Stocks discussed on the in-depth session of Jim Cramer’s Mad Money TV Program, Tuesday, April 25.
With the Nasdaq near its highs, people ask if the market has come up too fast? “I want to tackle head-on the notion that the Nasdaq is overvalued, something we heard a lot of chatter about today because the index blasted through the 6000 level, and whenever we crash through big round numbers, it tends to cause instant soul-searching,” said Cramer.
People are comparing it to the last time Nasdaq hit 5,000 and then nosedived. Cramer said comparing with the early 2000s is not fair. At that time, the tech stocks led the market higher and they were overvalued; Microsoft (NASDAQ:MSFT) P/E of 59, Cisco (NASDAQ:CSCO) P/E of 179, Intel (NASDAQ:INTC) P/E of 126 and Oracle (NYSE:ORCL) P/E of 87 compared to today’s valuation of 20, 13, 17 and 16 respectively.
The average stock of the S&P 500 trades at 21 times earnings and these 4 tech giants are cheap compared to the average stock. Investors are however worried about market leaders like Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX). They have inflated valuations like tech stocks did in 2000.
“Amazon has the greatest sales momentum of all time. I’ve never seen a company this large grow so fast in a market that’s worth trillions upon trillions of dollars worldwide,” he said. Even in the year 2000, the investors would have paid high multiples for Amazon-like growth. The difference however is that Amazon is making billions and spending it for further growth. It has huge cash flow.
Netflix, on the other hand, is an opportunity stock that has massive growth potential. As they enter into the global market, the fund managers are eager to buy the stock.
Other big stocks like Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) trade at 14, 18 and 21 times earnings respectively. “Now, some of you might say, that all of these stocks could still prove to be wildly overvalued if the global economy turns upside down. But right now, things seem to be doing just fine, and they could be getting even better if President Trump can push his tax cuts and repatriation plans through Congress,” said Cramer.
“Even though the Nasdaq 100 is up 14% year to date, I refuse to call it overvalued not only versus 2000, but compared to many other eras that I have to admit seemed a lot less risky,” he concluded. Stay invested in the market and buy quality stocks on pullback.
Off the charts
Cramer went to the charts to get a technical view of the CBOE Volatility Index or VIX with the help of technician Mark Sebastian. He compared the VIX to S&P 500 to get a read on the market trajectory.
When the market rallies, the VIX goes down as there is less fear. The inverse is also true. “Sebastian says that sometimes the best way to measure the strength of an up move is by looking at the severity of the decline in the Volatility Index. In other words, when the VIX really gets pounded, you know you’re looking for a terrific run,” said Cramer.
The charts of VIX and S&P 500 over the last two years show that when the market rallied, VIX declined and after each decline the market kept rising. During the election in November, the VIX spiked from 13 to 22 and the market declined when the FBI director reopened Hillary Clinton’s email investigation. “Sebastian would’ve expected a 5-7% decline given the action in the VIX. He says we tend to see this kind of behavior when the market is worried about what might happen, not what is happening,” said Cramer.
A similar thing happened when President Trump was elected. “This was a great example of the VIX forecasting a terrific move. Immediately after the election results, if you took your cue from the volatility index, you knew it was time to do some buying and you caught the beginning of November’s phenomenal Trump rally,” added Cramer.
After the French elections on Sunday, the VIX declined to a low level of 10.5 and the S&P 500 rose 1.6%. “Looking at this moment through the prism of the big rally we got last November when the VIX plummeted, Sebastian thinks this is showing that we have got a lot more room to run. Based on the action in the VIX, he easily sees the S&P traveling to 2,450 before it runs out of steam,” concluded Cramer.
Don’t chase stocks. If invested, stay the course.
It’s not just the earnings, but the M&A activity that is driving up the markets. There were two good M&A deals in the last week which went unnoticed among the earnings news – Post Holdings (NYSE:POST) buying Weetabix for $1.76B and Cardinal Health (NYSE:CAH) buying three businesses from Medtronic (NYSE:MDT) for $6.1B.
The market did not pay enough attention to the Post Holdings deal but it’s big in Cramer’s opinion. Post is the third-largest cereal maker in the US with strong brands under its belt like Honey Bunches of Oats and Raisin Bran. The company is a domestic player with 93% of its business coming from the US. Weetabix, on the other hand, is the UK’s second biggest cereal maker which has most of its business internationally. It distributes in 290 countries. “I think the international cross-selling opportunities could be enormous here. The company is a smart acquirer that knows how to under-promise and over-deliver,” said Cramer. This will boost their earnings and cash flow.
Investors have focused on Cardinal Health’s ailing drug distribution business and the company’s estimate cuts for 2017 and 2018. They did not see the acquisition which will add $0.22 to 2018 earnings and $0.55 in 2019. This acquisition will help the company diversify which investors have failed to look at. “What really matters is that these Medtronic assets will help Cardinal Health continue to diversify itself away from that lousy drug wholesaling business that caused the darned shortfall in the first place, and they’ll give the company’s medical supplies segment a much needed shot in the arm,” said Cramer.
CEO interview – Briggs & Stratton (NYSE:BGG)
The stock of Briggs & Stratton went up after it reported a $0.01 earnings beat. Cramer interviewed chairman, president and CEO Todd Teske to find out more about the quarter.
The stock is up 15% in the last month. Teske said the company’s success comes from its push into the commercial market as well as increasing sales. This high end of the market remains strong but there is a pick up in starter homes.
The company sees a big opportunity in the commercial market as they have just a 10% share. New innovations like engines having a 500 hour maintenance window instead of the 100 hour window makes a huge difference.
They are keeping a close watch on steel tariffs and other material costs. 85% of the company’s products are made in the US but Teske was however concerned about the growing skill gap in the US. “I and other manufacturing CEOs have been out there talking a lot about the fact that we need people who can run robots, program robots, CNC equipment, robotic welding and things like that. It’s a big issue,” he added.
Cramer said that strong earnings from the market leaders show that the market is not expensive.
All these stocks rallied after their earnings.
Viewer calls taken by Cramer
Sunoco (NYSE:SUN): Their sale was terrific but they have made many reckless moves. Their yield is a red flag.
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