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Friday marked a nasty day when stocks went back to "Crazy Town," TheStreet’s Jim Cramer told his Mad Money viewers. Oil plunged to its lowest level since 2009 and investors didn’t hesitate to sell stocks as the commodity continued lower. Elevated concerns about the high-yield debt market didn't help.
With that in mind, what's Cramer doing this week?
On Monday, he’s keeping an eye out for more news about high-yield bond funds. If there’s more bad news involved, it could push stocks lower and make for another ugly day.
On Tuesday, 3M (MMM) - Get Report will host an analyst meeting. "I don’t think this is the best moment in 3M’s history, as it surely needs a better economy worldwide than it has right now," Cramer said. But despite this, he views the Action Alerts PLUS holding as a good core portfolio position because it’s well-run and pays a solid dividend.
Wednesday will be "monumentally important," he said, not because FedEx (FDX) - Get Report reports earnings and gives investors insight into the global economy. But because the Federal Reserve will announce its decision on the rate hike, which is likely to become a reality. If the statement’s wording is done carefully and the Fed signals that another rate hike is not around the corner, it could lead to a market rally. Conversely, a dour statement could send stocks reeling.
If stocks do make another move lower, it could be a buying opportunity, at least for Accenture (ACN) - Get Report and General Mills (GIS) - Get Report , two stocks Cramer likes and which report earnings Thursday morning. Thursday also features an analyst meeting from Delta Air Lines (DAL) - Get Report . Although the stock is cheap based on valuation and is benefiting from lower fuel costs, he is not a buyer unless the stock gets really hammered between now and Thursday.
Cramer also likes Lennar (LEN) - Get Report , which reports earnings on Friday. However, he is not a buyer of the stock so close to the Fed’s rate decision. He is a buyer of Darden Restaurants (DRI) - Get Report , which reports earnings on Friday, too, but only if its dividend yield reaches 4%. BlackBerry (BBRY) also reports earnings.
His bottom line: It may be prudent for investors to lock in some gains ahead of what could be a volatile week.
Speculate on Mattress Firm
Sometimes stocks get unfairly punished when the broader market falls as badly as it did on Friday, Cramer said. One such stock was Mattress Firm Holding (MFRM) , which tumbled 5.3%.
Cramer noted that in September the company missed on revenue and earnings estimates, lowered its full-year guidance and forecast low-single-digit same-store sales growth. Shares fell 23% in a single session as a result.
But then the company made its $780 million acquisition of Sleepy’s, which was mostly financed through cheap debt, Cramer said.
The deal will allow for Mattress Firm to expand from over 2,400 locations to over 3,500 locations. It will create cost synergies, be accretive to earnings in the first year, allow for better use of its distribution network and boost free-cash flow. Cramer explained the company can use its increased free-cash flow to pay back its debt for the deal.
The acquisition also gets Mattress Firm into some more difficult-to-penetrate markets, such as the Northeast. Recently the company topped Wall Street’s expectations for earnings and revenue, and reported better-than-expected same-store sales results of 3.8%.
While Cramer gave his blessing for investors to buy the stock, he warned shares tend to be volatile, and there are still concerns out there. Some are worried the company paid too much for Sleepy’s and now have an over-leveraged balance sheet as a result. But those concerns are likely overblown, he added.
If you’re looking to speculate on this mattress stock, look for it to get pushed lower following the Fed’s rate decision, Cramer suggested.
Cramer Says Yum!
The company is planning to split into Yum! Brands and Yum! China -- with the former maintaining control over its global operations, ex-China. The split should take place by the end of 2016.
Cramer explained that China was once a promising and fast-growing business segment for Yum!, but it has since become an anchor dragging down its stock price. The company is looking for a slow and steady approach for its Yum! Brands segment, aiming for a 2% dividend yield, steady earnings growth and becoming a 96% franchise entity. "It'll be a cash machine," he said.
As for Yum! China, management said its November same-store sales fell 3% year over year, which isn’t good. But the company has plans in place to turn around its Chinese operations into a faster-growing, riskier play. They’re looking for 15% annual earnings growth, no debt and enough free-cash flow to initiate a significant share buyback after the first year, Cramer said.
Where will that growth come from? Management is looking to grow its store base 5% to 6% per year, from its current count of 6,900 to 20,000 in the long-term. That’s to go with 4% to 5% annual same-store sales growth and 3% to 5% annual margin improvements, Cramer explained.
Investors who want a piece of the action can consider buying the stock in the high $60s, Cramer said. There’s plenty of time before the split takes place to see if the Chinese business starts to improve. If it doesn't, Cramer said he is inclined to stick with the Yum! Brands portion of the spinoff.
Cramer Blesses This Merger
Some day, investors will look back at the selloff in Dow Chemical (DOW) - Get Report and DuPont (DD) - Get Report and kick themselves for not taking advantage of Friday’s drop, Cramer said. The two companies picked a bad day to announce a $130 billion mega merger.
While some might argue that buying shares in a chemical company amid a slowing global economy and in front of a Fed interest rate hike is a bad idea, Cramer disagreed based on the strength of each company’s management team.
The companies plan to merge into one entity -- expected to close in the second half of 2016 -- before splitting up into three separate businesses. The move is expected to create $30 billion in shareholder value, a figure Cramer believes is accurate. Part of the value will be driven by cost savings, plant overlaps and synergies. But part of it will be from the market-leading businesses the companies will form.
The first company is agriculture chemical business, which will be exciting with the companies’ diverse and broad range of products. It will be a "one-stop shop powerhouse," Cramer said. The second is a material science business, which leverages technology to find innovate solutions in packaging, construction and durable goods.
Finally, the third business is Cramer’s favorite: the specialty products company. This company will have industrial bioscience products, electronics, materials, and nutritional, health and safety products, he explained, adding that it reminds him of 3M.
So what should investors do now that the deal is announced? Cramer, who is long Dow Chemical in the Action Alerts PLUS portfolio, said he’s staying long the stock until the merger as he’s getting paid a 3.5% dividend yield in the meantime. In fact, had he not been restricted due to mentioning the company earlier in the day, he would have been buying more for the portfolio.
No Huddle Offense
In his "No Huddle Offense" segment, Cramer said investors need to keep a careful eye on bond prices.
All too often, investors who focus on stocks as their only investment can get "blindsided" by a big selloff, something that may have been predictable based on bond trading, Cramer said.
Third Avenue Management recently announced that it is barring its investor withdrawals from its Focused Credit Fund, which is a very rare move for a mutual fund, he explained. Investors go to mutual funds for simplicity and liquidity, not to be locked out and barred from their capital.
The issue is the fund’s allocations, which are in very risky, high-yield assets, Cramer said. The liquidity in the high-yield bond market has dried up so much, this fund isn’t able to sell its holdings for a high enough value in order to return the money to its shareholders. The buyers simply aren’t there, he said.
This situation is big problem, and it only exacerbated investors' fears over the weekend that they, too, would be shut out of other high-yield funds. That will likely cause a big wave of selling in high-yield credit markets, which in turn will likely put pressure on stocks on Monday.
Investors bought these high-yield notes to generate more yield for their portfolios, because they weren’t getting a high enough return from other fixed-income assets, he added.
The pressures that this will put on the stock market have Cramer concerned, especially since a Fed rate hike will likely only make the situation worse. Eventually, this situation should pass, but not without taking stocks lower first, he said.
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At the time of publication, Cramer's Action Alerts PLUS had a position in DOW.