Market Expectations Are Reset - Cramer's Mad Money (11/8/18)

by: SA Editor Mohit Manghnani

DowDuPont split will unlock a lot of value - CEO Ed Breen.

Take-Two Interactive is not just a hit driven business.

Stay away from anything housing.

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Thursday, November 8.

"The single best thing that happened to stocks in November was the hideous bruising that we got in the month of October. Bizarrely enough, the newfound sense of fear and negativity created by the October meltdown is the best thing that could've happened to this market, because it gives stocks the breathing room that they need to roar higher again," said Cramer.

The stocks cannot keep going higher all the time and expectations need to be reset. The market has been rallying since Trump gave a big tax cut along with his agenda of deregulation. The bad news started coming in after he started targeting China for their trade practices. That was combined with fears of inflation which led to a wave of rising interest rates.

"After yesterday's 500-point Dow rally, I see a market that suddenly is beginning to make some sense. If you're a bull, you need a day like today that consolidates and cements yesterday's move," added Cramer. Despite good earnings, the shares of Amazon (NASDAQ:AMZN), Alphabet (GOOG, GOOGL) and Apple (NASDAQ:AAPL) have come down massively without anything being wrong with the companies. All three were downgraded by analysts.

"What did the negativity accomplish besides getting you out at the bottom? Well, it reset expectations. In other words, the newfound pessimism has finally lowered the bar enough that the risk has been seriously diminished by the widespread feeling of despair," said Cramer.

With oil prices going down along with slowdown in housing, it may prompt the Fed to take a pause on interest rates. All the bad news is now baked in and with no other news on the horizon, "No news can be good news".

"We have expectations that are now lowered to the point where, for most stocks, anything good could cause them to fly. I think it's entirely possible that, with a few more placid days like this one, we could get sideline money to come back in, as the calendar and stock cupboard are bare and maybe it's time to get long," he concluded.

CEO interview - DowDuPont (NYSE:DWDP)

DowDuPont beat earnings, announced a new stock buyback program and yet its stock is off 16% in 2018. The company is about to split itself into three in 2019. Cramer interviewed CEO Ed Breen to get a roadmap of the three companies.

Breen said the split will bring three world-leading companies in their respective industries into the public market - Corveta in agriculture, Dow in material science and DuPont for specialty products. Post split, investors will be able to own these three separately and all would be shareholder-friendly in terms of dividends and buybacks.

Corveta will be introducing 21 new products in the next five years while Dow is the cash cow which is committed to be spending 20% on buybacks. DuPont will be one of the best specialty product companies matched with the likes of 3M (NYSE:MMM).

He adds that the split has been confusing for investors and it will unlock a ton of value for them. "The beauty of redoing the portfolio — and I'll use DuPont as the example is we're going to spend almost $1B on R&D per year, so it's at a rate that's very healthy compared to the competitive peer set."

"You're bringing that R&D into the same end market opportunities, like in nutrition and health. We both had nutrition and health companies, and now you're bringing double the R&D to bear on that industry," he added. Be it electrifying cars or lightweighting vehicles, DowDuPont's end markets explain how they're able to grow. "You've got to be in the right secular areas and that's where we are really diverting our R&D and innovation machine, so we're in the high, fast-growth areas over the next five to 10 years," said Breen.

CEO interview - Take-Two Interactive (NASDAQ:TTWO)

Take-Two has already sold 17M copies of their latest game 'Red Dead Redemption 2' and reported good earnings. Cramer interviewed CEO Strauss Zelnick to know what this means for the company.

RDR2 had the best opening weekend for an entertainment product. "In eight days, we've sold in 17M units of 'Red Dead Redemption 2.' That's more than we sold of the first 'Red Dead Redemption' in eight years. Oh, and by the way, the first 'Red Dead Redemption' was a huge hit," said Zelnick. The game Wild-West-style, action-adventure theme works well in times of social sentiment.

"Typically, in really good times, often in really bad times - you can decide what kind of times these are - I will say that I think the sprawling universe that's offered by Take-Two, the extraordinary opportunities to explore that universe and the deep and meaningful story combine with great gameplay to create a great experience," he added.

The company is not just a hit driven business and their 'Grand Theft Auto 5' is a five year old franchise that continues to generate good revenue. The recurring consumer spending is up 28% Y/Y and the gross margins are rising. They are benefiting from the rise of eSports with their NBA2K title.

CEO interview - Norwegian Cruise Line Holdings (NASDAQ:NCLH)

Norwegian Cruise Line posted a good quarter partially due to the falling fuel prices. Cramer interviewed CEO Frank Del Rio to know what led to the strong performance.

"All those doubters about overcapacity and the late business cycle, they just don't understand the cruise industry. We're resilient, we perform terrific in both good times and bad times and, I think, sooner or later, the fundamentals of performance will overcome all the pessimism and all the wrong assumptions that are being made out there," said Del Rio.

He expects the fundamentals to catch up with the negativity. "Our ships go full every single time. The question is, at what price? And we've shown, year after year, organic growth in that 3% level — 4% for us this year — that defies what the naysayers have to say," added Del Rio.

They have added five ships, have a strong balance sheet and have an order of eight ships.


"The rise of ETFs has made the group of stocks nothing but chits in a bizarre game of stock market roulette," said Cramer.

The FANG stocks are a part of 10 different ETFs and their stock movement is being driven by ETFs while it should be the other way around. "The tail is wagging the dog," added Cramer.

The worst part is there are hidden ETFs that try to mirror the actions of portfolio managers by using derivative instruments. "These are totally abusive, moronic and horrible," he said. The stock of Visa (NYSE:V) and Mastercard (NYSE:MA) are also a part of such ETFs and their moves are determined based on the way ETFs decide to play.

"At the end of the day, these ETFs can be very useful for day traders, but normal investors pay a terrible price because it makes the whole business of stock picking much more difficult, and, yes, far more futile than it should be," he concluded.

Viewer calls taken by Cramer

Dell Technologies (NYSE:DVMT): Cramer advised holding the stock as news flow seems to be positive.

Redfin (NASDAQ:RDFN): Cramer does not like the stock as it has missed many quarters. Anything housing and autos should be stayed away from.


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