Jim Cramer shares his views every day on RealMoney. Click here for a real-time look at his insights and musings.
Cramer: Nike's Call Was Both Enlightening and Disturbing
Posted at 7:22 a.m. EDT on Wednesday, Dec. 21, 2016
Is Nike (NKE) - Get Report a growth stock? Is a company with 6% revenue growth a company that deserves a premium multiple? Do we want to pay 22x earnings for a company that has a North American growth rate of 3% with inventories up 9%?
Do we like a company with gross margins that are contracting at 140 basis points--pretty negative--even if it has terrific 17% growth in China?
Have we an affinity for a company that tells us its chief metric, futures orders, no longer are indicative of the future because of the growth of the direct to consumer sales?
Or, should we just care about the headline numbers: a clear beat of $0.07, $0.50 v. $0.43 expected, with $8.18 billion in revenues vs. $8 billion that the street was looking for?
I think it all depends on the stock price. In a time when the Dow Jones Industrial average is within striking distance of 20,000 and people want laggards, I could argue that the earnings and revenue beats are good enough that you shouldn't look under the hood.
I mean, after all, Action Alerts PLUS charity portfolio holding Starbucks (SBUX) - Get Report , its best analogue, is struggling with a roughly similar set of issues in terms of North America, with 4% same store sales growth instead of 5% and we accord that company a multiple of 26x next year's numbers. That's because there's some real strength in China and a lot of irons in the fire, including a new concept that could be additive in a couple of years: the Roastery, with its reserve coffee.
So why not give Nike the same benefit of the doubt, especially when Trevor Edwards, the Nike Brand manager, says that Nike has "incredible momentum" in basketball? "Basketball is back," Edwards said defiantly on the call.
And that's the word that comes out, which exemplifies what's going on at Nike: it is defiant in the face of doubters, defiant because the changes that are coming over the company. The incredible growth of direct-to-consumer may not be considered an important part of the mosaic and yet the growth of it is so great, how can it not be?
So what's the beef? Why not just go buy it? I think the reason is that the call was both enlightening and disturbing. They claim basketball is back, but the numbers, at least domestically, don't indicate as such. They tell us not to pay attention to the futures, yet the futures have been the metric they told us to rely on until this quarter and not coincidentally the futures are ugly vs. the guidance. And then, in a bit of false shadow boxing, they tell us not to worry about the growth in the lifestyle business as it portends to some sort of trade-off against the performance business because "they fuel each other."
Nobody I know was talking about a trade-off going into this quarter. They were talking about a resurgent Adidas (ADDYY) and a competitive Under Armour (UA) - Get Report , and neither came up or seemed to even be a factor on the call, even as I think that much of the pressure on the North American numbers comes from the awakening of the sleeping European giant and the toughness of Kevin Plank and Nike's Baltimore competitor.
I left feeling both more understanding and empathetic to Nike and its desire to present itself as a company with great growth, but also a litany of questions about what's really going on here if basketball is back and innovation is leading the charge.
Call me confused.
Confused at $51 is okay. Confused at, say, $56, isn't.
Which is why I think the stock can have a move, but in the end it will bump up against growth parameters because, believe me, if I am confused, I am not the only one who is truly puzzled about what is happening in the overall landscape to this great company with the tremendous balance sheet, fantastic worldwide reach but a possibility that its goods just cost too much.
That's really what could be behind the definitive North American slowdown, as befitting a declining gross margin and the possibility of excess inventory going into the holidays.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long SBUX.
Posted at 4:10 p.m. EDT on Tuesday, Dec. 20, 2016
Cramer: I'm Already Sick of Dow 20,000, and We're Not Even There Yet
OK, so not today.
But the whole thing is starting to make me nauseous. I almost threw up when I saw a Dow 20,000 hat. What we want is for no one to recognize it. That the event comes and passes without any sort of hoopla.
Maybe because I have lived through so many thousand crossings, I just think they are the ultimate in bad--let me get the technical term--karma where all of the negativists really get to poke fun and holes into anyone who is bullish even if they have been bullish for some time.
