NEW YORK (Real Money) -- The market has caught a selloff, so what do you buy? I like to go back to what had been working just a week ago and -- I hope -- pick up a couple of discounts on some very winning names.
Where does this winning list come from? How about the companies that performed best in the quarter that just ended? They are the logical places to go, especially because nothing has happened to change their fortunes and they are all still in favor.
First is Williams Companies (WMB), which is always a competitor in the shipment of oil and gas, and is now a powerhouse after its purchase of Access Midstream Partners. Sure, Williams paid a 50% premium to pick it up. But, when it comes to shipping all of the oil and gas we are finding in the U.S., few companies are in the driver's seat as much as Williams is. The deal was incredibly accretive, which means that the stock's rally turned out to be justified despite what had looked like an overpayment. Williams can drop down pipelines into instantly wealth-creating master limited partnerships.
It's hard to imagine this stock getting hammered from the current level, unless oil prices break down hard and natural gas goes back to $3 per MMBtu from more than $4 now. I don't think that will happen.
Second is Newfield Exploration (NFX). This long-out-of-favor oil-and-gas play has been shrinking itself and becoming much more liquids-oriented. What many don't realize is that these oil-and-gas companies are actual growth names, with increases that far outstrip all but the highest-growth tech stocks. Newfield has 28% production growth. It also has assets in the just-now-being-rediscovered Woodford and SCOOP Oklahoma shales. I think this one has got further to run, and it has to be added to the list of fast growers along with EOG (EOG), Pioneer Natural Resources (PXD), Noble (NBL) and Anadarko (APC).
Third is Micron (MU). What can I say about a stock that has quintupled in 18 months? How about this? This stock can keep going higher as long as no new capacity is added to dynamic random-access memory (DRAM) -- and it looks like this won't happen. I think Micron can earn $5 per share next year, and while the stock is never going to get a premium multiple, it is difficult to figure out why shares should stay down at current levels, especially because so many wise guys are betting against it.
Why are they doing that? Well, historically, there have been 10 or so producers of DRAM, but many have fallen by the wayside, and not that long ago Micron bought a failed conglomerate of Japanese producers called Elpida -- and it's been nothing but net ever since, as there's now a slap-happy oligopoly with Korean manufacturers Hynix and Samsung. The other part of Micron's business, flash, remains in tight supply as well, as the producers haven't seen fit to add capacity here either.
Now, we know that, for the first time in ages, demand has picked up for personal computers. Typically, then, one of the players in this universe should blink. But when you have so few players you tend to get a lot of forbearance, as there is enough market share for all to go around. The pie is growing anyway, so no one needs to take any more or to truly try capturing more volume by taking it from others.
Fourth, not surprisingly, is Allergan (AGN). This company has been in play ever since Valeant (VRX) decided that Allergan's franchise dovetailed nicely with its ophthalmological unit, and that Allergan's gigantic mid-teens commitment to research and development could be radically scaled back to bring far more money to the bottom line. Now, we don't know what's going to happen here, as Allergan is fighting it tooth and nail. Also, Valeant -- which is being aided by Bill Ackman, the man who would destroy Herbalife (HLF) to save its employees from exploitation -- could raise its bid again.
Valeant needs acquisitions to keep going. Allergan just wants to be left alone to be the largest pharma company with good growth. That's a very reasonable aim, but it's irrelevant at this point. I am not an arbitrageur, but Allergan stock is probably 30 points too high without this deal.
Another takeover name comes in fifth: Pepco (POM), which is getting a bid from Exelon (EXC) and is an acquisitive utility but not all that well-run. We have way too many utilities in this country, and periodically we hear that there is going to be consolidation. But the only real consolidator is Exelon, so I wouldn't count on a wave of these kinds of deals. At the same time, I am a huge believer that we are in a wave of mergers and acquisitions that will be the biggest in history, so nothing can be ruled out.
The sixth stock is one that is also emblematic of this moment: Vertex Pharmaceuticals (VRTX), a company with a meaningful advance in curing cystic fibrosis. We often forget why we take biotech pain like what we experienced on Tuesday. It's because of companies such as Vertex that are working on breakthrough medicines. When they do make breakthroughs, their stocks go from $60 to $90 -- with no speed limit.
For instance, Gilead (GILD) has a terrific hepatitis C pill that it purchased from a company with no revenue, Pharmassett VRUS, at a gigantic premium to where it had been. Then there's Idenix (IDIX), whose shares tripled when Merck (MRK) bought it for its hep C formulation. Owning a biotech, you recognize, can be an amazing speculation holding.
