Cramer: Winners and Losers of the Frugal Young Generation
Posted at 11:56 a.m. EDT on Monday, April 4, 2016
What happens if the Great Recession really did change things in a dramatic way? What if we went from a nation of spenders to a nation of savers? Or, have stagnant wages kept us from spending as we once did? Or, is it generational, a whole new cohort of young people who don't want, or can't spend on what they once did?
There's a whole generation of portfolio and hedge fund managers who came out relatively unscathed from the Great Recession. They were making tons of money before, and they are still doing it now. You may think it is unfair, but the top people at the big banks made fortunes -- I almost wrote made out like bandits, but then again, bandits tend to get caught, and none of these people did. Many of those came through to the other side, resumed their lives once they were sure their paychecks were solid, or they caught on quickly at other firms.
But they are now so divorced from the rest of this country, that they seem mystified, mind-boggled by so much of what's going on. They are armchair generals, far removed from the front of consumer spending, so they can't see a thing through the fog of wealth. That mystification keeps creating opportunities, which most of the old pros thought would have gone away by now.
First, let's deal with the wage stagnation and the costs that younger people have to bear. The demand for a prestigious private school university education still outstrips supply, and while a classic state school arguably provides an equal or even superior education on a department by department basis, the $250,000 in student loans create a backdrop that doesn't lend itself to bold consumer spending.
Health care may be more universal than ever, but because of the paucity of outfits willing to provide care, deductibles have risen for many small businesses, solo proprietors and those with jobs that don't provide health care protection. One look at the real estate investment trusts connected with apartment complexes tells you that we are still retreating from being a nation of owners with not enough home units being built, while renter apartments become the mainstay option beyond living at home with your parents or in-laws.
I expect that to change, gradually, but the fact that it hasn't has eluded many of an investor. Part and parcel with the student debt is an aversion to take down any other kind of debt, a residue that would create a mirage of savings that really amounts to a lack of spending power.
It's within that backdrop that we can work backward through a micro filter to figure out what these people are spending their left-over money on.
First, and most obvious, this unknown generation -- except to themselves -- likes to spend on experiences, not things. They are chary when they do. These are AirBnB folks, hence why that company remains my favorite unicorn. They are Priceline (PCLN) and Expedia (EXPE) - Get Report people, too. They simply refuse to "throw away" their money on their physical surroundings. They like to travel, but not lavishly. Hence the scarcity of new hotels, except where there's a dire need. They love theme parks. That's a big reason why Six Flags (SIX) - Get Report and Cedar Fair (FUN) - Get Report are such huge winners. It's causing chronic undervaluation of Disney (DIS) - Get Report and Comcast's (CMCSA) - Get Report theme parks, which seem almost ancillary to the analyst community, but are cash bovines for their companies.
Second, they shop for bargains. They do it on Growth Seeker portfolio name Amazon (AMZN) - Get Report , but if they go to brick or mortar, there's some sharp class differences. The sales numbers are staggering at Dollar General (DG) - Get Report and Dollar Tree (DLTR) - Get Report . It makes sense. There's actual value there. When it comes to home goods and apparel, that's Ross Stores (ROST) - Get Report and TJX (TJX) - Get Report , the latter being the double-barreled juggernaut of Home Goods and TJ Maxx.
It's like this generation has totally figured out not to pay too much for clothes. They just hold the line. Trying to get them to pry money from their wallets is seemingly impossible, unless you are a whip-smart retailer like Action Alerts PLUS holding charity portfolio holding Target (TGT) - Get Report , which is targeting expectant mothers, those with newborns and those going to college. Those three touch points are the only places where brick and mortar has a definitive edge. They like to do-it-themselves if they can; hence Home Depot (HD) - Get Report and all of its booming aisles.
So, the question then becomes: away from their excessive, almost Great Depression-like frugality, where will they splurge? Where can you catch them really opening their wallets?
First, let's just call it their cellphones, which is a broader rubric for a whole host of activities now done on cellphones -- so the faster, better, more beautiful, longer-lasting and powerful cellphones are a must. The lack of price sensitivity is something that one of those get-on-through-to-the-other-side wealthy stock pickers can't see unless they have kids. When I say spend on cellphones, what I mean is spend on entertainment through cellphones, everything from Facebook (FB) - Get Report and Alphabet (GOOGL) - Get Report to Netflix (NFLX) - Get Report and sports programming, the latter two still playing havoc over the extremely profitable, but short of growth traditional entertainment providers.
This cohort, which seems worldwide in nature even as our own set of circumstances spurs younger Americans and Chinese in particular, comes with endless revenue streams for those who can capture them. Amazon's got it down. Obviously, Verizon (VZ) - Get Report and AT&T (T) - Get Report do, too, as does T-Mobile (TMUS) - Get Report . All three remain buys.
But it is Apple (AAPL) - Get Report that keeps coming up as the winner. Apple's like a shrewd, fast-moving army that waited to spring the trap once it had a billion people in its cauldron. You get them in and now you make them pay Apple per month. We applaud Facebook for how it capitalizes off of your own content, and love Alphabet for being able to harness machines to think for you, but we chronically underrate the revenue streams that Apple's driving through its brilliant app store plan, where Apple shares in the bounty of the creation of others.
