Stocks discussed on the in-depth session of Jim Cramer's Mad Money Program, Monday, March 21.
The market has had a decent run in February, but Cramer thinks that stocks are still undervalued. While the rally was induced due to the Fed holding back rates or a recovery in oil price, this opens up opportunities for other stocks. "I think that a lot of this move has to do with the fortunes of individual companies, and how much more their stocks may be worth than where they are currently valued," said Cramer.
Consider Starwood (HOT), which got a bid of $11B a few months ago from the Marriott (NYSE:MAR) group. Reckoning the fact that Starwood has 1,300 properties across the globe, Cramer thought that the bid was low. There was pressure on the board from short-sighted activists who demanded a sale. Recently, the Chinese company Anbang Insurance Group gave a higher bid by $2B, which led to Marriott giving a counter-bid for $13.6B. The fact that Marriott's stock did not move on Monday suggested that they are not overpaying. "To me it says that Starwood should never have been so low to begin with. That the stock market was just wrong," said Cramer.
Next instance was Caterpillar (NYSE:CAT) which pre-announced it will fall short of the Street's expectations. Its yearly earnings expectations are still the same, but its current business is below expectations. The stock went down only to rise higher later. Some are calling it a technical run but Cramer thinks Caterpillar should have never been low in the first place.
Then there was news about Sherwin-Williams (NYSE:SHW) bidding for competitor Valspar (NYSE:VAL) which led to the latter's stock rising 23% on the news. Cramer also thinks that McDonald's (NYSE:MCD), American Airlines (NASDAQ:AAL), Wal-Mart (NYSE:WMT) and Disney (NYSE:DIS) are all undervalued currently.
"I think it gets obscured by the bigger backdrop of the Fed and the presidential race and the weakness of the rest of the world. At any given time, we have had a rolling bear market in so many different sectors," said Cramer. When the smoke clears and people see the bigger picture, these stocks will be selling way higher than they currently are.
Johnson & Johnson (NYSE:JNJ)
The entire pharma sector is in bear market mode due to the political issues surrounding it. One exception to this is Johnson & Johnson, which is up 4% for the year while the drug index is down 9%. The company was a poor performer relative to the rest of the stocks in the sector for the last few years, but the sudden rebound is a result of background work.
"The truth is that Johnson & Johnson is finally benefiting from a turnaround that was many years in the making, a comeback that has been spearheaded by CEO Alex Gorsky. Yes, the difference here is all about leadership," said Cramer. Gorsky took over as CEO in April 2012 and has got the drugs, medical devices and consumer products in order.
Cramer thinks JNJ could have the best pipeline in the industry. They have 11 drugs with greater than $1B sales along with recently approved compounds like Darzalex for multiple myeloma, Xarelto for blood clots and strokes and Imbruvica for chronic lymphocytical leukemia, that have the potential to be huge.
The company has $18B cash on balance sheet which is triple-A rated. It has a 2.8% dividend yield, trades at 15.6 times earnings and has a huge buyback program. One important factor is that JNJ has huge overseas business and with the dollar peaking, it could reap great benefits for a long time. "JNJ has become of the few pharma companies that I think can withstand this election year and come out on the other side much higher than where it is now," said Cramer.
Stock winners in March
Fund managers often use sports analogies in the stock market as they are prone to it. "The sooner you get the sports analogies out of your heads, something that hedge fund managers in particular are prone to, the sooner you will realize that you can make money not betting against a loser and for a winner, but rather by just accepting that there could be multiple winners and you aren't betting at all," said Cramer.
Investing in a good franchise can do well over time irrespective of the competition. This can be compared with Oracle (NASDAQ:ORCL) which reported great numbers last quarter. The company has been transforming itself from premise-based to cloud-based. Everyone thought the cloud business was bad after Tableau (NYSE:DATA) and LinkedIn (NYSE:LNKD) reported shocking numbers. This impacted the stocks of Adobe (NASDAQ:ADBE), Salesforce (NYSE:CRM), SAP (NYSE:SAP) and many other cloud names.
When Oracle and others reported good numbers, hedge fund managers realized that not everything is connected. Good stocks are like great franchises that do well in the long run.
Cramer came back with the homework on stocks he couldn't give his opinion on earlier.
Tyler Technologies (NYSE:TYL) is the information technology service provider for public listed companies. The company has a huge addressable market and limited competition. The company reported poor earnings last quarter and still trades at 33 times earnings which is very expensive. Don't buy.
Stag Industrial (NYSE:STAG) is an industrial REIT play. It yields 7% which might not be sustainable in Cramer's opinion. The company has exposure only to the industrial sector and has been selling properties to buy other properties. The company has to generate positive cash flow which can take a while. Ventas (NYSE:VTR) is a much better buy.
StoneMor Partners (NASDAQ:STON) is an MLP selling goods and services related to the funeral business. The company yields 10.4%, but has negative cash flow which makes the dividend not sustainable. They have huge debt which is stretching their balance sheet. This stock is a sell.
Sherwin-Williams offered $11.3B for its competitor Valspar. "This deal is a shocker," said Cramer. Sherwin is paying $113 in cash for the stock that closed at $83 on Friday. Valspar's sales were hurt as it was losing business to Sherwin. The stronger dollar was also hurting Valspar's earnings.
This deal makes a lot of sense since the combination of the two big companies will lead to a further reduction of paint companies, leaving PPG (NYSE:PPG) and Masco (NYSE:MAS) as the other big players. Benjamin Moore, owned by Berkshire Hathaway, is a strong competitor too.
Sherwin will have synergies of $280M from the deal, which should benefit the acquirer. "In my view, the 5% decline in its stock price today seems a bit silly given how spectacular this bid is for Sherwin-Williams," said Cramer.
M&A activity picking up is a sign of a healthy overall market.
Viewer calls taken by Cramer
McKesson (NYSE:MCK): This stock is a battleground as the middlemen are being crushed. Stay away.
Boeing (NYSE:BA): Cramer said he missed the upside in Boeing, but he still wants to stay away from companies with accounting irregularities.
Fitbit (NYSE:FIT): Cramer thinks the stock represents value at $15.
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