Your personal views on the stock market don't matter, Jim Cramer told his Mad Money viewers Thursday. Wall Street has a playbook for when the Federal Reserve starts raising interest rates and that means "Don't Fight The Fed" and "Don't Fight The Tape" need to be your mantras.
The reality is that interest rate hikes could take years to affect the entire economy. The industrials, for example, will likely be safe for a while. But according to the playbook, the first groups to go are high-multiple tech stocks. Any stock that trades on sales, and not earnings, is going to see some tough times ahead.
Over on Real Money Pro, contributor Paul Prices says Costco (COST) - Get Costco Wholesale Corporation Report is a great company, and while investors might not like to hear it, they should avoid the stock now as it commands about four times its EPS growth rate right now. That suggests the shares are very, very pricey. Get more of his investing ideas and trading strategies on Real Money.
The next group to get hit by rising interest rates are the housing stocks, which is closely followed by high-multiple retailers. If you own any of these stocks, you need to re-evaluate your positions.
Not everything is a loser when the Fed is not our friend, however. The universe of potential winners is just smaller. The financials are winners. Cramer suggested Morgan Stanley (MS) - Get Morgan Stanley Report and Wells Fargo (WFC) - Get Wells Fargo & Company Report. Investors can also add some consumer staples like Clorox (CLX) - Get Clorox Company Report, which rose 1.1% Thursday. Pharma is also a good choice, according to the playbook, and that means stocks like Eli Lilly (LLY) - Get Eli Lilly and Company Report, which was up 1.3% by the close.
"Don't fight the Fed," Cramer concluded, it's time to start switching gears for the new year.
Both Sides of the Wayfair Story
The bulls and the bears are fighting it out over the stock of Wayfair (W) - Get Wayfair, Inc. Class A Report, which received a buy rating from Needham with a $280 price target, while at the same time receiving a sell rating from Bank of America with a $175 price target. Shares responded by falling another 8%.
Analyst face-offs like this are great for investors, because you get to hear both sides of the argument. In the case of Wayfair, Needham points out that while there may be short-term weakness, the company's CastleGate fulfillment service is the company's hidden gem. Meanwhile, Bank of America cites that Wayfair is up against tough comparisons and it doesn't think the company can deliver as people begin to travel more and spend less on their homes.
Shares of Wayfair are off 16% for the year, but Needham felt the stock is worth 1.6 times sales. Bank of America felt 1.2 times sales is a more realistic valuation. According to Cramer, they're both wrong.
The Fed is no longer our friend, Cramer reminded viewers, and that means the market isn't going to pay up for a stock like Wayfair. Using 2023 estimates, stocks like RH (RH) - Get RH Report trade for 19 times earnings. Williams-Sonoma (WSM) - Get Williams-Sonoma, Inc. Report trades for 11 times earnings. Wayfair trades for 32 times their 2023 estimates and that's simply way too high.
Beware the Flood of SPAC Deals
The Securities and Exchange Commission is starting to take a hard look at Special Purpose Acquisition Companies, or SPACs, but that hasn't stopped investors from getting conned by these money-losing deals.
SPACs allow companies to come public by circumventing the traditional IPO process, placing all of the risk on the would-be shareholders. Cramer and CNBC looked into 193 SPAC deals that came public this year and found 69% trading below their merger price, with only 12% of the deals up more than a few percentage points.
The latest SPAC deal was Buzzfeed (BZFD) - Get BuzzFeed Report, which debuted at $15 a share last week, only to slide down to $5 today. Not only was Buzzfeed a loss for shareholders, but the company itself planned on raising $250 million, but walked away with less than $16 million.
Cramer explained that there's virtually no risk for early investors of SPAC companies, as they're allowed to redeem their shares if the deal goes bad. Additionally, SPACs can offer sweetheart deals to institutional investors, called PIPE transactions, which all but ensure that individual investors lose.
Despite the SEC's actions thus far, there are still 20 SPAC fund raises a week, on average, which is why Cramer said investors need to beware.
Executive Decision: Adobe Systems
In his "Executive Decision" segment, Cramer spoke with Shantanu Narayen, chairman, president and CEO of Adobe Systems (ADBE) - Get Adobe Inc. Report, the cloud software provider that saw its shares plunge 10.1% after reporting what Wall Street felt were weaker-than-expected forecasts. Shares of Adobe are still up 13% for the year.
Narayen said Adobe had an outstanding year in 2021. It was the company's first $15 billion year and the first to see $3 billion in digital media revenues. Adobe generates over $2 billion in cash flow and has a lot of profitability.
Regarding Adobe's 2022 forecasts, Narayen said their business is still as healthy as it's ever been, but the foreign exchange rates are expected to begin working against them.
Finally, when asked what the metaverse will mean for their company, Narayen said the metaverse is all about creating content so users can learn and experience new things. Nobody does the creator economy better than Adobe, he said.
The Fed's Fine Line
In his No-Huddle Offense segment, Cramer said the pundits criticizing Fed chair Jay Powell's "light touch" when it comes to interest rates have it all wrong. He reminded viewers that in 2019, before the pandemic, we had high growth, terrific unemployment and low inflation. Then 800,000 people died and millions left the workforce, while at the same time, shutdowns caused supply chain chaos.
Powell has a very fine line to walk. Inflation isn't being caused entirely by rampant demand, so Powell can't slam on the brakes as many would like. Omicron still has the possibility of doing real damage to our economy. Don't forget, the Fed has dual mandates to foster employment and keep inflation at bay. Using those guidelines, Powell's doing exactly what he needs to do.
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