Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV program, Monday April 4.
While the tech sector has been hit hard, not all stocks in the group are in the doldrums. Red Hat (RHT) is one of Cramer's favorite "disruptive tech plays" whose Open Source technology competes directly with Microsoft's (MSFT) software. Red Hat offers its software for free and allows customers to make adjustments, and it also provides support and maintenance. CEO Jim Whitehurst explained that customers develop a relationship with Red Hat and purchase software they are already familiar with. A full 80% of revenues come from subscriptions, and Whitehurst commented that most of Red Hat's growth is from existing customers while it continues to attract more users. The renewal rate for subscriptions is 25-30%.
On March 23, Red Hat beat earnings estimates by 4 cents and reported stronger than expected revenues at 25%. It saw a 30% growth in billings just in one quarter, which was the best quarter Red Hat has seen in 3 years. The earnings news turned the cloud group around, and similar stocks moved up. Red Hat is up 14% since Cramer got behind it in August 2010.
Part of the company's success is its seizing on a secular trend from older mainframe systems to next generation open platforms. The company provides airlines with technology to make reservations more efficient, and gas and oil companies with solutions to manage payroll more efficiently. "We are a subversive player," said Whitehurst, "with just 20% share and a massive growth opportunity."
"Red Hat has it," said Cramer. "Take a look at it."
The best company in a group does not always have the best stock. Sometimes it is a good idea to bet on the underdog than to go with best-of-breed. Cramer used the example of the two leading home improvement names, Home Depot (HD) and Lowe's (LOW), to prove his point. "Home Depot is good, but Lowe's is getting better." Lowe's has been lagging but is about to get its house in order with a major restructuring program that will improve margins and mean higher earnings. How do we know Lowe's restructuring will work? The strategy is very similar to that employed by Home Depot before the recession, and was a main factor in HD's emerging from the slowdown in good shape.
Lowe's is in a better position than Home Depot to improve, because expectations for Lowe's are much lower, and it can open more stores. Lowe's can follow Home Depot's example of cutting costs per square foot, which are down for HD 8% since 2007, hiring more part-time and fewer full-time employees, and improving product selection. Lowe's already has many advantages: its inventory is low, gross margins are 35%, higher than Home Depot's, at 34%. Lowe's multiple is 13, lower than HD's at 14, but Lowe's has more growth: 17% compared to HD's 14% growth rate. Lowe's balance sheet is clean and it can raise enough cash to increase its dividend or to buy back shares. Both HD and Lowe's will do well when housing bounces back, but Lowe's is the stock to buy until then.
Cramer took a call:
Caterpillar (CAT) is up in a straight line, and may be on a parabolic move. He would not sell it, but would wait for "one of those weird intraday selloffs" to buy.
Sometimes stocks sell off for all the wrong reasons. Luxury accessory maker Fossil (FOSL) reported a remarkable quarter on February 15 with an 11 cent earnings beat and stronger than expected revenue gains for 32.8% year over year. Same store sales were up 23%, and yet the stock was taken down 6% in one day, and a week later, the stock dropped to 11% from where it was before earnings. However, the stock has come back with a vengeance, and is up 25% from its drop after earnings and 12% from its level before earnings.
What happened with Fossil? The Street didn't like hearing that Fossil was going to spend more money to invest in its business. This wasn't a case of margins getting squeezed, this was simply a good company that wanted to become better by investing in its growth. Fossil plans to open 80 new stores, accelerate e-commerce and grow its sales in Asia from 15% to 33%. Investors who took the long-term view and saw that Fossil was actually improving its value caught a huge gain in the stock. Cramer thinks Amazon (AMZN) has a similar story; the stock got punished for margin weakness when it is spending money on improving its business by moving into the cloud. Cramer urged viewers to look for similar stocks that get penalized for growth initiatives, since they are buying opportunities.
Cramer took some calls:
Coach (COH) has been punished for its Japan exposure, but Cramer thinks the stock will come back.
Best Buy (BBY) is down so much it doesn't seem worth selling, but Cramer thinks it is in a secular decline.
While it is a good idea to look to the leaders in any sector, it is important to recognize when there has been a change of the guard. The old mammoths of tech: Microsoft (MSFT), Hewlett-Packard (HPQ), Intel (INTC), Cisco (CSCO) are falling by the wayside, all posting losses in the quarter, some in the double-digits, while the Dow gained 6.4% in the quarter. Microsoft doesn't seem to be innovative enough, even for its new offerings, Cisco is having market share stolen from it left and right, Hewlett-Packard is suffering from the rise of the Tablet and Intel made a faulty acquisition of McAfee when, according to Cramer, it should have bought Arm Holdings (ARMH).
The four new leaders of tech: Facebook, Amazon (AMZN), Google (GOOG) and Apple (AAPL) are constantly duking it out with each other and staying fresh. Facebook is starting to move into Google's turf with ads, but Google still has the best search engine. Amazon still has only 8% share in global commerce with room to grow, and is making new forays into cloud technology. Apple's products are the highest quality and the lowest cost in the industry. Cramer would buy any of these new leaders on weakness and sell the old tech dogs on any strength.
Cramer took some calls:
SolarWinds (SWI) is an enterprise network managing play that is close to its 52 week high. Cramer says it is a hold, but it is too new to buy.
QLogic's (QLGC) best days are behind it. There is not enough cooking there, and it is not the innovator it once was.
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