Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Tuesday April 10.
A Stock Picker's Market: Alcoa (AA)
Tuesday saw the worst decline so far this year, with the Dow sinking 214 points. Stocks are besieged lately from negative macro data, and things seem to have gotten worse since the Fed reported the economy was getting better. The employment number on Friday was disappointing, a small business survey showed a lack of confidence, and China reported a decline in imports. Italy's economy is in shambles, and Spain seems to be a bailout candidate. Tuesday saw a 5% decline of stocks from their highs this year, but there are positive signs, such as the shockingly positive quarter from Alcoa (AA), which was expected to disappoint. Alcoa seems to be saying that even cyclicals can be bought in this environment and raw costs aren't unbearable. Cramer thinks it is reasonable that, after the greatest run for stocks since 1998, there has been a pullback. He would buy high quality growth stocks on these declines.
Growth is back in style for 2012, although on a day when there is a hard sell-off, like Tuesday, it might be hard to tell. However, Cramer would use the current declines as a buying opportunity for growth stocks, and use wide scales while buying on the way down (for instance, putting in a smallish position at first, and buying more after every decline of 10-15 points). Chipotle Mexican Grill (CMG) has been a stock that has risen so consistently, that it seemed unlikely that investors would find a buying opportunity. The stock has fallen with the current sell-off and may decline more; Cramer would buy the stock on the way down, and outlined 10 criteria that determine that CMG is a good investment.
1. CMG has a multiple year growth story with fantastic visibility. It has same store sales of 11.1%, the highest in the industry, and raised its forecast. The company currently has 1,230 stores, is planning on opening 155 more locations this year, and can keep up this pace for another 10 years before CMG reaches saturation point. Its store in London has been a success, and CMG plans to open an additional London location as well as expanding into Paris. In addition, CMG is planning to grow its highly successful Asian Noodle Shophouse theme beyond Washington, DC.
2. End markets are big enough to support growth.
3. Is CMG competitive? Healthy fast food was an oxymoron before CMG came along with its natural, organic convenient food. As a first mover in the space, CMG understands its customer base better than anyone else.
4. This growth company is investing money into growing its business and its share price, and doesn't yet offer a dividend.
5. CMG is expanding internationally; its stores have been well-received in Europe, and Asia could be next.
6. CMG has a clean balance sheet as it is building out new restaurants. Its cash flow is strong and it has hardly any debt.
7. The stock trades at a multiple of 38, which seems rich, but its 22% growth rate gives it a PEG ratio of 1.72, which is reasonable for a high quality growth stock.
8. Cramer thinks CMG's management team is the best in the fast food business.
9. Since CMG is a play on healthy eating, it is not dependent on the world or domestic economy.
10. CMG grew its gross margins in spite of higher prices for raw costs. Since people pay up for CMG's "food with integrity," CMG is a company that can pass on its raw costs to customers.
Cramer took some calls:
SodaStream (SODA) - this once great growth stock has stalled, and new initiatives are not going to move the needle. Once a growth stock slows this much, it is unlikely to regain its momentum.
Intuitive Surgical (ISRG) has strong fundamentals.
Nu Skin (NUS) is very speculative and is unlikely to become a growth stock.
With oil retreating from its highs, Cramer wanted to hear from an oil producer about where oil is going and how much money can be made. CEO John Schiller discussed high yields from even Energy XXI's (EXXI) more mature oil fields in the Gulf of Mexico. The company is taking assets it bought from Exxon (XOM) and is making $65 million while expending only $10 million for production. John Schiller says the company can still make a lot of money even if the price of Brent falls to as low as $80. However, Schiller sees the decline as only temporary and envisions a long-term level for Brent crude in the range of $115 to $140, given global demand.
With the awful decline on Tuesday, Cramer says the current market is a stock picker's market. However, according to technician Dan Fitzpatrick of TheStreet.com, the fallen charts that looked like buying opportunities on Monday became disastrous by Tuesday. What is the difference between a buyable sell-off and stocks in a toxic zone? Technicians look at key levels, and when stocks drop below these key levels, they are perceived to be in free fall. While Cramer values fundamentals over charts, he thinks it is essential to pay attention to how technicians interpret the charts as a way to explain how entire sectors can decline in one fell swoop. Cramer recommends picking up quality stocks in some of these fallen sectors.
For instance, the S&P 500 seemed to be fine as long as it was holding above 1370. However, no one expected the S&P to drop below 1370, which it did without even a pause, but fell straight down like a rock into water. Once the S&P 500 crossed the 1370 threshold downward, the sell-off picked up steam. Cramer discussed Fitzpatrick's analysis of sectors that were leading stocks until Tuesday, and what has changed.
SPDR Homebuilders ETF (XHB) is down 3%, but on Monday, XHB seemed to have had a buyable pullback. Once the XHB dipped beneath its 50 day moving average on Tuesday on high volume, the chart began to look ugly, even as individual stocks, PulteGroup (PHM), Toll Brothers (TOL).
SPDR S&P Retail ETF (XRT) broke out to the upside in early October and consolidated to a symmetrical triangular pattern of lower highs and higher lows. When the XRT flirted with its 50 day moving average on occasional pullbacks, buyers stepped in, but on Tuesday, it broke down below this key level and the chart did not hold.
Financial Sector SPDR ETF (XLF) has pulled back 5.4%, but was showing some very bullish signs before the pullback with a golden cross pattern (when the 50 day moving average crosses above the 200 day moving average) in March. However, after the recent pounding, the chart has given back its gains and it is now testing a floor of support which is its 50 day moving average. Fitzpatrick thinks if it can hold above $15, the XLF can rebound. If it drops below $15, all bets are off.
Technology Select Sector SPDR ETF (XLK) is holding up pretty well, compared to other sector ETFs, with a 1.4% pullback, and has run up 20% so far this year. If this ETF holds $29, buyers could come in, but Fitzpatrick is not sure if it can stay above this level.
Cramer reiterated that the technical data is just a way of explaining how sectors and stocks can reverse so quickly. He still emphasizes the fundamentals and the advantage of using declines to pick stocks with great long-term stories.
Best Buy (BBY) announced restructuring and the departure of its CEO, but many people do not think Best Buy (BBY) will survive. It has the reputation of just being a showroom for Amazon (AMZN) products which people can buy more cheaply and have delivered to their doors. BBY has been slow to move into mobile and has insisted on stocking non-profitable television sets. While some brick and mortar retailers will survive e-commerce, Cramer is not optimistic about Best Buy's prospects.
Jim Cramer's Action Alerts PLUS: Trade right alongside a Wall Street pro! Start your 14-day FREE trial today.
Get Cramer's Picks by email - it's free and takes only a few seconds to sign up.