Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Friday April 8.
6 Earnings and IPOs to Watch in the Upcoming Week: Alcoa (NYSE:AA), JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC), Google (NASDAQ:GOOG), Zipcar (ZIP), Arcos Dorados Holdings (NYSE:ARCO); Other stocks mentioned: McDonald's (NYSE:MCD), Target (NYSE:TGT)
While the averages have been rallying, one thing might make stocks screech to a halt: rising oil prices. A few months ago, Cramer said if oil breached the $110 level, he would not be so bullish on stocks, since high oil prices are bad for businesses and make the consumer think twice before going out. With oil at $112, Cramer is not changing this target, and warned that he will not be as bullish as he has been even if earnings are good, because high prices at the pump trump earnings. He took a look at earnings and IPOs for the coming week:
Alcoa (AA) tends to disappoint on its earnings, especially now with worries about China's orchestrated slowdown. Cramer thinks Alcoa has a good long-term story, especially with the aerospace taking off. The stock has been no slacker, up 16% year-over-year, but the stock might get punished on earnings.
Zipcar ((expected to trade under the symbol ZIP)) has high growth and should be a terrific IPO.
Arcos Dorados Holdings ((expected to trade under the symbol ARCO)) is another IPO scheduled for Tuesday, and is the world's largest McDonald's (MCD) franchisee with 1755 stores in Latin America and the Caribbean. Cramer thinks this IPO is the major deal of the week.
JPMorgan (JPM) has been breaking out since Cramer recommend it a few weeks ago, but Cramer doesn't know what JPM will say that would continue the rally. He admitted he can't be as bullish about the stock with rising oil.
Google (GOOG) is a cheap stock many people think is expensive, with a $580 price tag. This company has loads of cash and is one of the least expensive in the group. However, with the change in management, many investors may be looking for a reason to bolt from the stock.
Bank of America (BAC) needs to explain that it never intended to pay a dividend and wasn't slapped down by the government, as the press reported. The bank also needs to say that Merrill Lynch is back and bigger than ever. However, the stock is not acting well and is not yet ready to run.
Cramer reminded viewers that oil may trump any good news from companies and any rally should be used as an opportunity to sell.
Cramer took a call:
Target (TGT) has "lost its way." The stock has fallen while other retailers have performed well. Cramer would not be a buyer of Target.
The Definitive Price-to-Earnings Shrinkage Event for Banks
With the news that Elizabeth Warren might go from unofficial banking czar to the official head of the Consumer Financial Protection Bureau, bank stocks are going to get crushed, said Cramer, "This is the definitive price-to-earnings multiple shrinkage event" for financial stocks. Cramer, who has followed Warren's career closely, says she is excellent at what she does and what she does best is to "destroy profitability for banks." While it is a good thing to be concerned about the consumer, Cramer thinks she does so at the expense of banks and shareholders. Bankers should be dismayed at this news, and for investors, now it is not worth paying up for banks. In fact, earnings estimates should be cut for the entire group, and bank stocks will continue to go lower.
Who the Heck is Heckmann (HEK)?
Cramer features a speculative stock that may solve the number one problem plaguing domestic oil and gas drillers: what to do with contaminated frac water? Hydraulic fracturing is a process that requires using fresh water and chemicals to fracture the ground and release oil and gas. For every barrel of natural gas produced, seven barrels of water are needed for the fracturing process, and what is left behind is contaminated water that needs to be disposed of or recycled. Contaminated water from this process has raised environmental concerns and is costly to dispose of. Nearly 40% of the costs for drilling are spent disposing of frac water.
Heckmann (HEK) charges drillers $2-$7 per barrel to deal with the contaminated water by storing it in its own wells, sending it to water treatment facilities or recycling it. While Heckmann isn't the largest frac water treatment play, it has the fastest growth. CEO Richard Heckman was once the CEO of U.S. Filter, which grew substantially in value through acquisitions until the company was bought. While Cramer is not usually a fan of special purpose acquisition vehicles, he has been impressed by Richard Heckmann's past success in creating value. Heckmann raised revenue guidance by 50%, and the company is trading at a multiple of 25 with a 25% growth rate. Cramer likes the company's growth, but warned viewers that it is a very speculative stock, so do homework and use limit orders when buying.
