CNBC’s Jim Cramer recommended buying and selling the following 5 stocks on his Friday, November 18, episode of Mad Money. In this article, I analyze which of his picks are good buys right now.
Costco (COST) - Trading around $81.
This members-only wholesale retailer has true pricing power and is prepared to display that power through deep discounts during the holiday season. Costco achieves this pricing power by purchasing in large volumes. The downside to this approach, which also holds true for rival Wal-Mart’s (WMT) Sam’s Club stores, is that the supply is limited to a number of brands. Shoppers searching for variety will be forced to turn elsewhere.
However, Costco is well-positioned to benefit from informed consumers leery of shopping online and/or looking for a specific brand or model due to its expansive selection of electronics. Although Costco’s 24.6 P/E ratio is double that of its competitors Target (TGT) and Wal-Mart, its year-over-year quarterly revenue growth of 16.8% is quadruple that of Target and twice as much as Wal-Mart’s. It is worth noting that Wal-Mart’s performance numbers also includes its grocery stores and super centers.
Although Cramer’s charitable trust sold its entire position in the retailer, Cramer gave it a glowing recommendation based on solid fundamentals and a strong 4th quarter marked by a robust holiday season. Trading up 13% YTD, Costco stock is still worth owning because of its 1.2% dividend yield and the company’s ability to negotiate prices with suppliers significantly increases profit margins, which will directly impact the bottom line. Cramer was right on COST.
Deere (DE) - Trading around $72.
Cramer gave this agricultural equipment maker a buy recommendation, which was the correct decision. Deere recently announced its plan to invest $32 million into production in Russia. The region is renowned for its wheat production and Russia has 20% of the world’s forestry and 9% of its arable land, significantly increasing Deere’s growth prospects.
Cramer, whose charitable trust owns Deere shares, recommended this best of breed tractor maker on the idea that farmers will spend more money on equipment to try and get more crops out of the same acreage. Equipment-maker CNH Global (CNH) is good, but not great. Cramer considers Deere to be a proprietary company, whereas CNH isn’t because their equipment isn’t special.
Deere is a way to play both equipment and agriculture. Deere’s low price-to-earnings multiple of 12.5 and 2.2% yield presents a value for a stock that could provide multiple years of growth. The fourth quarter will prove challenging, as the stock is trading down 10.5% YTD, but is worth buying and owning throughout 2012. Cramer was right on Deere.
IntraLinks Holdings (IL) - Trading around $5.60.
This software solutions firm has practically been in freefall and is showing no signs of a recovery anytime soon. The company reported an in-line Q2, but lowered Q3 guidance. The company seems to be continuing this trend. IntraLinks reported Q3 revenue of $54.8 million and $0.11 earnings-per-share. While the Q3 revenue was a 15% year-over-year increase and beat estimates by $0.3M, the EPS missed by a penny. However, the 4th quarter guidance was significantly lower than consensus and the stock fell 20% on the news.
Cramer prefers both competitors IBM (IBM) and EMC Corp. (EMC) over IntraLinks. Companies like Salesforce.com (CRM) shows the investment community how cloud-computing firms should be performing in a world where the shift to mobile, social and cloud technology is rapidly taking place. IntraLinks can’t compete long-term with competitors who offer better services and have pricing power due to their size. IntraLinks is trading down 71% YTD. The best bet is to take the haircut and invest in a best-in-breed cloud-computing company with significant growth prospects. Cramer was wrong on this one.
DSW (DSW) - Trading around $45.
This shoe-centered retail store is one of many positioning itself to take advantage of what is expected to be a strong holiday shopping season. Specialization in one aspect of retail has paid off for DSW. Unlike competitors J.C. Penney (JCP) and Macy’s (M), the specialty footwear retailer is able to manage inventory and expenses more closely.
The smaller overhead is directly reflected in its 14.7% year-over-year quarterly revenue growth. J.C. Penney has -4.8% quarterly revenue growth while Macy’s has QRG of 4.10%. The 1.3% dividend yield paired with the 11.54 price-to-earnings ratio, which is lower than the 15.41 industry average, presents a convincing argument to own the stock heading into the end of the 4th quarter.
DSW is up 14.5% YTD, but is still trading about 10% off the 52-week high. DSW generates a 12.3% profit margin, higher than any of its competitors. With more and more consumers looking for quality merchandise at reasonable prices, DSW is one of the quality retail stocks that should pay off for investors. Cramer was right on DSW.
Computer Associates (CA) - Trading around $21.
Cramer gave this information technology software and services company a sell recommendation, and it’s clear that it is the only way to play the struggling firm’s stock. The stock’s performance may be surprising when considering its Q2 results beat estimates. Computer Associates reported in-line quarterly revenue of $1.2 billion, a 10% Y/Y increase, and EPS of $0.51, a $0.02 beat. Forward guidance, however, is what killed/damaged the stock. Executives said, “we were not pleased with one area, new product sales.”
Computer Associates adjusted fiscal 2012 revenue growth expectations down to 5-6% from 6-8%. The consensus before the adjustment was 9.3%. This news signaled a red flag to investors and the stock is trading down 17.88% YTD as a result. A 1% dividend yield and 11.8 PE ratio is hardly enticing enough to own this stock with shoddy fundamentals.
Competitor Oracle (ORCL) is acquiring Salesforce.com’s firm, RightNow (RNOW) and is releasing its Fusion cloud apps. Larger competitors with better fundamentals and performance expanding cloud offerings and IT services, sticking with a stock like Computer Associates (CA) appears to be a losing strategy. Cramer was right on CA.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.