Cramer's Mad Money - Microsoft's Mid-Life Crisis (5/10/11)

by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Tuesday May 10.

Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), Apple (NASDAQ:AAPL), Arm Holdings (NASDAQ:ARMH), Netflix (NASDAQ:NFLX)

"At best, this 'steal' is a joke," said Cramer about Microsoft's (MSFT) acquisition of Skype for $8 billion. Sure, Microsoft could have paid more for Skype, but this, like Intel's (INTC) acquisition of McAfee, is a "Big Cap Tech Mid Life Crisis." Intel was proud of getting McAfee on the cheap, when it would have done better to have bought Arm Holdings (ARMH) which has Apple (AAPL) exposure. At least McAfee is profitable; Skype commands a lot of eyeballs but not eyeballs that pay. For that, Microsoft should have bought Netflix (NFLX). If Microsoft paid $8 billion for a not so profitable company, why couldn't it have bought Netflix (NFLX) for $16 billion and benefited from its huge profits?

CEO Interview, Doug Tough, International Flavors & Fragrances (NYSE:IFF). Other stock mentioned: McDonald's (NYSE:MCD)

Because the market is volatile, it is important to have defensive stocks as part of a diversified portfolio. International Flavors & Fragrances (IFF) has exposure to defensive stocks but is not as burdened by raw costs as are many soap and cereal companies. IFF produces flavors and fragrances for McDonald's (MCD), Frito Lay and many recognizable brands. The company has 16% market share and is taking emerging markets by storm with 76% of its revenues from overseas. The company beat its most recent earnings estimates by 9 cents with a 9.2% rise in revenues. The new CEO, Doug Tough, has seen a 40% rise in stock price since he took the helm in March 2010. The company spends 8% of its sales on Research and Development, and the investment is paying off with aggressive growth.

Doug Tough discussed the new emphasis the company is placing on health and wellness and its research on ways to flavor food with less salt and sugar. The company has been especially successful in introducing natural flavors and fragrances to the European market. IFF is passing on rising raw costs to customers, and has been successful in doing so, since IFF's clients realize that flavor or fragrance is a "very critical part" of their businesses. The company conducts 400,000 consumer interviews worldwide to more effectively develop flavors to suit regional tastes. The fragrance part of the business has grown 14%, and Tough discussed new lucrative contracts for fragrances.

"This company is on an explosive growth path," said Cramer. "It has a lot of share to take, even at 52 week high, and represents a lot of value."

CEO Interview: David Vieau, A123 Systems (AONE)

There is a lot of talk about electric cars, but many investors are worried about buying stocks levered to this trend because the perception is that these companies are overly dependent on government funding, which might or might not materialize. A123 Systems (AONE) is a $650 million company with no material revenues yet from electrical vehicles and has posted heavy losses. However, the company is investing in a build-out and hiring more workers in anticipation of an explosion in electrical cars. A123 has partnerships with many major players in the auto industry. The stock was a hot IPO, and reached $25 at one point before its steady climb down to around the $6 level. The company recently reported earnings that were 5 cents lower than expected and a fall in revenues. However, A123 said it would double revenues given its high volume, and Goldman Sachs agreed with this prediction.

What is holding the electric car industry back? CEO David Vieau said the company is on the path to developing capacity for electric cars and has the largest lithium-ion battery factory in North America. The company recently raised $254 million in a secondary offering which raised its cash holding to $400 million. A123's batteries are different from those of the competition because they are more safe and durable, long-lasting, have no toxic materials and are 100% recyclable. A123 is currently seeking funding from the government, but even if the funds don't come through, the company has enough grant money for the next 18 months. While more loans might be forthcoming in 2014, the CEO says he expects the company will be profitable by that time. "A lot of our risk is behind us now," he said. The company has built factories and is expecting to see a return on its investment in the near future.

Cramer said, "We have been cautious, but now that we are finally almost there and the stock is so low, it could be interesting. Do your homework, don't go wild, let the stock come to you."

Coal Is Still King, Market Vectors Coal ETF (NYSEARCA:KOL), Peabody (BTU)

Commodities are going crazy with the fall of silver and the decline in oil. With so many fund managers buying commodities with borrowed money, is there any in the group left that is worth the investment? Coal is still king, at least for the long term, given strong demand for both thermal and metallurgical coal in emerging markets. What is coal going to do in the shorter term? Cramer looked at the technical side of the trade.

Coal fell last week along with oil, but the drop may be a buying opportunity. Since the end of 2010, Market Vectors Coal ETF (KOL) has been trading sideways and has been consolidating between $51 and $45. The stock is at its $48 support level, and this might be a good entry point. Following the Elliot Wave Theory, Kol's B wave and C wave both indicate an upside for the commodity. The squeeze chart indicates that volatility might be slowing down and is setting the stage for KOL to "fire off." The technical signs point to coal having a breakout in August, and KOL may reach $52.75.

However, Cramer isn't satisfied with an ETF. The best play on coal's upside is Peabody (BTU) which is "the Exxon of coal." With its Australian mines, the company is in a perfect position to continue its growing exports to Asia. BTU is 10 points off its high, and is cheap. "A coal breakout is on the horizon," Cramer said, "...and when it happens, the stock to own is BTU."

The X-Factor of Stocks: Amazon (NASDAQ:AMZN), Panera (NASDAQ:PNRA), Chipotle Mexican Grill (NYSE:CMG), Polypore (NYSE:PPO), Domino's Pizza (NYSE:DPZ), Fossil (NASDAQ:FOSL), Google (NASDAQ:GOOG), Waste Management (NYSE:WM)

How do you decide if a stock has "got talent?" Sometimes it is not so obvious why some stocks just seem to keep going higher. Many just have that "X Factor" that attracts fans, like the "food with integrity" theme that drives up Chipotle Mexican Grill (CMG) after a not-so-hot quarter or Panera Bread (PNRA). Amazon (AMZN) rallied to an all-time high on virtually no news. Polypore (PPO) is dazzling the public even though it sells a rich multiple of 44. Fossil (FOSL) is a stock with star quality with its 20 cent earnings beat and 12 point rise in stock price. Fossil represents a tectonic shift in retail given the power of its brands, a shift that cannot be measured by hard, cold numbers alone. Fossil is seeing 57% growth in Asia, 34% in Europe, and the company is reaping the rewards of having invested in growing the company. In just one quarter, the stock saw a 62% growth in revenues, and will continue to be a great performer.

Cramer took some calls:

Google (GOOG) is spending a lot of money, and it isn't clear that the company is going to see returns on its investments. The new CEO is not skilled at explaining the company's moves. "I'm suspect about its long-term profits," said Cramer, "and I'm not recommending Google on the show."

Waste Management (WM) has one of the "prettiest" charts and is "firing on all cylinders." Cramer would hold the stock and buy on any decline.


Jim Cramer was up 31% in 2009. Click here now to sign up for Jim's Action Alerts PLUS and trade alongside him. Special discount for Seeking Alpha users.

Get Cramer's Picks by email - it's free and takes only a few seconds to sign up.