Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Thursday December 23.
How to Trade the Final Week of 2010, American Express (AXP)
Next week's game plan is looking a little blank because there is not a lot of data at the end of the year. However, looking at the last 20 years, Cramer located the ten years the market rose 10% or more and noted the last five days of the year saw an average gain of 1.3%. So a good week ahead is on the cards if history is any indication of what stocks might do. At worst, action will be "benign" said Cramer.
Why are averages so good in the last week of the year? One reason is that money managers play defensive to preserve their gains for the year. They bid just below wherever their favorite stocks trade and create a floor that prevents big sellers from breaking through. The shorts give up and walk away, because demand lies underneath stocks, protecting them.
Analysts have tremendous power to devastate stocks with downgrades, as witnessed in the freefall of American Express (AXP) after it was downgraded on exaggerated worries about government regulations, but analysts tend not to use this power at the end of the year, nor do they want to risk unpopularity when the bulls are protecting their holdings. Finally, executives usually hold off on reporting bad news until January, since they want to end the year on a positive note.
How do you distinguish a fad from a great long-term story? Sometimes it can be a challenge, but it isn't impossible to predict which stocks have staying power and which are just flashes in the pan. During the fateful dot.com era, one much-hyped stock was Webvan, a $1.3 billion dot.com that was supposed to be the main way to play online supermarket shopping. The stock had a meteoric rise, but when bankrupt in two years. What did Webvan do wrong? It was not able to execute, faced too much competition from supermarkets, and didn't provide a value proposition to its customers. People feared that Amazon (AMZN) would follow the same fate as Webvan, but instead Amazon is up more than $1,000 since Webvan went under.
What should investors look for in hot stocks that appear to be fads? The company should have a handle on competition, have barriers to entry, add value and be revolutionary; to have staying power, a company should change the way customers eat, shop, dress and live.
At first, Cramer was a skeptic about OpenTable (OPEN), the online reservation company. Danny Meyer, famed restaurateur and hospitality expert, was also unsure about the hype surrounding OpenTable, and now is on its board of directors. The company's revenues are generated from subscriptions, which provide great earnings visibility. It saves restaurants and customers time and money. While many restaurants have their own websites, OpenTable actually manages many of these sites. The stock is up 249% from its IPO price of $20 and has a 51% growth rate compared to a multiple of 46. Given the fact that the stock has yet to expand fully domestically and internationally, Cramer thinks OPEN has plenty of room to run.
Netflix (NFLX) is a similar growth story to OPEN and has the potential to continue its expansion. It has changed the way people watch TV and movies with streaming video. Netflix has a high multiple of 24, but with a 29% growth rate, the price is right.
Priceline (PCLN) is another success story which has boldly gone where no company has gone before. It is one of the best-performing stocks of the last ten years, up over 5,000%. This company has completely changed the way people book flights and hotels, and while there is competition, PCLN is best of breed with a multiple of 19 and a growth rate of 27%.
"There is nothing faddish about these three stocks," said Carmer.
Cramer told one viewer he likes Monsanto (MON) but prefers Deere (DE). Similarly, he prefers Schlumberger (SLB) to Baker Hughes (BHI), but would hold onto the latter, especially if oil goes to $110. When a viewer asked Cramer how he could avoid recommending Thompson Creek Metals (TC) because it is too speculative when Novagold (NG) is also speculative? While Cramer conceded that both companies are "unproven" Novagold's mines were found to be the largest gold resource in North America. He thinks NG will be a great story into 2015 and prefers gold to other metals. When one caller asked Cramer to recommend a nanotech play, he said the industry is too faddish and doesn't like any stocks in that space. Finally, Cramer's favorite water play is PerkinElmer (PKI) which tests and cleans water, and is very inexpensive.
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