Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Monday February 27.
5 Great Ways to Play the Oil Bull Market: ConocoPhillips (COP), Schlumberger (SLB), EOG Resources (EOG), National Oilwell Varco (NOV), Magnum Hunter (MHR). Other stocks mentioned: Cheniere Energy (LNG), TransCanada Corporation (TRP)
Oil has been on the rise, but fell a few points recently. Such dips give investors a chance to buy oil stocks; since prices are higher at the pump, why not get "revenge" for the rise in oil by making money buying stocks in the oil sector? Cramer thinks everyone should have at least one oil stock, but which one to buy depends on an investor's tolerance for risk. He rated 5 top oil plays, from the most conservative to the most risky:
1. ConocoPhillips (COP) has huge buybacks that actually shrink the float and a 3.4% dividend. The company is breaking itself up to unlock value by spinning off its refining business and holding on to its exploration and production segment. COP has a clean balance sheet and great assets, but still has some exposure to low-priced natural gas. The stock has only risen 5% so far this year, but may play catch-up with other stocks in the sector, because it has an analysts day March 5th and its breakup is official on May 1st. Cramer would buy the stock ahead of these two catalysts.
2. Schlumberger (SLB) is one of the largest oil companies and is a main beneficiary of the huge rise in drilling. It increased its capital expenditure budget by 30%, and 80% of its revenues come from outside of the U.S. SLB has 60% market share in deep water drilling, and it should cash in on the comeback of drilling in the Gulf of Mexico. SLB expects to see 30% earnings growth, and with a multiple of 14, the stock is a steal.
3. EOG Resources (EOG) is the best way to profit from the unconventional domestic shales like the Bakken and the Eagle Ford. EOG is shifting from natural gas to oil and is growing its oil production and reserves aggressively. Its assets in the Eagle Ford alone are worth the value of the entire company.
4. National Oilwell Varco (NOV) has 70% market share in the production oil rigs, but prices need to stay high to keep NOV's backlog growing. Investors who believe that oil will stay high for some time, either due to global unrest or demand could risk buying NOV, but it isn't a stock for the squeamish.
5. Magnum Hunter (MHR) is a small, speculative oil company that has major acreage in the Bakken, the Eagle Ford and the Marcellus. While it is 49% levered to natural gas, the company is moving aggressively into oil and recently reported "insanely rapid" production growth of 455% and a 44% increase in proven reserves. The company is transforming itself into "an efficient drilling factory," according to management and might be a good takeover target. However, a lot can go wrong with such a small company, especially in the case of an equity offering. MHR is definitely a speculative play.
Cramer took some calls:
TransCanada Corporation (TRP) is not likely to benefit from a potential approval of an oil pipeline from Canada, because nothing has changed to compel the government to approve such a move after rejecting the Keystone Pipeline. Under the current administration, the pipeline looks unlikely.
Cheniere Energy (LNG) made investors a lot of money. Cramer would let it come down before buying.
Gas prices are going higher, the news is bad out of Europe, but shoppers and diners are out spending. Darden Restaurants (DRI) reported a strong quarter, and Disney's (DIS) theme parks are packed. People are fixing up their homes, according to Lowe's (LOW), which has been a laggard but blew away numbers. Home Depot (HD) is keeping up its solid track record. While many expected housing to turn last year, 2012 might be the year the value of houses actually increases, and Cramer thinks homeowners are fixing up their homes in anticipation of this turn. Warren Buffett expressed a desire to buy up homes en masse as an investment strategy. Cramer would not buy homebuilders yet, but would invest in housing-related plays.
Cramer took some calls:
Ford (F) is doing well domestically, but there are questions about its ability to make inroads in China, and Ford's European and Latin American business is not doing well. Cramer thinks Ford is stalled.
Procter & Gamble (PG) announced a major restructuring program which involves cutting $10 billion in costs and laying off 5,600 people. When an iconic company like PG makes such a dramatic move, investors should ask what is wrong with the company. Some of the issues are PG-specific and some are issues affecting the entire soft-goods industry. The major names in the consumer goods space, Kimberly Clark (KMB), Conagra (CAG), Clorox (CLX) and General Mills (GIS), are facing higher commodity costs and rising competition from generic brands. PG is not seeing much growth outside of emerging markets, and is unable to pass on its higher raw costs to the customer, because cheaper knock-off brands are becoming more popular. PG has not been able to translate its 5% revenue growth into earnings per share growth. These problems are not yet reflected in PG's share price; the company trades at a rich multiple of 16. Cramer would only buy stocks in this sector if there is a major pullback or an exciting catalyst, like Kellogg's (K) acquisition of Pringles, a move that should transform the company. For now, the major players in the consumer goods industry are too hard to own.
B&G Foods (BGS) is in the business of buying neglected brands from bigger companies and transforming them. Among its most visible brands are: Ortega, Cream of Wheat, B&G pickles and now Mrs. Dash, which it bought from Unilever (UL). CEO David Wenner calls Mrs. Dash an "underinvested brand," since there wasn't any new development in it for 3 years under Unilever; what is the reason? Mrs. Dash doesn't move the needle in a company as big as Unilever, but BGS could profit well from it. The essence of BGS' strategy is to move quickly to find opportunities neglected by huge, sometimes sluggish, giants in the sector. BGS raised its dividend recently by 17.4% for a 4.5% yield, and has risen 118% since Cramer got behind it in 2010. However, the stock has fallen 3% since the beginning of the year. The company is not as dramatically affected by rising commodity costs as other consumer goods companies, and its price hike is a negligible 2% for the year. It doesn't need to spend as much on R&D, because much of it is in-house. David Wenner is not worried about competition from generics, because brands like Cream of Wheat foster customer loyalty that only strengthens with time. Cramer thinks the stock is just resting and is going to accelerate.
Should Apple Offer A Dividend?
Should Apple offer a dividend? Cramer's answer? Who cares. High momentum growth stocks with earnings power do not need necessarily to offer a dividend or to buy back shares since they already return value to shareholders with growth. Cramer expects Apple to earn $55 per share in 2012, compounded to its 30% gain this year. Value stocks need a dividend, not momentum stocks.
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