Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Thursday June 16.
With a rally in stocks on Thursday, Cramer took the quiet of the moment to outline the worst case scenario the bears are painting for investors. So for those who want to know how bad it can get, Cramer spelled out the scenario.
If the Greek government defaults on its debt, it will be to Europe what the collapse of Lehman Brothers was to the U.S. Cramer doesn't think Greece will be allowed to default, and that the Europeans will postpone or try to solve the problem. He expects Germany to work with the IMF to help bail out Greece, but if Greece is allowed to fall, bonds of poorer countries will not be bought, these countries will fall apart, the banks that insured these bonds will fail, and huge layoffs will result. Europe will fall into a second Great Recession.
The pain will trickle down to the U.S.and its banks which are "insuring uninsurable risks over there." Stocks will get hammered and will fall near their 2008 levels. U.S. companies will lay off workers, commodity prices will plummet, construction will stop. Money will be taken out of risky stocks and will go into defensive names. China will stop raising interest rates, which should help industrial stocks, but unemployment will rise to over 10%. The Dow may pull back 60%. However, the market will bottom after this as sellers are shaken out of the market and things look brighter in China.
"I'm not buying it," said Cramer. "I think we are closer to a bottom than a top." However, he explained to his viewers, "the next time someone tells you it is the end of the world, I just want you to know what the end of the world looks like."
Cramer took some calls:
Energy Transfer Partners (ETP) is a strong stock that is making excellent acquisitions and has a yield of 7.6%; "This is for me."
It is no secret that Cramer hasn't liked tanker stocks in a while, given the oversupply of ships that bring down day rates, complicated ownership and the poor balance sheets of most tanker companies. Frontline (FRO) management forecasted 5 more years of pain for the sector. However, Teekay Tankers (TNK) CEO Bruce Chan wanted to defend his company's story. TNK has an 11.5% dividend and has dropped 6% since Cramer put the stock on the Sell Block a few weeks ago.
Bruce Chan acknowledged that oversupply was a significant issue. Most tanker companies produced ships aggressively in the mid-2000s when day rates were high, and are now stuck with a glut of tankers. Chan described the tanker glut as a "hangover," but added, "With every hangover, there is another party around the corner." Chan discussed his company's secure fixed rate business with contracts for 1-3 years and TNK's ability to produce positive cash flows during the worst time for the industry in many years. Chan thinks the industry will soon bottom, since no one is ordering new ships, and ship orders are at the lowest levels in 20 years. The CEO added that the company is able to cover its dividend with its strong cash flow.
The American economy is becoming a Dickensian Tale of Two Cities with luxury end retail performing well and ultra-low end taking share from the "vanishing middle." The preference for private label brands in the supermarket is a growing trend, along with the increasing tendency to hold onto old autos and fix them up rather than buying new cars. Auto repair is non-discretionary; since most Americans depend on driving their cars for basic transportation, they will always pay up to repair their autos, even if they feel they can't afford to. Cramer discussed the two leading plays in the auto repair sector.
AutoZone (AZO) is the leading auto parts retailer. It reported one of the best quarters at the end of May with 19 consecutive quarters of double-digit earnings growth. The company has benefited from the mass closing of dealerships across the country; consumers who used to take their cars to the dealers for repair now go to AutoZone. The company has been remodeling their stores to attract more commercial business. The expansion into Mexico has been successful and the store count in the country has doubled over the past 3 years. Cramer thinks AutoZone is the single best stock buyback play; it has repurchased $9.9 billion in shares since 1998.
For those who are put off by AutoZone's triple digit share price, there is O'Reilly (ORLY) as an alternative. ORLY is adding 170 new locations to its store count and plans to add another 210 stores next year. The company is expanding through acquisitions, and its sales may double.
Cramer took some calls:
GM (GM) has a huge cash flow story and is a very inexpensive stock. Those who are interested in starting a position should buy GM on the way down, but "it's not going great right now."
Boeing (BA) has dropped on the labor issues, but Cramer thinks it should be bought here since it is in a multi-year cycle.
Caterpillar (CAT), Cummins (CMI), Honeywell (HON), Eaton (ETN), Emerson (EMR), United Technologies (UTX), 3M (MMM)
Investors with exaggerated skepticism are embracing the dour picture painted by the macro trends and are ignoring the CEOs as if they don't know what they are talking about. How could Caterpillar (CAT) have raised its dividend and reiterated its guidance when China is falling off a cliff? When Cummins (CMI), the best manufacturer of trucks in the world, says that domestic demand is rising, management is dismissed as having fallen off a haytruck in Indiana, the company's headquarters. 3M (MMM) reiterated its bullish outlook and raised its growth targets, but what do they know? They've only been doing this for 100 years. People doubt Sandy Cutler's optimism, when the Eaton (ETN) CEO is the one who predicted the slowdown in orders in 2008 before the crash. Honeywell (HON) says its divisions are strong, United Tech (UTX) is seeing no slowdown in business, but acceleration. Yet people still doubt these CEOs in favor of the macro picture. What do the CEOs know anyway, said Cramer, they are only running their companies.
Booz Allen Hamilton (BAH)
Cramer often recommends getting into an IPO and then making a quick retreat. Booz Allen Hamilton (BAH) is an example of a company that had a recent IPO, but is worth buying on the decline after the initial IPO hype. The stock shot up dramatically after its IPO, but has fallen to $17; the post IPO lockup period created selling pressure. Last week BAH reported a terrific quarter with an 8 cent earnings beat, upside guidance and an elimination of $250 million of its debt. However, The Street did not pay attention. "We looked, we listened, we liked it...it is a better piece of merchandise than when it became public...so Booz it up!" said Cramer.
BAH is a management and technology consulting firm that receives 98% of its revenues from the U.S. government. The government's tightening of its purse strings is good news for BAH, because the firm can advise the government on where and how to cut costs. Starting in August, the company's non-competition clause expires and it can go commercial. This is a huge catalyst for BAH, which might be called on to advise Europe's poorer governments. The company is hiring aggressively to prepare for the expected increase in clients. BAH might be a broken IPO, but it is not a broken company.
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