It's almost as if the thing you most want to do is hit 20,000 and just go negative, just say, "OK, I have been positive, but that's it, I am out of here."
Why not do that?
Simple: For someone like me, the Dow means so little that I was going to drop it from my performance letters in 2000, my last year as a hedge fund manager. It just seemed dumb to focus on it.
Not only that, but if you like to talk about individual stocks, you are often being antithetical for liking the Dow. You want Pfizer (PFE) - Get Report and Caterpillar (CAT) - Get Report ? What's the theme there?
But the issue is the scrutiny, and this market doesn't need the scrutiny. I have endlessly talked about what can go wrong within the context of liking the market, and at Dow 20,000 the "what will go wrong" group will quickly overshadow those who like the market, especially as I expect program selling to kick in if we do get there--and yes, I see the irony of writing "if," not when.
I think the real scrutiny should be on the people who endlessly downgraded a First Horizon (FHN) - Get Report or a Key (KEY) - Get Report --they don't quit--or who had a sell on CAT or Western Digital (WDC) - Get Report or who upgrades Nvidia (NVDA) - Get Report now.
These are the people who are the goats, not the soon-to-be alleged goats, who wear the Dow 20,000 hat knowing that it's really more of a bull's-eye than it is a chapeau.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.
Cramer: Animal Spirits Are on the Prowl
Posted at 2:19 p.m. EDT on Tuesday, Dec. 20, 2016
Now it is all about the prism, the prism we put our thoughts through. A positive prism produces positive results that might otherwise be viewed as negative. And that's how we can advance after making endless advances already.
It's also a good sign that the entire advance we have on our hands may not be as easily repealed as so many think will happen. It means the market, while always more dangerous than if it had done nothing, is based on a new way of viewing things, a way that can only be described as a belief that President-elect Donald Trump will fulfill his mission to get the economy moving in a sustained fashion.
You know I like to do my own research and rely on my own thought processes. But one of the things I have learned over time is that whether it be Warren Buffett or Dave Tepper or Bill Miller--to name the best investor of our lifetime, a terrific hedge fund manager whom I worked for when he was at Goldman Sachs and a mutual fund manager who has had huge calls--is it's OK to learn, listen and quote them.
So I have to consider the comments from Ray Dalio, a fantastic money manager who runs the $150 billion Bridgewater Associates, whom I will quote and then parse. First, he said, "Animal spirits will lift markets." Then he went on to say, "Trump is a deal maker who negotiates hard and doesn't mind getting banged around or banging others around. Similarly, the people he chose are bold and hell-bent on playing hardball to make big changes happen in economics." He went on to say Trump will also be forceful on foreign policy, education and the environment.
This is Mad Money, so you are not going to get my views on the latter, but let's start with the phrase "animal spirits will lift this market." We know the people whom Trump has picked are going to push hard to get his agenda going, the agenda being lower corporate taxes, repatriation of overseas assets at a reduced tax rate and deregulation.
Remember, I always say that if he can get these through, you are going to see earnings estimates go higher, both the bottom and top lines. The bottom line is simple: If you can bring in more money and pay fewer taxes, that's going to produce higher-than-expected earnings.
Now, we are all used to companies cutting costs to beat the numbers. And we are used to seeing companies buy back stock to beat the numbers. Frankly, though, we are so used to seeing both that we don't care for them anymore. We have judged these things to be superficial and we hunger for accelerated sales from deregulation and the possibility of expansion of the overall economy, maybe as much as 4%. Consistent growth could produce a different, growth mindset that would feed on itself.
Which brings me to the animal spirits of the market. You may hear this term and be puzzled, so let me solve the puzzle. One of the greatest investors of all time, John Maynard Keynes, put this thought in our heads. Let me give you the full quote: "Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature, that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits--a spontaneous urge to action rather than inaction and not as the outcome of a weighted average of quantitative benefits."
