Stocks discussed on the in-depth session of Jim Cramer's Mad Money Program, Thursday, January 14.
From the checklist Cramer gave a few days ago, suddenly most of the things have happened and the market rallied on Thursday. "In what can only be described as a pretty amazing 24 hours, a slew of worries were addressed, and even though these positives can be quickly undone, we still got a terrific rally," said Cramer. Firstly, the investor sentiment has become worse, something that should happen before the market can bottom. Then, the high growth FANG stocks were giving up due to selling.
Next, there was relief from China as the markets rallied. Oil also moved away from sub-$30s. Then there were strong earnings from JPMorgan (NYSE:JPM), the shares of which went up by 1.5%. Lastly, the Fed's James Bullard mentioned that the Fed won't raise rates if the market is in turmoil.
The market is not out of the woods yet and Cramer suggested selling the laggards in the portfolio on strength.
How cheap is cheap?
"Don't let the rally on Thursday get you into a value trap," said Cramer. Value trap is a stock that appears cheap due to low P/E ratio, but in reality the estimates are too high. When the earnings come down, the stock gets crushed. "This can be a difficult concept for people, since the price-to-earnings multiple or P/E ratio, is the number one metric we use to value stocks and determine whether they are cheap or expensive," said Cramer.
P/E ratio is used by investors to figure out how much the market is willing to pay for a company's future earnings and it is popular since it gives an apples to apples comparison. If the P/E for a stock is low, investors view it as cheap. There are stocks with super-low P/Es that can be laggard for years and eventually get wiped out. "These are value traps if one doesn't know what to watch for," said Cramer.
Rising and falling earnings estimates drive the stock prices. Consider the case for Ensco (NYSE:ESV), which is trading at 4.7 times earnings estimate of $2.27 per share while the average stocks in the S&P 500 trade at 16 times earnings. Given that the stock has lost 80% in the last 2 years, it might seem like a bargain, but the reality is that the earnings estimate of $2.27 is still too high and there is no way the company can meet its estimates. Offshore drilling is not economical right now. This is a typical case of a value trap as the company will not earn much and investors will lose faith in it.
IBM (NYSE:IBM), which is losing business, may also be another value trap with a low P/E. Some others are Freeport-McMoRan (NYSE:FCX) and U.S Steel (NYSE:X). Lastly, some airlines might also not be able to meet their earnings due to high price competition.
Discipline of buying stocks
"Complacently negative investors dismissed Wednesday's ugly close as just more of the same horrible action. But opportunistic investors? The ones who sense that stocks are getting too cheap and change their view? They look like real winners, at least for the moment," said Cramer.
Cramer's trust purchased stocks in the last hour of trading on Wednesday, because those levels were set long ago. This is discipline. One cannot just say that all of a sudden the market looks cheap and go with the flow. In reality, the market was so terrible that he did not feel like buying stocks, but he reminded himself that one cannot freeze buying just because of current negativity, and the buying levels were set a long time ago with a cool head that was not driven emotionally.
"If you don't buy something when the market is universally and deservedly despised, then when will you buy, especially if you're sitting on a boatload of cash?" asked Cramer. There will be no bell that goes off signalling a market bottom, it's the discipline to buy when everyone hates the market and sell when everyone loves it.
"Thursday was a textbook example of the importance of discipline. Nobody wanted to buy stocks Wednesday afternoon. It felt like the world was ending, for heaven's sake. But you can't let those emotions influence your decision-making process," concluded Cramer. Discipline always trumps conviction.
CEO interview - Alder BioPharmaceuticals (NASDAQ:ALDR)
Alder Biopharma is a biotech specializing in antibody based therapies, one of which is a migraine drug in Phase III trials, and another drug for inflammatory diseases like arthritis that will be in Phase II trials later in the year. The company's stock rallied 11% on Thursday, but it is down 48% from its last year highs. Cramer thinks it has more room to run since a biotech with a lot of Phase II trials is far less speculative than those in early-stage clinical trials, but it's still a spec for younger viewers. He interviewed co-founder and CEO Randy Schatzman to hear what lies ahead.
"I think the thing for your viewers to understand is that the biopharma space has actually never been stronger and innovative. The fundamentals are sound and 2015 was actually its most productive year. Big pharma is looking to this industry to provide the innovation for their own pipelines," said Schatzman.
The company's migraine drug in Phase III trials is showing positive signs. Schatzman believes the company has identified and neutralized one of the primary factors that trigger migraines and the patients are responding well to the study. Alder is also spreading the word via social media to 36M migraine sufferers.
The company's arthritis drug will be entering Phase III trials later in the year for which Schatzman said, "it's going well."
Viewer calls taken by Cramer
J.C. Penney (NYSE:JCP): "You can make a buck in trade but this is not my kind of retailer."
Walgreens Boots Alliance (NASDAQ:WBA): Based on last quarter, which was great, Cramer thinks it is a good buy and they bought some for their charitable trust.
JetBlue Airways (NASDAQ:JBLU): The price competition in airlines is so much that people think they might not be able to meet their estimates.
GW Pharma (NASDAQ:GWPH): This is still a speculative stock.
Which oil stocks are good? "If an oil stock is below $10 and has a huge amount of debt, stay away."
Yelp (NYSE:YELP): Companies get bought when they are doing well and the time for Yelp being bought has passed.
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