Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Wednesday, October 19.
There are signs that the Democrats will win both houses of Congress. "I think it is important to frame the stock market in the context of a potential Democratic landslide come election day," said Cramer. In a Democratic domination, senators Bernie Sanders and Elizabeth Warren will have radical views on big businesses and banks becoming too powerful.
With government intervention in the private sector, many areas will be in focus. "The most visible areas are banking, healthcare and the environment, where rules are made that can make-or-break a company's earnings per share," said Cramer. If Democrats win both houses, then it means that there will be more regulation.
If the Glass-Steagall Act, which was repealed 17 years ago, is brought into focus to eliminate risky practices, then major banks will be hit hard. Many might have to dismantle. Financials and banking stocks are signaling a Democratic win.
The drug and healthcare stocks could see some pain too. Case in point is California Proposition 61 which is a ballot initiative that would allow the state to demand Veterans' Administration prices for the drugs it buys. The Veterans' Administration pays the lowest prices for drugs as they provide healthcare to Veterans. If this initiative is passed in California, it is likely that support will form for the states. This could impact profitability for drug companies.
What about mergers in Biotech? The Justice Department's anti-trust division blocks anything that could create excessive concentration. This is bad news for Bayer-Monsanto (NYSE:MON), Dow (DOW)-du Pont (DD) or Walgreens (NASDAQ:WBA)-Rite-Aid (NYSE:RAD) deals.
Environmental stocks could struggle as well. This could be bad news for the recent rally in coal and oil & gas. It would be negative for the overall sector with excessive regulations and permits. This means that investors will be willing to pay a lower multiple for M&A.
"The tepid action in the winners so far this earnings season simply does not indicate that the results are sub-par. It is a reflection of the fact that money managers are worried about a Democratic landslide come election day, so they are selling anything that the government could potentially squelch," concluded Cramer.
R.R. Donnelly (NASDAQ:RRD)
Cramer was happy about the breakup of R.R. Donnelly as he believed that the stock was valued less than the sum of its three parts. Now that it has broken into LSC Communications (NYSE:LKSD), Donnelley Financial Solutions (NYSE:DFIN) and R.R. Donnelley and Sons, the gains are done for now.
LSC Communications represents the company's printing business as a global leader in cost-effective print related services that include digital printing and office products. It is a slow-growth business but they have the scale to grow in a consolidating business. The company is forecasting flat to negative 3% growth in the medium term and this will hurt the stock. It has to acquire to grow. "Part of me wants to say that LSC Communications is the part of R.R. Donnelley that R.R. Donnelley didn't want because it is in a secular decline, but Tom Quinlan, the CEO of the combined company, decided to stick with this part of the business, so obviously he thinks it's got potential," said Cramer.
Donnelley Financial Solutions serves capital markets and money management clients to help manage financial communications. Their data analytics services is a growth business. IPO documents, proxy statements and regulatory filings are things that are handled by Donnelley Financial. "If you believe the market is headed higher long term, I can certainly see owning this one," said Cramer.
R.R. Donnelley is a multi-channel communications management company focused to help clients create, manage and execute on communications strategies. It is the strongest piece of the company and has the most debt too. After the break-up there is no information on the kind of dividends expected for investors from these three businesses.
"While there is definite value here, without some analyst coverage and more information, it is tough to pound the table, but I urge patience because I think the parts could be worth more than they currently sell for," said Cramer.
Salesforce.com (NYSE:CRM) hacked shopping list
The market was buzzing with Salesforce board member Colin Powell's hacked email account which had a list of companies seen as M&A targets. Cramer also had a look at the list to decipher which companies have the potential to be a part of Salesforce. Since the list is from May, many companies like Demandware (NYSE:DWRE), LinkedIn (LNKD), Marketo and NetSuite (NYSE:N) have already been acquired.
"Given that we know Salesforce was in talks to buy Twitter (NYSE:TWTR), I'd say that is pretty bizarre. My guess is that Twitter's board must have changed its mind about being willing to put the company up for sale only after this list came out, and that is the reason it was omitted," said Cramer.
Adobe (NASDAQ:ADBE) is too large to be acquired and in Cramer's opinion Workday (NYSE:WDAY) and Veeva Systems (NYSE:VEEV) do not seem to fit with Salesforce. It doesn't appear that Box (NYSE:BOX) and Zendesk (NYSE:ZEN) want to be acquired and Salesforce is not the kind to go for a hostile takeover.
Tableau (NYSE:DATA) is a bad fit while the valuation of ServiceNow (NYSE:NOW) is too high for a takeover. This leaves HubSpot (NYSE:HUBS) and Pegasystems (NASDAQ:PEGA), both of which have small market caps for a takeover and they would complement Salesforce's business well.
Cramer reiterated that investors should never buy stocks solely on the basis of M&A chatter unless they have good fundamentals. Most companies listed have good fundamentals and hence speculating on them might not be a bad idea.
CEO interview - Corbus Pharmaceuticals (NASDAQ:CRBP)
Corbus Pharmaceuticals is a small cap development stage biotech with a lead drug, Resunab, which is a treatment for various chronic inflammatory and fibrotic diseases. The company was granted orphan drug status by the EU on Tuesday and investors are excited about the drug's potential which sent the stock rallying. Cramer interviewed CEO Yuval Cohen to find out what lies ahead.
Cohen said that the company's focus is on a small family of diseases that are rare, or actually orphan diseases. "They only have tens of thousands of patients in the United States, but they are diseases where the effect on the patient can be devastating. Sadly these are diseases that are either life threatening or actually terminal," he added.
Resunab is in Phase 2 testing for four separate treatments and Cohen said the company has enough cash on hand to go through each round of testing. After orphan drug designation from the EU, the company is fast-tracked to acquire the same from the US.
After approval, the company will be able to treat diseases related to cystic fibrosis and lupus, along with other autoimmune diseases. These impact 80,000 patients in the West. Cramer likes the company's potential but cautioned investors as this is a highly speculative play.
Viewer calls taken by Cramer
Fitbit (NYSE:FIT): Cramer got it wrong. It could have a good holiday season so selling now will be a bad idea.
Expedia (NASDAQ:EXPE): The stock had a big move. Wait for it to come down before buying it.
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Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.