WFC, ALLY, AN, ULTA: Jim Cramer's Views

NEW YORK (Real Money) -- Jim Cramer shares his views every day on RealMoney. Click here for a real-time look at his insights and musings.

There Is No Auto Loans Bubble

Posted at 6:18 a.m. EDT on Wednesday, June 3, 2015

Yippee, we are selling cars and trucks at a 17.7 million pace. You know how good that is? It's up eight million units from the depths of the Great Recession.

But you know how weak that is? It's only back to where we were in 2005, before the great recession. In fact, it's identical to the peak.

Yet, we had 296 million people in our country back then. We now have almost 320 million, up more than 24 million.

When you look at it like that, is there really a ton of growth? Is it really that shocking?

It is certainly good news that, at least with autos, we are back to where we were before the tsunami hit. At about one million housing starts, we are still an astounding 700,000 units below where we were back then.

We have so radically underinvested in the housing industry, that you have to wonder if there will ever be a comeback to those levels, but with any pick-up in household formation the way Home Depot's  (HD) Carole Tome is starting to see, there's hope.

You want some sobering perspective on housing starts? We are hoping upon hope that the last few months might be a harbinger for a possible 1.2 million housing start figure. That would bring us back to where we were as a country in 1961. The difference? We were a nation of 180 million people back then. We have added 160 million people since.

Still, it doesn't matter. What's the first thing we heard when we got the 17.7 million figure? That there's a bubble in auto sales, fueled by cheap money. I googled bubble in auto sales on cheap money and found a horde of stories back dating back to 2012, the first year auto sales had a meaningful advance from the 2008-2009 trough.

So it is not a new alarm.

What was far more interesting to me was a decision made by Wells Fargo  (WFC), the second-biggest auto lender in the U.S., to put a lid on subprime lending at 10% of all auto loans back in March. Now it is true that the number one lender, Ally  (ALLY), is expanding in the category, going from 9% of all loans to 12 to 15%. I will grant you, that's excessive. Maybe Ally's back to its old bad ways.

But that's not been the case at either AutoNation  (AN) or Carmax  (KMX), at least according to their sobering and smart executives on their conference calls.

The ironic thing? People don't walk away from their cars as the pundits think they do. As Michael Jackson, the very able CEO of AutoNation recently told us, of the $3.5 trillion in auto loans made in the last decade, only $800 to $900 billion have outstanding balances. These loans get paid off. There's a simple reason: you can default on your home loan and still keep your job, but you can't default on your car loan and get to your job.

So bemoan the bubble in auto loans, but marvel, at least for a moment, that the second-largest lender cut back pretty drastically and yet auto sales continued to surge.

Worry about threatening subprime loan growth, but remember how few defaults there really are. And focus on two pieces of data: we have far more people in this country without far more cars and trucks sold from 10 years ago and the average vehicle on the road is now 12 years old -- thank you, AutoZone  (AZO), for that data.

The bottom line? When you add new home starts to auto sales, you get a picture of being "under-homed" and "under-autoed" from a decade ago.

Stop sweating fears of a boom and start wondering why we aren't even doing better in these two key fronts. The answer? We are just now starting to recover from the trauma of the Great Recession.

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long WFC.

Take Advantage of the Panic and Buy Ulta

Posted at 5:15 a.m. EDT on Monday, June 1, 2015

What do you do when shares in the company you own get slammed on what looks to be a perfect quarter? Do you join the horde and dump your stock, thinking the selling throng must know more than you do? Do you write the company off as just another "sell on the news" trade and move on?

Or do you sit back and say, "wait a second, maybe, just maybe, the market's got it all wrong"?

If the stock is Trifecta portfolio holding Ulta Salon Fragrance and Cosmetics  (ULTA), which reported an astounding quarter Thursday night and got crushed in Friday's session, I say you wait before you sell, because I think the market's collective negative judgment about this 800-store health- and beauty chain may not be so wise at all. 

First, no one denies that Ulta issued fabulous numbers. The company reported an 11.4% comparable store sales gain, the best of any major retailer I follow. Analysts had estimated Ulta would earn $0.93; it put up $1.04. Ulta blew away the $846 million sales estimate by $24 million.

But when trading opened Friday, the stock popped up about three dollars and then pirouetted down seven straight points, closing off more than 2% on the day.

It was a stunning and hideous reversal.

What was the ostensible reason for the selling? I think it had a lot to do with the company offering conservative guidance, 7-9% comp store growth going forward,  which seems like a big slowing from the just-reported quarter. That, plus some delayed marketing expenses that will hit this quarter and a heads-up that a new distribution center could have some kinks to be worked out, caused traders to head for the hills thinking, "that's the last good quarter we will see from these guys."

I beg to differ. 

Ever since Mary Dillon came in as CEO on July 1, 2013, Ulta's gone from being a somewhat sketchy, overhyped inconsistent growth stock to a well-oiled machine that just keeps getting it right, and this quarter was no different. She's got this company on a sustainable growth path that's not fully reflected in the 60 points that have been added to the stock since she joined Ulta from U.S. Cellular, where she had been the CEO for the past three years. 

You see, it wasn't just that Ulta put up better comparable store sales. It was how they were made, with 7.2% more transactions and ticket size up 4.22%, a perfect balance. It wasn't just a better omni-channel strategy than those of other retailers. It was the fact that her online business, which advanced 49.8% this quarter, contributed 170 basis points to the chain's comparable sales numbers, with the average online ticket size being 50% higher than the in-store variety.

Ulta didn't just have more people come in to the stores. It got them to spend more, with higher sales from their 15.5 million loyalty members, a number that's growing much faster than the typical retail loyalty program.

Ulta's executing at a fabulous level. It's leveraging social media with programs like #MyBeautifulMom, which pulled in 1.4 million views -- maybe someone's figured out how to make money on Twitter. It's managed to convince some of the most expensive brands, like Clinique and L'Oreal, to supply the chain right next to its own, lucrative private label offerings. 

In the meantime, Ulta's got plenty of runway to keep adding stores, and plans, prudently, to continue to build about 25 stores a quarter -- maybe too slow for some, but perfect for Dillon, who favors profitable growth over growth for growth's sake.

So what do you do with what looks now to be a broken growth stock? I say you ignore the trajectory, take out the emotion and face the facts: Dillon's in the early innings of a chain that could double in size and not scratch the surface of this splintered category.

I say you take advantage of the panic and you buy Ulta, betting that the company's just under-promising because when it over-delivers on the next quarter, you, not the fleeing traders, will get the last laugh all the way to the bank.

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the stocks mentioned.

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