NEW YORK (TheStreet) -- Jim Cramer fills his blog on RealMoney every day with his up-to-the-minute reactions to what's happening in the market and his legendary ahead-of-the-crowd ideas. This week he blogged on:
- ThePriceline-OpenTable deal, and
- Why he urges caution before trading on Iraq.
Click here for information on RealMoney, where you can see all the blogs, including Jim Cramer's -- and reader comments -- in real time.
Priceline-OpenTable Is All About Mobile
Posted at 12:53 p.m. EST on Friday, June 13, 2014
It's all about the handheld. That's all I can say about this whopper of a deal announced this morning, Priceline (PCLN) to buy OpenTable (OPEN) for $103. First, let me just say that I have been effusive in praising both companies, because both represent the model I most like, companies based on the modern-day convenience of technology.
Priceline allows you to fly and book hotels at the lowest rates. It is a beloved system and a very cheap stock, in part because Americans, including the analyst community, don't understand it. The stock sells at 20x earnings, despite some of the best growth of any company I follow. It's got a ratings system it bought in May 2013, Kayak, that allows you to see how a hotel or a restaurant is regarded by real users, although it is mainly used for hotels and inns.
I have liked OpenTable because CEO Matt Roberts, a frequent guest of "Mad Money," has designed a product that is a gift to users and customers alike. OpenTable is the de facto restaurant reservation system for the world. Customers love it because before they go out, they can check the menu of a restaurant to see if it suits them, and then they can get a table online at the time of their choice. If they can't, they will go to another restaurant. They will never again show up at a restaurant and be turned down, and if they don't like what's on the menu, they have no excuse.
Restaurateurs love it because the banes of their existences are banished. First, nothing is worse than an a table left open for the night, something I know well at Bar San Miguel, my small-plate restaurant in Brooklyn that doesn't take reservations. You have a deadweight loss, kind of like the deadweight loss that an airline has if it doesn't fill a seat, or a hotel if it doesn't fill a room. That's exactly what Priceline does for those two industries.
Second, I know from Danny Meyer, the noted restaurant guru who wrote Setting the Table, still one of the best business books I have ever read, that OpenTable makes it so you have far fewer cancellations. Danny, who is on the board of Open Table, says one of the reasons he likes the product so much is that people often make reservations but then if they can't make it, they don't cancel. However, if a reservation is made through OpenTable, a person can cancel easily without having the hassle of dealing with a manager who typically is none too happy to learn of the cancellation, which is why the non-patron is so anxious and doesn't cancel on the phone.
Plus, Roberts has data that show that for every dollar in OpenTable fees, restaurateurs generate $43 in revenue. That's a very sweet ratio, and it explains why business is growing at a 28% pace in North America and a 46% pace internationally, with lots of runway, as only 15% of reservations are done online.
OpenTable is the largest network of its kind in the world, with 30,000 restaurants, and that's despite the sluggish worldwide growth in the restaurant industry. Who knows what kind of numbers it can put up if things improve in economies worldwide?
But what's truly exciting about OpenTable is the handheld application. Out of nowhere, 41% of OpenTable's business is done mobile, and that makes a ton of sense, because people are in motion when they are going out. I believe this number can only grow. That makes for a terrific seamless app for Priceline, as you book planes, hotels and now restaurants, all after you looked up what the crowd is saying about each, via Kayak.
There is only one problem with this $2.6 billion deal that has driven OpenTable up 33%, a magnificent 47% gain, one that you aren't likely to get if you own CDs or bonds. Judging by the stock price, which is in excess of the $103 deal price, someone else wants this company. Or maybe multiple someone elses.
The reason? Once again, I have come to the conclusion that the public stock market is mis-valuing the true worth of certain companies relative to other companies. Just as Pilgrim's Pride (PPC) and Tyson Foods (TSN) fought over Hillshire Brands until Tyson pre-emptively paid about twice what the sausage maker was worth before the bidding started, I think it is natural that the likes of Google (GOOGL) comes in and tries to outbid Priceline. Here's why. Google not that long ago bought Zagat, a restaurant ratings service. I believe that the combination of a company that rates restaurants in tandem with a reservation system is a total killer app, and Google certainly has the money to make it happen.
