Stocks discussed on the in-depth session of Jim Cramer's Mad Money Program, Wednesday, July 20.
The markets have made a huge move and it's time to ascertain the risk-reward of the portfolio. "As we go higher and higher, the risks grow and you need to know not just the rewards but what can go wrong after this historic run," said Cramer. To explain the concept, he gave the example of Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN) as these three stocks are varied and they offer different means of valuation.
Microsoft reported a strong quarter on Tuesday and is transforming itself from a legacy PC business to a cloud focused business which has seen 100% growth. It has over $100B in cash and trades at 19 times next year's earnings and 16 times 2018 earnings. It is cheaper than the average stock in the S&P 500 and it yields 2.6%. "In an era where there are precious few ways to get decent income, Microsoft, after this incredible quarter, represents a very strong opportunity," added Cramer.
Facebook hit an all-time high when it confirmed that its Messenger app hit 1B users which mean that it added 200M users this year. The stock is expensive as it trades at 31 times earnings, but it also offers 31% growth rate which is accelerating. Growth stocks tend to trade between 1-2 times their growth rate and Facebook is trading at 1 times its rate which makes it cheaper than other growth stocks. "I pronounce Facebook as being relatively inexpensive versus a ton of other growth stocks in this market, suitable for those individuals willing to take on some risk in order to get a lot more reward than stocks like Microsoft can offer," said Cramer.
Lastly, there is Amazon which doesn't play by the rules. It cannot be valued traditionally as it trades at 117 times earnings. This is a different growth company compared to all others and it is for investors who are willing to take on risk. "You really have to believe that it will do the same thing to every other retail category that it has already done to books and electronics and apparel. You have to believe Amazon will destroy the mall," said Cramer. Lots of things have to go right for the stock to continue climbing.
Pet care theme
Cramer continued reviewing stocks that play the pet care theme. "This theme is here to stay, a fabulous place to invest on any scare, whether it be from the Fed or overseas or certainly from the madness of the upcoming presidential election," he said. He reviewed Blue Buffalo Pet Products (NASDAQ:BUFF), Freshpet (NASDAQ:FRPT), J.M. Smucker (NYSE:SJM), Henry Schein (NASDAQ:HSIC) and Central Garden & Pet (NASDAQ:CENT).
In the pet food space, Blue Buffalo and Freshpet are the only two pure plays. Blue Buffalo went public last year and its stock is up 40% this year. The company is seeing accelerating growth rate while Freshpet's growth rate is declining, although its stock is up 20% for the year.
Other companies are not pure plays on pet products but have decent exposure to the category. J.M. Smucker derives 29% of its sales from pet food while the animal arm of Henry Schein accounts for 27% of the total revenue. Central Garden & Pet also has exposure to animal food products.
Of these stocks, Cramer likes Blue Buffalo as it is a pure play on the pet theme, but the stock is up and trades at 30 times earnings. Smucker and Henry Schein are also good, but they are not pure plays and should be bought on weakness only.
The S&P 500 has rallied for some time and it now trades at 20 times earnings. Based on history, the valuations are near highs. The good news is that either the stock market comes down to make it cheaper or the companies start earning more so that they can justify the valuations. ""I believe the latter is happening, that the S&P will turn out to be cheaper than we thought and thus valuations will turn out to be less expensive, allowing us to get out of this period without a major correction to lower levels," said Cramer. Case in point is the earnings from Microsoft, Illinois Tool Works (NYSE:ITW) and Cintas (NASDAQ:CTAS).
All the three companies rallied on better than expected growth numbers. Microsoft reported super growth in its cloud business and all other categories, including PCs, grew. Strength in all categories of business for a huge company like Microsoft is not possible unless there is worldwide economic growth.
Illinois Tool Works is a company that makes industrial fluids, adhesives and tooling. It not only reported better than expected growth numbers, but also raised guidance. This couldn't have happened unless the global economy is doing well as only 46% of its revenue comes from the US.
Lastly, Cintas is a global uniform supplier. It reported good numbers and raised its revenue guidance sharply. More uniforms are needed only when the global economy is expanding, so growth in Cintas is good news for other companies too.
"That's the benign way you can get an expensive looking market to start looking cheap," said Cramer.
CEO interview - Core Labs (NYSE:CLB)
Core Labs is the oil service company that utilizes technology to analyze rock and fluids in oil reservoirs to help clients make drilling efficient. The company reported a good quarter on Wednesday and Cramer interviewed chairman and CEO David Demshur who believes that oil will have a 'V-shaped' recovery.
"One of the things that happens at $50, is we do have a lot of small, independent producers around the U.S. that are going to hedge future production. So, at $50 that is a good target to get through. Once we get through there we are probably heading up to the $60 range," said Demshur.
They have projects on the coast of Africa that has proven reserves between 800m-1.4B barrels. Those fields will be online in 5-7 years and will be profitable at $50-60 with new technology. Demshur is also optimistic about US shale oil where Core Labs is helping companies churn out 9-15% more in many cases.
Cramer thinks Core Labs is a well-run company but thinks that it will take some time for oil to reach $60.
CEO interview - XPO Logistics (NYSEMKT:XPO)
XPO Logistics is the fast growing provider of transportation and logistics services. The company had borrowed a lot of money to make big acquisitions in the last 18 months. "I think this company has its pulse on global commerce and if it can do well, then the whole stock market could continue to levitate," said Cramer. He interviewed chairman and CEO Brad Jacobs to hear how the acquisitions are helping them.
"We are at an inflection point in the growth of the company. So, for the last five years we have purchased 17 fantastic companies. We built the company like a tank, put the whole infrastructure in place, the technology and now we are reaping the benefits of that," said Jacobs.
He mentioned that the company is the leader on last-mile deliveries shipping heavy goods and appliances purchased online and in stores. They are also a leader in the returns business getting unwanted items back to retailers.
He believes that Europe is better than many believe and their business in the UK is stable and hedged for currency fluctuations. The company has $1.25B in Ebitda and projected earnings.
Viewer calls taken by Cramer
BP (NYSE:BP): They had a good quarter but the environmental problems are not behind them yet.
Ford (NYSE:F): Auto industry is challenged but Ford has good overseas business and a nice yield. Hold on to it.
Manitowoc Foodservice (NYSE:MFS): Their spinoff makes them a winner even at current levels.
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