With QE2 set to expire in June, many investors fear the bull market will expire along with it. Cramer thinks the bull market will continue, but he would expect a pullback and a rotation into defensive stocks. With oil rising to $110 a barrel, consumers might opt to stay home and cook rather than going to restaurants. A play on this trend is the world's largest producer of spices and seasonings, McCormick (MKC). The company sells branded products but has 40-60% market share in private labels, so as "the king of spice," McCormick competes with itself on the high and the low end of the shelf. A full 40% of its business is in the industrial space. McCormick has a slow, steady, 5-7% growth rate, and while its dividend is a modest 2.5%, McCormick has raised it consistently since 1925. The company gave a 30% return since the economy fell flat in 2008, and in the past few years, it has rolled out many new products which have produced 10% of its recent sales.
While McCormick faces rising raw costs of 5-7%, it plans to offset these expenses with productivity measures which should generate $40 million in savings for the company, and given its dominance, it can pass along its costs to consumers who are willing to pay up for its brands. Gross margins were up in both the consumer and industrial segments. Its 5% pullback since earnings provides a buying opportunity. The company beat earnings by 3 cents in March, but disappointed on revenues. While McCormick's multiple of 16 might seem high, it is lower than the industry average of 18 or 19. McCormick is the ultimate defensive play, and it has a long-term track record of dividend boosts.
Cramer took a call:
Nordic American Tanker (NAT) is not as positively affected by the price of oil as it is negatively affected by the fact that there are too many ships. Cramer is not a believer in the shipping space until the fleets are smaller.
BioMarin Pharmaceuticals (NASDAQ:BMRN), Alexion Pharmaceuticals (NASDAQ:ALXN), Vertex (NASDAQ:VRTX), Pharmasset (VRUS), Genzyme (GENZ), Exact Sciences (NASDAQ:EXAS), Alkermes (NASDAQ:ALKS), Amylin Pharmceuticals (AMLN), Inspire Pharmaceuticals (NASDAQ:ISPH)
Six months ago, Cramer dedicated a segment to speculative biotech stocks, and on Friday, he took a look at how these picks performed.
- BioMarin (BMRN) up 14%
- Alexion Pharmaceuticals (ALXN) up 15%
- Vertex (VRTX) up 38%
- Pharmasset (VRUS) up 204%
- Exact Sciences (EXAS) down 13%
- Alkermes (ALKS) down 18%
- Amylin Pharmaceuticals (AMLN) down 39%
- Inspire Pharmaceuticals (ISPH) down 21%
The winners were up an average of 44% compared to a mere 14% rise in the S&P 500 since October. Cramer noted the best way to speculate is with a basket of stocks to diversify risk. With a basket, the winners may cancel out losses from poorer performers. He admitted making a mistake recommending Alkermes and Amylin, which were both working on the same diabetes drug, and which did not receive approval from the FDA. From this, investors can learn not to buy two stocks working on the same drug, but to diversify with exposure to different diseases and different drugs. While Pharmasset and Vertex both had drugs for hepatitis, these game-changing drugs are not the same treatment.
It is also a good idea to find more mature stocks like BioMarin which already have drugs on the market and are making money on increasing sales. The best biotech speculative plays have orphan drugs, or drugs that are specialized treatments, have virtually no competition and for which patients are willing to pay a large amount of money. Genzyme (GENZ) perfected this business model and is now getting taken over at a premium. Inspire Pharmaceuticals is being taken over, but at a low price, and Cramer reiterated his warning not to buy a stock as a potential takeover target if its fundamentals are not strong. Inspire's low takeover price was due to poor clinical trials that pounded the stock. Exact Sciences' stock dropped 13% because it had no catalyst until the latter part of the year. While Cramer might consider buying the stock now on that catalyst, October was too early to buy.
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