At the same time, a very flush-with-cash Yahoo! (YHOO), after the Alibaba flotation, of which it owns a ton, could also join in the bidding. Why not? It needs to crack into this business with all of its handheld relevance, and OpenTable might be the way to do it.
Now, this deal has also spiked Yelp (YELP), and in some ways that makes no sense at all, as Yelp should have no desire to buy Open Table. That's because it has SeatMe, which it believes to be an OpenTable killer. SeatMe is a cloud-based system that is cheaper and is growing like a weed, threatening OpenTable's almost monopolistic hold on the industry. If anything, Yelp's initiative might have made Roberts more eager to sell OpenTable at this terrific price.
I think the deal just shows that Yelp, which is a company I adore, might be more in the driver's seat than people realize. It's got the best listings, the best model, in that restaurants and many other service businesses pay to have ads next to the Yelpers, the people who write reviews. The reviewers don't cost Yelp anyhing. What a model. I have often thought that Yelp should merge with GrubHub (GRUB), the restaurant delivery system that recently came public to, again, offer a seamless app for checking reviews and then getting food delivered, a pun intended, because GrubHub also goes by the name of Seamless. Then the two of them could merge with Yahoo!, where the chairman of Yelp sits on the board. But Yelp has no desire to sell, and it also works with Eat.24 and Delivery.com, which could also be GrubHub killers.
The bottom line here is that all of these companies, which happen to be heavily shorted by hedge funds, are part of the new world where everything is at your fingertips everywhere you go. All of these companies offer value to you, and all are more valuable than the market thinks they are.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long GOOGL.
Think Twice Before Trading on Iraq
Posted at 3:45 p.m. EST on Thursday, June 12, 2014
The market despises uncertainty, and suddenly we have uncertainty in spades from a place we were trying to forget, Iraq, which increasingly is looking like some sort of failed state.
Right now, our government is pondering action, some sort of action, and we don't know what it is. Worse, judging by President Obama's conference today, he doesn't seem to know what to do, something quite evident from his insistence on not ruling out anything.
Plus, he's saying "short-term, immediate things" need to be done militarily to preserve the situation, which, judging by the immediate decline in the stock market after he spoke, means that something could happen as early as this weekend.
So what will it be? Airstrikes? Drones? Soldiers? Boots back on the ground in Iraq? More lives lost in defense of a government that many Americans hate because the good works of our soldiers already seem undone?
That's uncertainty writ large. We've had many overseas issues in the last few years that have caused hiccups in the market: Egypt's Arab Spring, North Korean saber rattling, Cyprus' implosion, Syrian insurrection and, of course, the Ukraine. But none of these rose to the level of U.S. military action.
Plus, we are no stranger to declines caused by Iraq. While we have gotten used to Washington causing declines in the stock market, we must always remember that we had not one but two bear markets brought on by Iraq: Saddam's invasion of Kuwait in 1990 and our 2003 invasion of Iraq itself. Both caused tremendous dislocations for a variety of reasons.
Now, no one is talking about another full-blown war over Iraq, although we know that when the president uses language like "it is clearly an emergency situation," nothing can be dismissed.
And the first issue to think about, always, is the potential loss of life of our men and women in the armed forces.
The market understands that and has never been able to price in direct military action but always furiously tries to do so ahead of that action. That's why the lion's share of the declines in both Iraq wars occurred before the shots were fired, which is where we are right now, hence the need to be cautious.
Of course it doesn't help that we were at the lowest point for the fear index in ages ahead of this crisis. Nor does it help that Washington itself is in turmoil, as many political leaders from the opposition feel the need to lambaste the president, including House Speaker John Boehner, who accused the president of taking a nap on Iraq.