Anything that draws you into that ecosystem, whether it be the I-pad Pro, or the so-called failing Apple watch or the new, smaller format phones met for the aspirations of the Chinese, works for Apple's most bountiful stream yet, the 14% of their business that is service revenue, something that I think could double in a few years' time.
What else will they spend on? If you go out these days, you expect your picture to be taken or you take it yourself and you update your Facebook page or populate Instagram, and if Twitter (TWTR) - Get Report could ever figure it out, blast it out on what may now be a shrinking forum. That means you need make-up before you go out the door, especially if you have a wrinkle or a blemish, which therefore means about 40% of the population. That means you need Sephora, a private company that you can catch a bit of by buying the stock of J.C. Penney (JCP) - Get Report , or Este Lauder and Ulta (ULTA) - Get Report , the former being the worldwide powerhouse and the latter being the inexpensive place to get the requisite make-up. The better the resolution, the more need for make-up.
Finally, this generation doesn't seem as eager to buy a car. The aggregate car registrations for the 25 or less generation have fallen precipitously, some would say to 25% of their usual level. People use Uber and other ride shares because, like with vacation, they just want to get where they have to go. They seem to have as much use for a car as they do an expensive hotel room, which means little at all. That doesn't mean car sales are weak: the fleet is 12 years old. It does mean that car sales will be weaker than we might expect among younger buyers, hence the lower multiples the auto companies receive and the less than optimal numbers that CarMax (KMX) - Get Report and AutoNation (AN) - Get Report put up.
The winners are decidedly rag-tag. The losers are myriad, and difficult to understand if you don't have kids or can't put yourself in their mindset. But as baby boomers die off and this new generation inherits the earth, it's worth figuring what they will spend on, with their meager inheritance, made smaller by longer lives and expensive health care.
That way you can make money on the scarce winners and their accoutrements and avoid the yesteryear, pre-Great Recession staples that were once the lay-ups of an economy that rises up from the ashes and simply didn't this time.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long TGT, FB, GOOGL, AAPL, and TWTR.
Cramer: Analysts May Be Wringing Their Hands Too Soon
Posted at 3:16 p.m. EDT on Monday, April 4, 2016
Let the downgrades begin!
CLSA says take some profits in the Ingersoll-Rand (IR) - Get Report ; it's come up enough; it also says to take profits in WhiteWave (WWAV) , which is part of the Action Alerts PLUS portfolio, after its run from the low thirties to the low forties.
Here's what I say: If the dollar starts soaring again (it hasn't), and if the European recovery somehow fails a year into its comeback, and if Janet Yellen goes back on her promise to be data-dependent, then I think that all of these downgrades make a ton of sense. Stocks have had a huge run, including all of the aforementioned. They deserve a rest. If the companies falter badly in their quarters that are coming, then they are vulnerable.
But what happens to these stocks if the dollar stays on a course of weakness? I think estimates will go higher, not lower, for most of these companies when they report. What if interest rates stay low? Some of these companies provide some very good income, including Eaton and General Electric -- the latter of which also is part of the Action Alerts PLUS portfolio -- and I am not the least bit concerned that those dividends are at risk.
What if the consolidation in the food business continues? Am I really supposed to sell J.M. Smucker, which has done so well over the years yet is only up 4% for the year and yields 2%? Can I thread the needle?
Or how about WhiteWave? The stock has spent a ton of time consolidating. It's been a monster since it was spun out of Dean Foods (DF) - Get Report until very recently, when it has floundered along with Whole Foods (WFM) . But it hasn't missed its numbers, and with so many food companies going natural and organic, any one of them could buy this purveyor of natural and organic products, including plant-based drinks, and instantly change its stripes.
How about this General Electric downgrade? I get the reluctance to stay bullish on the stock given the remarkable run it has had from last year when it sold at $25. The jaunt to $31 is a very big move for a very big capitalization stock, and at 20x earnings I can't pretend that the valuation isn't stretched. But what happens if CEO Jeff Immelt, who has been so fabulous at extricating the company from its up-and-down financial business and making GE a pure industrial, buys back a huge amount of stock and gives you a big dividend boost? What happens if he follows large shareholder Trian's plan to bring out value? Then I think $40 is doable, especially if the dollar stays soft. And I am not counting on China coming back any time soon. We want to use the decline to buy more for my charitable trust.
Finally there's Facebook. No doubt it's expensive on this year's earnings. Sure, maybe there is a chance that it comes in for profit-taking when it reports three weeks from now. But it's only up 7% for the year. And you know you can't value this stock on near-term earnings. You have to think longer term. I think this company has as much as $6 in earnings power out three years. What then? Do you sell it here, now, betting you can get back in? Maybe. I just think that the risk is to not own it, kind of like when everyone traded out of Apple (AAPL) - Get Report -- another Action Alerts PLUS stock -- back in the 90s.
So, go sell. Go ring the register on these terrific stocks. I just think that for the most part these are chances to buy, not sell. I know that seems contrary today, but not if everything falls into place, and I think that it just very well might do so.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long AAPL, GE and WWAV.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long TGT, FB, GOOGL, AAPL, GE, WWAV and TWTR.