Cramer's Mad Money - Avon, You've Never Looked So Bad (4/11/11)

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Includes: AVP, BX, CSCO, DRI, GNC, HLF, HMC, KKR, MSFT, PTEN, STX, TM, TUP, ULTA
by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Monday April 11.

Mad Mail: Cubist Pharmaceuticals (CBST), Teva (NASDAQ:TEVA), Deere (NYSE:DE), Potash (NYSE:POT)

Cubist Pharmaceuticals (CBST), is a specialty biopharma company focused on infectious diseases. Its main drug is a hospital-based treatment for infection. Cubist is a stock that is a real business with real revenues, but it has a really big gain of 30% after shooting up 15% overnight last week on the resolution of its patent litigation suit with Teva Pharmaceuticals (TEVA). "You've missed it," said Cramer. While the company reports earnings this Thursday, it is expected to be a non-event, and even though there is a drug in Cubist's pipeline, it isn't going to be out until the end of the year, and there are no catalysts to move the stock until then. Cubist may be a stock to watch for later in the year, but it is not worth buying now, especially not with the current risks in the market, such as high oil.

Cramer thinks farmers should be planting more to take advantage of soaring soft commodities prices. "Demand has exceeded supply, and that is not going away." Cramer would own Potash (POT) and Deere (DE) on this trend. The bull market in agriculture is "a multi-year story."

"High oil prices might ultimately be bad for oil stocks because of concern about demand destruction. However, if oil prices drop, there will be worries about low earnings. Basically, Cramer thinks oil is a tricky space right now.

Avon (NYSE:AVP), Tupperware (NYSE:TUP), Herbalife (NYSE:HLF), Ulta Salon (NASDAQ:ULTA), GNC Holdings (NYSE:GNC)

The best business model in the world is not enough to overcome an incompetent CEO, and even a cheap stock is not worth buying if the CEO has a proven track record of failure," said Cramer. With the rest of the direct sales space on fire, Avon (AVP) has never looked so bad. It is down 4% for the year to date and has declined 17% in the last 12 months. Other direct sales companies, Tupperware (TUP) and Herbalife (HLF), are taking share and taking names worldwide. When unemployment is high, these companies usually perform well, as more people try to find ways to generate extra income. Herbalife's stock has soared 105% since Cramer got behind it in 2009, and Tupperware is up 70% since Cramer recommended it in 2008. Tupperware delivered a 10 cent earnings beat in February and Herbalife exceeded earnings estimates by 19 cents the same month. Avon missed estimates by 8 cents, revenues rose a mere 1% and gross margins declined by 80 basis points. In short, Avon's quarter was "embarrassing."

More embarrassing was the actual conference call, which Cramer described as "awful" and "full of anger." One Deutsche Bank analyst said, "The business fundamentals remain solid? Do you guys really believe that?" An analyst from Citigroup added, "Shouldn't there be some people who will lose their jobs over such awful execution?"

It isn't that Avon's markets are to blame; it does business in emerging markets just like Tupperware and Herbalife. While the other two companies are on fire in Brazil, Avon's compensation plans in Brazil are poorly designed and don't offer rich incentives. The company fails to execute on growth expectations

Avon even executed a restructuring plan, but margins were flat even after these reforms. The cash flow problem is so severe that Avon appears to be flushing it down the drain. Avon appointed new people to leadership positions in every geographic region and had a coherent growth plan with well-stated goals. However, the bar was set too low and Avon didn't even jump over the bar.

The biggest problem with Avon, said Cramer, is the CEO, Andrea Young. Cramer thinks the stock is not worth buying until the company has changed for the better and the only way to make that change is if Young steps down.

Cramer took a few calls:

Ulta Salon (ULTA) is too rich with a very high multiple of 44. Even though the growth rate is also high, "no one ever got hurt taking a profit."

GNC Holdings (GNC) is a good play on the health trend and is counter-cyclical. "I think it can take off here," said Cramer.

KKR & Co (NYSE:KKR), Blackstone (NYSE:BX)

The Street makes out banks as being like gangsters making fortunes right and left, when in fact financials have been hobbled. Big banks are whipping boys, as the government puts restrictions on derivatives and the sell-side aspect activities when it was bad mortgages and sloppy lending that caused the credit crisis. Private equity players KKR (KKR) and Blackstone (BX) can benefit from the misery of the big banks, because they are not bearing the righteous indignation of the government. Cramer likes both, but he prefers KKR because it is more of a pure play on private equity, which comprises 85% of its sales. KKR is performing well, up 70% since its IPO in July.

KKR's money managers borrow to fund buying companies which they improve and then sell out as IPOs. In a low interest rate environment, KKR can borrow more and buy more companies. KKR has a proven track record; out of 95 companies they invested in, the value increased by an average 3.3 times the original investment. KKR also has domestic oil and gas assets and generates significant fees from its money managing business. The company beat earnings by an amazing 39 cents and has a rich 6.7% distribution rate. In a tormented sector, KKR remains one financial that is a buy.

Earnings Do Matter, but...with stocks: Darden (NYSE:DRI), Honda (NYSE:HMC), Toyota (NYSE:TM)

As earnings season approaches, on thing is for certain: earnings do matter. However, earnings matter insomuch as investors have to figure out how much they are willing to pay for those earnings. If the world is unstable, if the economy is not perceived as strong, investors are less willing to pay up even for good stocks. Cramer confessed that after 18 months of a bull market, Cramer is going to start sounding more bearish. Individual stocks may go higher on good earnings, takeover news, upgrades or acquisitions, but the big picture of skyrocketing oil and U.S. debt will rain on the stock parade, no matter how good the news is.

Darden (DRI) has been down, but Cramer said he is glad management admitted they were worried about gas prices. These remarks caused a decline in Darden which allowed it to adjust. Cramer thinks Darden is safe to buy at its current level.

Honda (HMC) is down 23% on the disaster in Japan. Cramer says he doesn't want to own any Japanese stocks right now and he admitted he can't figure out how HMC and Toyota (TM) trade, since the issues involved are complex.

Tech Has Flatlined: Microsoft (NASDAQ:MSFT), Cisco (NASDAQ:CSCO), Seagate (NASDAQ:STX)

Tech has flatlined. The level of underperformance is staggering, especially with the inventory glut in tablets, slow demand in Asia and the dominance of Apple (NASDAQ:AAPL). While Microsoft (MSFT) and Cisco (CSCO) can't go much lower, that is no compelling reason to buy. Parts makers may trade up on small bits of news, but as seen with the brief rally in Seagate (STX), the rises will be stock specific and temporary and will yield little if any pin action for similar stocks. Cramer would sell tech stocks into strength and wait for the sector to return in back-to-school season.

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