The markers do not like it when our president looks weak and seems to lack authority, and comments like Boehner's don't lead the people to believe that Obama is acting from strength. It's more like he's acting with some degree of confusion, which does seem understandable, given the speed with which major parts of Iraq have fallen into the hands of anti-U.S. insurgents.
A market sent down by a president who is perceived to be caught off-guard is not a market you want to rush headlong into. It doesn't inspire buying, especially when you know that we are a little more than a percent off all-time highs. If anything, we have to say, let's give this one some room, let's see how it plays out, particularly because something unexpected could be very imminent.
Now, Iraq has more than just military implications for the market. Iraq is currently producing 3.6 million barrels of oil a day. The world is thirsty for oil. We don't know if the Saudis, the logical swing factor in the oil market, can make up for a real shortfall in oil, and it appears that, already, 500,000 barrels of oil production could be imminently at risk.
Now we keep hearing that the insurrection is occurring far away from the big-producing oil fields. But if there is a full-blown civil war, it's perfectly logical to believe that the workers in the oil fields will not show up and that the pumping will decline sharply.
I think, conservatively -- conservatively now -- the price of oil could easily increase by 10%, something that Dan Dicker, the energy expert at TheStreet, concurs with. When you get that kind of increase from the already inflated base of $106 for West Texas crude and $112 for the more important Brent that our gasoline is priced off of, then you can see the financial damage that an oil stoppage in Iraq could provoke.
A previous spike in oil from the 1990 Kuwait incursion helped trigger the bear market of that year, and the sudden spike in oil to $145 in 2008 helped precipitate the Great Recession. Oil is just a gigantic tax on the American people, and while there are 10 states whose economies get some boost from an increase in oil, the rest of the country just plain gets stung by it.
Now typically, I decry those who use foreign dilemmas to explain why they are selling. You have heard me say endlessly that most of these overseas crises are just buying opportunities. But given the immense complexity of the Middle East with the Syrian civil war, Iranian provocation and a government in Iraq that may lose control of the situation with alacrity, we have to presume the worst about oil for the moment.
And that makes more for sideline watching than plunging in to take advantage of the first break in a market that's near the all-time highs. Put simply, it's a new situation that just began to be baked in, and that means caution is needed.
Why not be more aggressive? Simple, because it is about the numbers. It is always about the numbers. And unlike the other foreign crises enumerated earlier, this one has a clear impact on the numbers. In fact, if oil increases much beyond where it already has, I think you will see a wave of number-cutting, and it will be in leadership areas in the market.
Take the classic example of the airlines. I have liked these now for a year and a half. I still do because of the consolidation that has caused less competition and higher prices. The airlines have been minting money, and the estimates have risen continually. That's how you get such huge gains, and the gains in the airlines these last two years are breathtaking. Delta Air Lines (DAL) has quadrupled in two years. Southwest Airlines (LUV) has tripled. The astonishing rise in the merged and reconstituted American Airlines (AAL) is the stuff that dreams are made of. How fitting that they could be derailed or at least stunted by this tempest.
Normally I would say, "Use this nearly 7% decline in American to buy. Take down some Delta here, off 6%." But I can't. I can't because any one of the multiple analysts who like these stocks could slash numbers and downgrade ratings tomorrow.
Same thing with travel, leisure and retail stocks. Gasoline was high enough at the pump going into this crisis that we had to worry about all three. Now we have to ponder $5-a-gallon gasoline, and that too is going to cause numbers to be slashed.
Believe me, the potential for increased estimates for the roughly 10% percent of the market that does better with higher oil prices will not make up for across-the-board estimate cuts.
So what to do? Pretty simple. If you have cash, do what we did for my charitable trust today, which you can follow along at Action Alerts PLUS: Nothing. That's right. We are waiting. There is now no hurry. Let's see how things play out. If you have some outsized profits in stocks, remember that we aren't even 2% from the highs. Feel free to take them. I've been through two Iraq shocks already. I know these aren't investible until after the cannons start firing, not before.