Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Wednesday August 17.
Why has Home Depot (HD) been outperforming Lowe's (LOW) on a consistent basis? The secret is management. Both of these companies appear to do exactly the same thing, but Home Depot reported a beautiful upside surprise with a 4 cent earnings beat and revenues that rose 4.2%, and Lowe's disappointed with a 2 cent miss. Home Depot raised guidance, Lowe's lowered guidance. Same store sales for HD are up 4.3%, while same store sales for Home Depot are down 4.3%. The two companies seem to have a mirror-like reverse image on every metric, including inventory and gross margins, with Home Depot stronger and Lowe's, weaker.
Cramer recommended Lowe's in the spring because he thought it would catch up with its rival with its store renovation plans. However, the company has been dragging its feet, while Home Depot has already renovated its stores and is seeing results. Home Depot has better products, a great website, has cut costs and closed down stores that were not working. In short, Home Depot is winning because its management is better, and they did not blame their problems on the economy, unlike Lowe's management. Home Depot is an example of why investors should stick with best-of-breed.
Edwards Lifesciences (EW)
In a volatile market, it is essential to look for stocks that have huge upside potential and limited downside. Edwards Lifesciences (EW), a producer of heart valves and devices that measure cardiac activity, lost 22% of its value over the last month. Cramer had noticed this stock before, but felt it was too expensive. However, after its current decline, it might be a buy.
The company has developed a less invasive way to replace heart valves by threading through blood vessels rather than open heart surgery. This is good news for the 300,000 patients in America who are denied open heart surgery because of the risk. Add to this number the patients who may elect for this procedure rather than invasive surgery, and the market in the U.S. alone could be $1 billion.
EW also produces valves and machines that monitor glucose for diabetics. In these areas, EW is considered the gold standard in the industry. The company trades at a multiple of 24 with a growth rate of 26%. For extra safety, Cramer would consider playing EW with November 65 calls to cut off the downside.
With the Dow going down only to recover to close up 4 points, investors may ask "Are we headed for a recession?" The head-spinning volatility and the mixed messages from data points and executives makes everything seem uncertain. Executives couldn't seem to agree whether the economy was to blame or not. Dell (DELL) reported decent earnings, but it guided revenue down on lack of consumer confidence. However, this could be due to the fact that consumers are shunning PCs in favor of iPads. Saks (SKS) and Dick's Sporting Goods (DKS) were also cautious, but Target (TGT) indicated that consumers are buying aggressively. TJX (TJX) has lean inventories, and doesn't seem worried about the economy. Urban Outfitters (URBN) said the last ten days had seen very slow sales for its Anthropologie brand, but some have pointed toward the company's weak performance in general.
So who is right? Cramer sides with the CEOs who don't use the economy as an excuse, but can execute in any environment. While the management of some companies may prefer to blame the state of the economy for their poor performance, effective CEOs who say the opposite are proving the weaker ones wrong.
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