Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Tuesday May 8.
Profit From Other People's Panic: Rackspace Hosting (NYSE:RAX), Fossil (NASDAQ:FOSL), Bed, Bath and Beyond (NASDAQ:BBBY), Ralph Lauren (NYSE:RL), Vitamin Shoppe (NYSE:VSI), Mako Surgical (NASDAQ:MAKO), Amazon (NASDAQ:AMZN)
Early in the day, the Dow did a nosedive of 198 points, only to close down just 76 points by the close. Chaos in Europe was to blame, and Cramer said what was the most disappointing thing about the decline was the mass panic selling that ensued. Even stocks that had nothing to do with Europe or the drop in oil prices got slammed. While Fossil (FOSL), for good reason, declined because of Europe, as it sank 47 points, Ralph Lauren (RL) was unfairly hit, and fell 12 points. Anyone who bought RL at its lowest point made money, since it closed down only 5 points. Much of the selling was random: Mako Surgical (MAKO) lost 15 points, Rackspace (RAX) fell 5 points, Bed Bath and Beyond (BBBY) shed points after a good quarter, even though it, and other retailers, should benefit from lower prices at the pump. Some declines seemed completely random. Investors could have made money buying Vitamin Shoppe (VSI), which opened down, even after reporting a good quarter; the stock rallied 9 points in 45 minutes. Amazon (AMZN) gave investors a rare buying opportunity, and rewarded those who bought it with a 5 point gain from its low by the end of the day.
Cramer's advice? The next time there is panic about Europe or oil prices fall, try buying instead of selling; "Panic is not a great strategy, but buying other people's panic is."
On a down day, one Dow stock not only didn't decline but hit a 52-week high. AT&T (T) has moved on since its failed attempt to merge with T-Mobile (OTCQX:DTEGY). The company reported a magnificent quarter, with 20% growth in its data business, margins growing 260 basis points and customer churn down to 1.1%, which is the lowest for 7 quarters. The company offers customers a choice of handsets, and has "the best Android device ever" said CEO Ralph de la Vega. The company is able to manage the subsidies it has to pay handset makers. Its smartphone sales were up to a record 5.5 million, and the company still delivered strong gross margins (while smartphone sales are good for the company, they can often eat into the gross margins, given the expense of the devices). Ralph de la Vega said that changing the company's cost structure prevented the increase in smartphone sales from negatively impacting gross margins. The CEO discussed a digital home automation and security system called "Digital Life" to be released this summer; "This is something the industry has never seen before," said Ralph de la Vega.
Cramer would buy AT&T if its stock price ever dips.
Last year, when AT&T announced its plan to merge with T-Mobile, Sprint (S) CEO Dan Hesse predicted the deal would not go through. Hesse's prophetic skepticism about the deal did not help the share price; in the past year, Sprint's stock has been cut in half, even though Sprint has made a deal with Apple (AAPL) to sell the iPhone. Some analysts are worried that the heavy subsidies Sprint needs to pay Apple will cut into its gross margins. Dan Hesse feels that, while there is some short-term pain, for the long term, the deal will provide the company with significant profits through subscriber fees. Dan Hesse is considering cutting a portion of his compensation to eliminate "some of the distraction" caused by short-term worries over Sprint's deal with Apple. Sprint is also in the process of writing off its Nextel business, and Hesse indicated he is uncertain how many customers may be lost during the transition.
Hesse noted that 44% of customers Sprint added were new customers, and the company has successfully put through some price increases. Sprint saw the highest increase in its average revenue per user in the history of the wireless industry, and beat The Street's estimates in this metric by 30%. Hesse expressed confidence in his company; "That is why I'm buying stock."
Electronic Arts (EA) is one of the major names in gaming stocks, and is making the complex transition into mobile and social networking. The stock has been a genuine battleground, and it dropped 4.3% on Tuesday, while it is already down 30% so far this year. In spite of this, its digital online downloads are growing 59%, smartphone revenue is up 94%, and the company plans to launch 41 new titles within the year. EA is trading at a cheap 9 times earnings and has a fortress-like balance sheet.
CEO John Ricitiello discussed the company's recent guidance, which The Street didn't think was bullish enough. However, Ricitiello added that the company expects a strong latter half of the year and 2013 from the blockbusters it plans to release. Concerning the disappointment over Star Wars, the CEO said sales beat the target of 1 million and are now at 1.7 million, so Star Wars is "a solid and successful franchise." However, expectations were inflated, but even if there was some disappointment, "Star Wars is not a bellwether for us." When asked why Zynga (ZNGA), a newer, more specialized competitor, has a market cap of $5.7 billion, while EA's market cap is $5 billion, Riccitiello said that, in spite of the apparent disparity, EA is a more solid, better diversified company that grows organically and not merely through acquisitions. Cramer thinks that EA is cheap enough that those who own it should stick with it.
How did a major biotech company move 55% in a single session and an additional 10% on Tuesday on Phase II data? Usually such a company only makes such a dramatic move on FDA approval. However, the Phase II data on Vertex's (VRTX) cystic fibrosis drug were so dramatic that analysts raised their price targets. Studies revealed that a full 46% of cystic fibrosis sufferers participating in the study reported major improvement in lung congestion. If Vertex's drug is approved (an event that might not happen until next year), the company could add $6 billion in revenue to its current market cap of $13 billion. There is virtually no competition for this drug, and therefore, Vertex is able to charge a high price for the treatment. While there is no guarantee that the FDA will ultimately approve Vertex's drug, it might be worth speculating on VRTX if it pulls back.
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