Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Monday January 24.
7 Reasons for the Momentum Shift: Union Pacific (NYSE:UNP), CSX (NYSE:CSX), Alcoa (NYSE:AA), PPG Industries (NYSE:PPG), Apple (NASDAQ:AAPL), Schlumberger (NYSE:SLB), Intel (NASDAQ:INTC), GE (NYSE:GE), Salesforce.com (NYSE:CRM), MEMC Electronics (WFR)
Cramer spent the past weekend pondering the reasons why the market was sluggish last week amid so many good earnings reports. However, It looks like the momentum has changed. Here's why:
1. Earnings have been "absolutely tremendous." A full 65% of companies that have reported so far have beaten earnings, and with expectations set high, this is significant.
2. The earnings beats are for real. Bears alleged strong earnings were "manufactured" by downsizing and overly aggressive cost cutting, but recent numbers have shown demonstrable increase in sales and revenues. "This is the best sales growth in 3 years."
3. China is not the only game in town. Last week saw a lot of good news from the U.S., as discussed by UNP (UNP), CSX (CSX) and Alcoa (AA), which says commercial construction could be coming back from the dead.
4. Raw costs are higher but they are manageable. PPG Industries (PPG), for instance, says it can pass on some of these costs, and not all are increasing.
5. Apple's (AAPL) strength. If Apple had sold off after the "most explosively fabulous quarter I have ever seen" then it would have looked bad for other stocks. With the outstanding $10 move up on Monday, confidence was restored.
6. Stocks are having a delayed positive reaction. Companies that saw declines right after their earnings last week are seeing rallies: Alcoa, Schlumberger (SLB), Intel (INTC). On the same principle, Cramer would buy Skyworks (NASDAQ:SWKS), because it might rally after its decline following its strong quarter last week.
7. The GE (GE) effect. General Electric reported strength in all of its intensively diversified segments and the company is once again becoming a leader and an indicator of a strong economy. Cramer thinks the next stop of the stock is $23.
Cramer took a few calls:
Although Cramer liked MEMC Electronics (WFR) when oil went up, he didn't like the resignations among management. He prefers Alcoa, which he thinks is going to $22-$23. "Alcoa is ten times the company of MEMC."
With the Australian flood waters receding, rebuilding projects in Australia have to be swift and efficient. The flood impacted commodities and the raw costs of "almost everything." However, many of these stocks have come down hard and are cheap. Cramer had three picks on the Australian rebuild:
1. Weyerhaeuser (WY) is the play for wood. The stock has not kept up with where it should be because the media is so bearish on housing. The stock is a play on lumber being bid up and pulp, and Cramer thinks it will move from the $21-$22 range to $25-$26.
2. Freeport McMoRan (FCX) is the stock to buy whenever homes need to be rebuilt, since construction of houses always involves copper. The stock is down 13 points on worries about rising mining costs and the price of ore. Cramer thinks there is plenty of room to run.
3. Alcoa (AA) is Cramer's Dow pick for 2011, and is the ideal way to play the rising cost of aluminum.
CEO Interview: David Crane, NRG Energy (NYSE:NRG)
Electric vehicles are not just hype anymore - they are becoming a reality that could potentially make investors a lot of money. NRG Energy (NRG), a diversified power generator is rolling out 50 electric vehicle charging stations in Houston, Texas in addition to selling home chargers for $2,000 outright and $49 a month. The stock is down 11% since Cramer recommended it in February 2010, but then he was getting behind the stock as a nuclear play, and its EZ-GO battery recharging stations are a bigger story than nuclear.
CEO David Crane says his company is solving the problem of range anxiety - when an electric car driver worries about where the next station is - in two ways; by putting up stations all over the Houston area, and making it quick and easy to recharge vehicles at home. While someday this business might outstrip NRG's other businesses, it will take some time to grow electric cars, given supply constraints, but Crane sees the business really taking off by 2013; "This is going to be the biggest thing for our industry since the air conditioner."
While the company once was the most forward-looking nuclear play in the country, Crane admits that nuclear hasn't been as successful as he had hoped in the United States, although he still hopes NRG will be able to build its plant in Texas. It is necessary to look overseas for the "nuclear renaissance."
Cramer told viewers not to wait until 2013 to buy NRG.
Cramer prepared viewers for the pregame smackdown between Kimberly Clark (KMB) and analysts before the company reports on Tuesday morning. While the quarter is not expected to be so hot, low expectations may create an upside surprise or any kind of uptick. While KMB is well off its highs, it has a "shockingly large" 4.1% yield. With so little bullish feeling about the stock (5 buys, 11 holds and 2 sells), a change of heart of even one or two analysts from bearish to neutral or to bullish might affect the movement of the stock for the next several months.
Last quarter, Kimberly Clark missed earnings by 14 cents, guided to the downside and estimates were adjusted lower. For a major improvement this quarter, the company needs to address four major issues:
1. Pricing pressure on margins.
2. Losing market share to Procter & Gamble (PG)
3. Competition from private label tissues and toilet paper
4. Weak professional business, as the bathroom business fell double digits.
Even if none of the four issues are addressed, the stock might rise if it beats estimates, but if management discusses even one of these problems, the stock is likely to go up even higher. Kimberly Clark needs to beat The Street's low estimates of $1.15 earnings per share and $5.03 billion in revenue. Guidance must move the range to higher ground.
However, Cramer confessed, "I don't expect anything like an upbeat report here," but even if earnings disappoint initially, reassurance from management might cause the stock to rally. Cramer would wait and see how the drama unfolds intraday.
Stocks often move unexpectedly after earnings, and for this reason, investors need the equivalent of "post game coverage" to figure out moves in the market. Cramer used McDonald's (MCD) movement on Monday as a classic example of how a stock that falls on earnings at the beginning of the day can turn around intraday. McDonald's "allegedly" had met expectations of $1.16 earnings per share and missed revenues only slightly, but still fell 6 cents at the opening and dropped another 10 cents shortly after the open. The quarter itself was not worrying investors as much as weak comparisons, weakness in Europe, rising commodity and inflationary costs and a lack of innovation in beverage items.
While The Street really expected a beat and a raise from McDonald's, the company still had a chance to redeem itself at its 11 am conference call, during which management confidently addressed all of the concerns one by one: weak comps were because of inclement weather and January same store sales are increasing 4-5%, management feels "pretty confident" that they can raise prices to cover inflationary costs and not lose customers. Management reported increasing market share in Europe and new menu items. The conference call inspired enough confidence to lift the stock to close up 34 cents. Cramer thinks McDonald's will continue to rise higher if it gets an upgrade from one or two analysts. Since the stock trades at a low multiple of 15 with a 3.3% yield, an upgrade might be likely.
What does McDonald's teach us? If a stock falls on earnings, don't give up until the conference call, when management might soothe worries and bring the stock up.
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