Seven is another oil-and-gas story, this time Anadarko Petroleum. This stock ran up from $86 to $107 when it paid a settlement in a lawsuit that had previously kept its stock from appreciating with the rest of the group, even despite the company's superior production growth. Many spectators thought Anadarko might owe the government as much as $10 billion for the environmental liabilities of its former Kerr-McGee subsidiary. When it paid a little more than $5 billion, much less than people feared, what buyers found was perhaps the oil company most vulnerable to a takeover by one of the majors. It still is, even after the magnificent run.
Eighth: Old tech has had quite a run -- and, just like Micron, which makes flash memory as well as DRAM, SanDisk (SNDK) has benefited from the tightness in the flash market. I don't see any new foundries on the horizon that will affect the supply and demand. This stock is no bargain, as it sells at 16 times next year's earnings, but it will most likely exceed those expectations and vastly exceed them if the pick-up in device hardware proves to be a reality.
The ninth is a played-out odyssey: Iron Mountain's (IRM) status change to real estate investment trust. Many bears thought the record-keeping company would not be able to change into REIT status and pass on juicy rents to shareholders. They were wrong, and Iron Mountain enjoyed a nice short-squeeze-enabled rally. It's a sale.
Finally, there's one I like very much: Molson Coors (TAP). Here's a stock in a growing industry -- beer sales were up more than 3% this quarter, whereas carbonated sodas were down about the same amount, according to Alcoa's (AA) numbers last night. Consolidation in this group, moreover, is ongoing and positive. Anheuser Busch Inbev (BUD) has made no secret that it covets SABMiller, and if that happens the U.S. Justice Department will most likely order it to spin off Miller to -- you guessed it -- Molson Coors.
The next thing you know, you'll have the son of Constellation Brands (STZ), a stock that's up more than fourfold when it got the rights to sell Corona and Modelo in the U.S. for a song because of antitrust concerns involving Inbev's purchase of Budweiser. Molson Coors is a buy on its own, but this divestiture win would move its stock quickly to $100.
So, if the market continues heading down, recall what worked last quarter -- not just the stocks, but the themes as well, such as oil-and-gas pipelines and production, mergers and acquisitions, new drugs and old tech. Those are all very much in play, and the weakness allows you to get in these themes for prices you would have killed for just 10 days ago.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long APC.
This article was originally published on Real Money at 6:44 a.m. on July 9.
Now let's look at TheStreet Ratings' take on some of these stocks.
TheStreet Ratings team rates WILLIAMS COS INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate WILLIAMS COS INC (WMB) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its solid stock price performance and expanding profit margins. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Compared to its closing price of one year ago, WMB's share price has jumped by 76.92%, exceeding the performance of the broader market during that same time frame. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.
- 38.99% is the gross profit margin for WILLIAMS COS INC which we consider to be strong. Regardless of WMB's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, WMB's net profit margin of 8.00% compares favorably to the industry average.
- WILLIAMS COS INC's earnings per share declined by 16.7% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, WILLIAMS COS INC reported lower earnings of $0.64 versus $1.16 in the prior year. This year, the market expects an improvement in earnings ($1.11 versus $0.64).
- WMB, with its decline in revenue, slightly underperformed the industry average of 3.2%. Since the same quarter one year prior, revenues slightly dropped by 3.4%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
- The change in net income from the same quarter one year ago has exceeded that of the Oil, Gas & Consumable Fuels industry average, but is less than that of the S&P 500. The net income has decreased by 13.0% when compared to the same quarter one year ago, dropping from $161.00 million to $140.00 million.
- You can view the full analysis from the report here: WMB Ratings Report
TheStreet Ratings team rates NEWFIELD EXPLORATION CO as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate NEWFIELD EXPLORATION CO (NFX) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, impressive record of earnings per share growth and compelling growth in net income. However, as a counter to these strengths, we find that the company has favored debt over equity in the management of its balance sheet."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth greatly exceeded the industry average of 3.2%. Since the same quarter one year prior, revenues rose by 49.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
- NEWFIELD EXPLORATION CO reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, NEWFIELD EXPLORATION CO turned its bottom line around by earning $0.79 versus -$6.70 in the prior year. This year, the market expects an improvement in earnings ($2.03 versus $0.79).
- Net operating cash flow has slightly increased to $365.00 million or 1.67% when compared to the same quarter last year. Despite an increase in cash flow, NEWFIELD EXPLORATION CO's cash flow growth rate is still lower than the industry average growth rate of 17.65%.
- The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. In comparison to the other companies in the Oil, Gas & Consumable Fuels industry and the overall market, NEWFIELD EXPLORATION CO's return on equity is significantly below that of the industry average and is below that of the S&P 500.
- NFX's debt-to-equity ratio of 0.94 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Despite the fact that NFX's debt-to-equity ratio is mixed in its results, the company's quick ratio of 0.54 is low and demonstrates weak liquidity.
- You can view the full analysis from the report here: NFX Ratings Report