Stocks discussed on the in-depth session of Jim Cramer's Mad Money Program, Tuesday, January 12.
The markets seem counter-intuitive as they should go higher when the oil price collapses. "With oil at $30, pretty much straight down for months now from June of 2014, when Brent hit $114, you would think we would be dancing in the streets. I can recall whole bull markets based on the falling cost of fuel," said Cramer.
When the oil prices go down, it cuts heating bills which adds lots of money in people's pockets. Every company uses energy, be it plastics or trucking. This should help companies prosper. Why is the market falling then?
The real issue is the oil market itself. As the oil price falls, the production will decline. Even pipeline companies which were labelled as toll road operators will have less oil to transport. The companies and money managers see a different picture where all commodities are falling due to lack of demand. In Cramer's opinion, apart from airlines or cruise companies, no other company is even talking about the long-term effects of cheaper oil. Even the retailers and restaurants are not seeing sales pick up.
The pain of the oil industry lies in the bond market where energy companies are defaulting. Almost 30 companies have defaulted, which means that the high-yield bond market will need restructuring for $300B. "That is a frightening figure. It is possible that if oil stays down here or goes lower, a huge part of the $300B in high-yield bonds that this industry has issued will need restructuring," said Cramer.
Many pundits think that crude will rebound quickly, but energy experts tell a different story. "We need to respect the fact that something good for the economy, lower oil, can actually be a negative for the stock market, at least short term no matter how wrong it might turn out to be over the long term," concluded Cramer. The selloff might not end till oil stabilizes.
CEO interview - Dow Chemical (NYSE:DOW)
Dow Chemical has proposed a merger with Dupont (NYSE:DD) where the two companies will combine and then split into 3 businesses - agricultural chemicals, material sciences and specialty products. This merger will bring out tremendous value for the shareholders in Cramer's opinion, but the fact cannot be ignored that markets don't love anything with agriculture exposure. He interviewed Dow Chemical's chairman and CEO Andrew Liveris to find out what the merger will mean for the market.
Liveris mentioned the new facility in Texas which converts propane from shale gas fields and converts into propylene that is a vital input for many products and chemicals. This facility is the largest of its kind globally. Almost one-third of Dow's purchase of propylene will come from this facility now. They also have an innovation facility with 900 scientists that will work on innovating new speciality products.
Commenting on the Dow-Dupont deal, Liveris said that, "The macros here are everywhere and nowhere. And the only thing that is going to come through here eventually is companies that perform. This deal makes so much sense. For years Dow has been asked how are you going to grow in agriculture. What are you going to do with Dow AgroSciences? Well here is the answer. We are putting together with Dupont and Dupont AgroSciences what will be the number 1 player in seeds."
The combined companies will have synergies up to $3B. Currently the companies are exposed to China and other global markets, but the negativity will pass.
Darden Restaurants (NYSE:DRI)
"Do your homework," reiterated Cramer. If investors bought Darden restaurants simply because activist investor Starboard got involved, then they would be disappointed since Starboard is trimming its stake. Smart investors who have studied the company will know that the company might benefit from lower gasoline prices, new management and new ideas. If at all, use the weakness to buy the stock.
Activists get involved with companies for different reasons, many of which have nothing to do a with a regular investor's portfolio. So it's best to make decisions after doing your own homework. Another case pointed out by Cramer was when Starboard got involved with Macy's (NYSE:M), nudging the company to turn its real estate to a REIT. Investors who blindly followed got burned as Macy's rejected the offer.
If one doesn't have the time to do homework, invest in an index fund. Do not rely on activist investors blindly.
Cramer's mea culpa moment
With an ever-changing market, the investment strategies should also change. "I'm just saying that this is an unforgiving market and you have to expect that things will go wrong, not right," said Cramer. He agreed that his opinion on 2 stocks were wrong. Speculative stocks have been the worst strategy for 2016 so far.
First is Fitbit (NYSE:FIT), which was recommended by Cramer when it went public. After the CEO's interview, he was reassured that the holiday season will be a big winner of health and fitness. While Cramer was right about the product of Fitbit, the stock has gone the other way. There are many reports of Fitbit's competition coming out of Consumer Electronics show and the Apple watch as well. Regardless of these things the stock still remains speculative. "This market abhors speculation and I should have recognized that. My bad," said Cramer.
The other stock was Aloca (NYSE:AA), which Cramer recommended buying since the company would be splitting into 2. The price of aluminum won't matter much and one day the market will react positively to the split of Alcoa, but to push this speculative stock in the short term was a wrong move. "Just like with Fitbit I misjudged the antipathy people have toward any story with any holes in it, let alone a speculative situation with some actual flaws," said Cramer.
Cramer still believes in the story of these 2 companies, but the current environment is not supportive.
CEO interview - Novavax (NASDAQ:NVAX)
Novavax is a next generation vaccine developer that has lost 25% of its value in 2016, although the stock had gained 41% in 2015. One reason for the stock to crash is that investors want to cash out of the speculative biotech stocks. Cramer interviewed CEO Stanley Erck to hear what lies ahead for the company.
Erck mentioned that the company had a great 2015 where they had 2 positive Phase II trials for their RSV vaccines and they expect to continue and replicate those results in Phase III. The company vaccinated 11,850 patients last month and they will be compiling data for these patients in the third quarter. He added that the company is on a predictable path and does not expect surprises.
Viewer calls taken by Cramer
BP Plc (NYSE:BP): No oil company's dividend is safe when oil is going down.
Citigroup (NYSE:C): The China exposure story of Citigroup might be overdone. Right now, the stock is out of favor.
Chipotle (CMG.B) (NYSE:CMG): There is time put in between a company's crises and getting out of it. Once that is done, the stock will see a rebound.
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