Markets May Be Cheaper Than We Think – Cramer's Mad Money (10/17/17)
Stocks discussed on the in-depth session of Jim Cramer’s Mad Money TV Program, Tuesday, October 17.
As the Dow hit 23,000 for the first time, Cramer had a contrarian thought. “Maybe stocks are cheaper than we think. When we see gigantic Dow Jones components jumping like small capitalization stocks, which helped the venerable index trade through 23,000 at one point today, we do know that something real is afoot,” he said.
Stocks are valued on future earnings and things are looking good in this quarter which hints at a brighter future. Cramer pointed at four stocks which show the market is cheaper.
- Johnson & Johnson (NYSE:JNJ) reported strong earnings with good growth. Yet its stock trades at 18 times next year’s estimates. This is low compared to peers like Colgate (NYSE:CL) which trades at 26 times earnings, Clorox (NYSE:CLX) at 24 and Procter & Gamble (NYSE:PG) at 22. “Moreover, JNJ has the single best balance sheet of any major American enterprise,” said Cramer. “You could argue that all of these stocks deserve to go dramatically lower, but I just think they’re expensive and JNJ is ridiculously cheap,” he added.
- UnitedHealth (NYSE:UNH) reported strong earnings as well with 21% revenue growth. The stock trades at a P/E of only 19. “Now, you could say that the earnings from operations only increased by 13%, but still, 19 times earnings for 13% growth? That’s a steal, which is why the stock rallied $10 today and closed at $206, an all-time high,” said Cramer.
- Morgan Stanley (NYSE:MS) reported earnings growth with a steady wealth management business. It trades at a P/E of 14. “Its valuation makes no sense to me. Same goes for JPMorgan (NYSE:JPM), which is also selling at 14 times earnings with the best growth I can recall, the lowest non-performing loans I can remember, and a new rate cycle ahead that could raise earnings by billions of dollars; and the company doesn’t need to add a soul to its workforce to get that return,” said Cramer.
- Lastly, Apple (NASDAQ:AAPL) has always been one of Cramer’s favorite stocks. “I often want to ask them, ‘Hey, do you use Samsung?’ I mean, really,” he said in reference to analysts who question Apple. Cramer thinks it is the best consumer product company in the world. “I think it could charge double for its service business and people would have to pay up because there’s nowhere else to go, it’s the only ecosystem that is seamless. Yet the darned stock sells for less than 15 times next year’s earnings estimates.”
In 1987, stocks traded at 29 times earnings and the interest rates were 7%. A pullback would be an opportunity for buyers.
Off the charts
“Even if the greatest bull run in ages is going on, there are losers and there are laggards, and they help define the action as much as the winners do,” said Cramer. Consumer staples is one such sector that has been sub-par. Cramer went to the charts with technician Ed Posni to see the direction of consumer staples.
He reviewed the chart of Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) first as it follows major consumer companies. It has traded flat since February and the charts show negative signs for the future. The head and shoulders formation shows a bearish pattern and it broke the neckline, which is a sign of an upcoming drastic pullback. Its trading below its 50-day and 200-day moving average and the 50-day average is about to go below its 200-day moving average.
“That’s an extremely negative sign, so negative that technicians like to call it the death cross. It’s very difficult to fight a bad chart and it’s doubly difficult to fight a death cross. In short, based on what Posni’s seeing here, the consumer staples ETF is in trouble,” said Cramer.
The next was Kraft Heinz (NASDAQ:KHC) as consumers have started demanding organic food instead of artificial and packaged food. KHC has been making lower highs and lower lows signaling a downtrend. It has fallen to $77, which is below its floor of support at $80. “Broken support is another one of these things technicians don’t want to see. It often signals a further nasty decline. It’s an ugly chart,” said Cramer.
When it comes to major food company General Mills (NYSE:GIS), things don’t look good either. It is trading at $51, which is below its floor of support at $53 and showing a downward trend. “If you want a healthy bull market, the consumer staples stocks are exactly the ones we need to leave behind. These are classic, recession-proof names that investors buy when they’re worried about a slowing economy. The fact that they’re being sold indicates Wall Street is more confident about the future,” concluded Cramer.
Netflix reported great earnings and subscriber growth and yet the stock rallied only a little and then fell in the next few days. “When everyone expects the numbers to be phenomenal, it’s very difficult to blow people away, no matter how excellent the quarter really is. And make no mistake, this was an absolutely fabulous quarter. Not perfect, but really, really great with even better guidance,” said Cramer.
Netflix doesn’t trade like a traditional stock on earnings, but on subscriber growth. While analysts were expecting 4.5M new subscribers, the company reported 5.3M. Some things to be concerned about are the piling debt and their cash burn. However, as viewers are willing to pay up for content, this should not be a problem in the long run.
“Remember, these declines tend not to last very long in this market if the companies behind them are growing like weeds, as this one is, and the analysts who recommended it before will reiterate their buys with raised price targets; in fact, that process has already started. In a few days, buyers will swarm back to the stock, which I believe is worth a lot more than its current market cap because of the vision, the artificial intelligence and the fact that Netflix is one of the great bargains of our era,” concluded Cramer.
Off the tape
Cramer went off the tape to review the privately held ThoughtSpot, which is into big data and develops business analytics search software. Their AI platform can be used to search streams of data like Google search without being trained as a data analyst. Cramer interviewed founder and CEO Ajeet Singh to find out more about the company and his views on big data.
“We believe that the future belongs to ease of access of data, and we look at big data not as a visualization problem, but really, as a human scale problem,” said Singh. For every data analyst, there are 600 data users asking for data reports. ThoughtSpot solves the problem for both of them.
Tools like Tableau are good to bring data to the average user, but one still needs an analyst to make sense of that data. “You still need an expert analyst to build a nice dashboard, and it takes about a week to do that. You need, really, fundamentally built technology that can be used by an average business user, and that is what ThoughtSpot provides,” added Singh.
They already have 12 Fortune 100 and 35 Fortune 500 customers and their platform is integrated into an enterprise’s system and connected to various data sources and end users. ThoughtSpot is a streamlined program that can be connected to any system to extrapolate data.
He also gave his take on AI. “There has been a lot of discussion about AI taking over the world. I don’t subscribe to that dystopian view of the world. I really think that the key is going to be trust between man and machine,” he said. “The humans will control the lanes in which AI will have to drive, and that is also a very key thing for ThoughtSpot. Because every time we enable trust between the solution we are providing, we allow our users to look into what we did. So AI is not a black box for them.”
Viewer calls taken by Cramer
Impax Laboratories (NASDAQ:IPXL): Cramer is not a believer in the generic drug industry.
Gray Television (NYSE:GTN): Take half off and let the rest run. Cramer doesn’t like how the group trades.
Viacom (NYSE:VIA): It’s a value trap. Get out of the stock.
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