Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Wednesday September 14.
The Tim Geithner Rally: SAP (NYSE:SAP), Apple (NASDAQ:AAPL), Juniper (NYSE:JNPR), Google (NASDAQ:GOOG), Alkermes (NASDAQ:ALKS), Elan (NYSE:ELN), Dolby Laboratories (NYSE:DLB), Salesforce.com (NYSE:CRM)
The 141 point rise in the Dow might well have been caused by remarks by Treasury Secretary Tim Geithner that there will not be a Lehman-like disaster in Europe. Geithner said to Cramer in an interview: "There is no chance that the major countries of Europe will let their institutions be at risk." If Geithner is correct, investors have been too fearful of late, but that isn't stopping the bears from accusing the Treasury Secretary of putting a good face on a potential crisis. Cramer disagrees with the bears' assessment of Geithner's statement for several reasons. Geithner knows what he is talking about, because he developed TARP and the stress test for banks during the financial crisis. Geithner is too concerned about his legacy to make false assurances to temporarily calm the public, only to be criticized when a crisis does erupt. The big banks of Europe are much more "cozy" with their governments than their counterparts in the U.S, and it is unlikely the Europeans will let their banks crash out of fear of "moral hazard." Simply put, "Geithner has earned enough credibility to be trusted," said Cramer.
A sector worth buying on the ease of European woes and because it has ceased to be punished by seasonality is tech. SAP (SAP) is a German software company that is going "gangbusters." It is not too late to buy Apple (AAPL), which is still shy of its 52 week high. Juniper (JNPR) is a networking company that has been so crushed that not much can hurt it. Google (GOOG) is making major inroads into Europe and in mobile, social media and cloud trends. Salesforce.com (CRM) reported a great quarter, but since summer was not the season for tech, no one took notice.
Cramer took some calls:
Dolby Laboratories (DLB) is not worth buying until housing recovers, since the main driver of its revenues are home theaters.
Not all stocks in the same sector should trade the same way; what is the key to finding the best stock in a sector? Execution. Cramer compared Cummins (CMI) and Navistar (NAV), two major truck companies that have very different prospects.
Cummins (CMI) held a very bullish analysts meeting this week, and rallied 6% after management's bold pronouncements about its future. Cummins is recognized as best-of-breed, thanks the the leadership of outgoing CEO Tim Solso, who expanded the company from an ordinary engine maker to include power generation, fuel efficiency technology, components and emissions control. Cummins now has diversified end markets and under Solso, its market cap expanded tenfold. The worldwide truck replacement cycle is in its early innings, and will continue to fuel growth. Cummins' sales outlook has been expanded from $18 billion to $30 billion, earnings growth is expected to grow from 14.5% to 18%. By 2015, the company expects to earn $20 per share, double the amount in 2011. Cramer thinks Cummins could be the cheapest growth industrial stock, thanks to product innovation, pricing power and stronger local distribution channels. Cummins expects double digit growth in all of its divisions, and yet sells at a multiple of just 9.
Navistar (NAV) paints a very different picture, with its colossal earnings miss and lowered forecast for all of 2011. Even though it is trading at a low multiple of 5.6, its engines are less fuel efficient and more expensive. NAV will continue to lose share to Cummins. Its Achilles heel is its military truck division, and with the U.S. government as its main customer for mine-resistant trucks, NAV is expected to suffer from the government's cuts in defense spending.
"Why buy the loser when you can buy the winner?" posited Cramer. Cummins is the truck company with accelerating growth.
Investors shouldn't let one negative, short-term data point drive them out of a long-term growth story. Cramer used the examples of Fossil (FOSL), Lululemon (LULU), Ralph Lauren (RL) and McDonald's (MCD) to demonstrate this point.
Fossil (FOSL), the high-end watch and accessory maker, saw a 12.5% haircut after a quarter that seemed like a disappointment, and eventually fell 22.5%. Cost pressures were to blame for the stock's decline, but this led to the company only slightly lowering its guidance. Since Fossil has had a terrific track record of beating earnings estimates and raising guidance, the stock was punished. The company still has pricing power and should have no trouble passing on higher costs to its loyal customers. Fossil was also hit in February because of its decision to invest more money into developing its business, but shares recovered.
Lululemon (LULU) has the reputation of being a "fad," and the bears tend to pounce when they suspect the party may be over. However, Cramer sees Lululemon as a lifestyle brand that isn't going away anytime soon, with plenty of room to expand. The stock was declined 8% after its "disappointing" quarter on Friday and was still down 4.5% on Wednesday. There were concerns about gross margins and higher labor costs, but the company has reported 20% same store sales growth, a figure that surpasses the growth of most retailers. Gross margins actually increased 470 basis points, so the reason for the disappointment was inaccurate.
Ralph Lauren (RL) saw its stock fall 15 points because of concerns over sourcing costs, but the stock recovered from the dip quickly and returned to pre-quarter levels. Ralph Lauren demonstrates the principle that companies that have pricing power can't be derailed by higher costs. With cotton prices down, Ralph Lauren is headed higher.
McDonald's (MCD) fell 4% on disappointing same store sales, but the main cause of the shortfall were country-specific problems. The sell-off in MCD was an overreaction, and when it does get hit, MCD becomes an accidental high yielder. The company sells at 15 times earnings with an 11% growth rate, and has a great long-term story, despite some short-term lumpiness.
Cramer took some calls:
Supervalu (SVU) is suffering along with the rest of the supermarket sector; "I wish them luck, but they are in one awful sector."
Oil demand is not going to wane, and yet the oil service stocks have been hammered. Cramer thinks the relentless assault on the drilling stocks cannot continue. He would buy Schlumberger (SLB), the best in the industry, Haliburton (HAL), Ensco (ESV) and Lufkin (LUFK). Cramer said the drillers "are the cheapest equities in the S&P 500."
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