I think that's most eloquent, but let's understand how it is playing out. In the big picture, or the macro, the excitement stemming from Trump and the people he is putting in and the pro-growth troika are producing animal spirits that are getting us to act, or buy stocks when we otherwise would be too circumspect to do so.
Think of what would be the clinical outcome of a weighted average of quantitative benefits. The dollar, for example, is soaring, we are almost at parity to the euro. For this entire decade, we have disliked when the dollar was strong, especially versus the euro, because that allows their companies to win share from our companies and we make less money when the proceeds of our sales are repatriated. Now we don't care at all. It doesn't matter.
Second, the market has always thrived on lower interest rates and disliked higher rates. But we have had a remarkable lift in interest rates and it doesn't matter. Third, we always heard from one of the best market prognosticators ever, do not fight the Fed. With that last rate hike, we are fighting the Fed and it hasn't mattered. After this run, the market is way overextended and historically expensive.
It hasn't mattered. Those are clear-cut examples of what the animal spirits Trump has unleashed have overcome. It's as if, even as the market has had a remarkable run under President Obama, the move is viewed as happening despite Obama. This move is happening because of Trump. The policies of Obama are being viewed as redistributionist and therefore not for overall growth, just the growth of labor. The policies of Trump are being viewed as pure growth and pro-business. He doesn't just want to let business fend for itself. He wants to push it to create more wealth.
So how does it play out on a day-to-day basis? Let's just consider the earnings reports we got today. Restaurant chain Darden (DRI) - Get Report , the parent of Olive Garden, reported an in-line earnings quarter this morning with lighter revenues than expected and disappointing same-store-sales numbers. Plus, while the numbers were positive per month, November was worse than October. That's a post-election month. On another day, this stock would have been downgraded and hammered. Instead it goes higher.
Auto dealer CarMax (KMX) - Get Report reported a decent earnings-per-share number but then disappointed on the top line. A revenue miss normally would be catastrophic for this company. Instead, it is up three as the focus was on better same-store sales, which clocked in at 5.4%, a nice number. Carnival Cruise (CCL) - Get Report gave you a strong quarterly report this morning but it gave a 2017 profit forecast of $3.30 to $3.60 per share when the Street was looking for $3.71. Egads, that's horrendous. Remember how often I have told you that forecasts are what matter? Guess what. The animal spirits in this market say don't worry about the weight of the empirical evidence, spontaneous action will be taken. And it was, with the stock up almost a buck.
It's not just the earnings, though. I have been saying endlessly that Nvidia (NVDA) - Get Report , the chip maker, is like racehorse American Pharoah with the triple play of machine learning, automobile and gaming chips. Today, without anything new, Goldman Sachs (GS) makes it a conviction buy. Bingo, the animal spirit of the bull ramps it up for another three points.
Or how about this one: Walgreens (WBA) - Get Report has been trying to sell some Rite Aid (RAD) - Get Report stores so it can dodge the antitrust regulators who are concerned about too much concentration. Today some little outfit called Fred's (FRED) , a general merchandise store, is going to buy 865 Rite Aid stores for $950 million in cash. Hold it right there. Fred's was a $400 million company coming into today. On this announcement, which is about a purchase price that is twice its market cap, the stock's up an astounding 78%. (Walgreens is part of TheStreet's Action Alerts PLUS portfolio.)
Isn't anybody worried that these perhaps run-down Rite Aids will prove too much for Fred's? Isn't anyone concerned that this little company is taking down a $600 million loan? The answer: absolutely not. Why? The animal spirits.
Look, it would be one thing if this has never happened before. But Keynes wrote about these animal spirits overriding mathematical and evidentiary concerns back in the 1930s. Plus, it's not like they are a big joke. This is not the first time the market's at all-time highs because of animal spirits. Most of the new highs have been generated by these spirits.
Or to put it another way, you may think it is irrational, and yes indeed, it is most likely irrational because it's bowing over the mathematical and the logical. But when you go to sell a million shares of any of the Dow stocks, there's a buyer right here and that, more than anything else, is really all that matters.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long WBA.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long WBA and SBUX.