (CMG), Apple (AAPL), Netflix (NFLX), Deckers (DECK), Intuitive Surgical (ISRG), Express Scripts (ESRX), Salesforce.com (CRM), Research in Motion (RIMM), Nokia (NOK), Motorola (MOT)
Cramer says his C.A.N.D.I.E.S. are not just momentum stocks that move simply because their stock prices are going up, but are stocks with earnings momentum because their earnings estimates continually go higher. Even as multiples are pulled down, higher earnings will continue to spell higher stock prices.
For instance earnings estimates for all of the C.A.N.D.I.E.S. stocks [Chipotle Mexican Grill (CMG), Apple (AAPL), Netflix (NFLX), Deckers (DECK), Intuitive Surgical (ISRG), Express Scripts (ESRX), Salesforce.com (CRM)] have increased 30-50% year-over-year with the exception of Deckers, which has increased 15%. However, "the analysts are wrong" about Deckers, because the stock is up 118% since last year.
One stock that has declining earnings momentum is former Cramer favorite Research in Motion (RIMM) whose estimates have increased just 18% over last year. Even though this is a respectable increase, on a monthly basis, estimates rarely surpass a 2% increase over the month before. With its share price down 24%, the stock is not cheap, but analysts think it could go even lower. It looks like RIMM could be the next Nokia (NOK) or Motorola (MOT) which have seen substantial declines in earnings momentum. Research in Motion is losing share in the smartphone market and Apple is "beating the stuffing out of them." After all Apple doesn't have to have a "buy one get one free" sale to prop up its numbers.
Union Pacific (UNP)
"It has gotten way too gloomy around here," said Cramer, lamenting the fact that there seems to be nothing to buy apart from accidental high-yielders and his high-growth C.A.N.D.I.E.S. However, there is one company that is "good and getting better." Although railroads usually perform best when the economy is strong, Union Pacific's (UNP) management has made bullish remarks about the company; is Union Pacific run by lunatics? Or is this company a genuine gloom buster?
CEO James Young says that carloads are up 17% for the quarter so far, and pure pricing has risen 3.5% and is expected to rise more as the year progresses. The company has already brought 2,000 of its formerly laid-off workers back. All six of Union Pacific's businesses have seen volume growth from the end of the second quarter up to now.
Energy is 23% of Union Pacific's revenues, and this number may increase once China starts looking strong again. The CFO said the company can take an estimated 112 million loads of business away from trucking. With a multiple of 12.9 compared to a 12% growth rate, Union Pacific is cheap.
While Cramer emphasizes having a diversified portfolio, he told one viewer that it would be alright to have 20% of his portfolio invested in SPDR Goldshares (GLD). He said Yum Brands (YUM) is a fabulous way to play the growth of the middle class in China. While CEO Eddie Lampert has done his best to revitalize Sears' (SHLD) "tired" brand, the stock is down in a straight line. Still, he suggested investors do research and come to their own conclusions about Sears.
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