Posted at 2:57 p.m. EDT on Friday, Dec. 11, 2015
One day we will look back at today and think, wow, how did we not take advantage of the weakness in the stock market and buy some Dow Chemical (DOW) or DuPont (DD - Get Report) after the two chemical giants announced a huge merger deal. We will be kicking ourselves that we missed an opportunity to split the new company into three different entities that will bring out even more value once the spinouts are complete.
Now I know there is plenty wrong with this stock market right now. We have the ever-declining commodity prices, including oil, which are causing tremendous pressure on both debt and equities, as we saw this week with the disastrous 75% dividend cut by Kinder Morgan (KMI - Get Report) and the shocking decision by a large mutual fund manager to bar sales of a high-yield fund because there was no liquidity to meet redemptions. We know the Federal Reserve is poised to raise rates into an environment where pretty much every industry I follow is weaker than it was six months ago. We know the rest of the world is slowing.
All of these factors make it so the stock market's doing quite poorly now, and I have become much less bullish about stocks, as I have said I would always have to be once the rate hikes begin.
Or to put it another way, this was a real bad day to announce the merger of Dow and DuPont into a $130 billion chemical titan. I know what people are thinking: Who wants a worldwide chemical company going into a Fed tightening cycle and a worldwide slowdown?
And I totally get that, if I didn't have so much faith behind the people doing the deal. First, Andrew Liveris, the CEO of Dow Chemical, has been working like a dog to get his company out of commodity chemicals where the prices are subject to the whims of the world's economies and Dow can provide no real value added. Meanwhile, he's cut out a huge amount of waste, lowered the cost of the raw feedstock needed for plastic while buying back a huge amount of stock and offering a bountiful dividend.
The actions Dow has taken this year have allowed its stock to rally 18% going into today's session, a pretty darned good return given the environment.
DuPont, too, has a CEO whom we have watched for some time and applauded for his insistence on endless value creation. Ed Breen was recently appointed CEO after Ellen Kullman left the company and he was immediately open to doing a deal that would bring out more value than Kullman was willing to do, even if it meant sacrificing DuPont's autonomy and rich history of success. We've liked Breen because we believe in breaking up companies to bring out value, and he unlocked more value when he broke up Tyco a few years ago than just about any CEO we have ever come across.
DuPont under Kullman had spurned suggestions by Trian Partners, run by huge shareholder Nelson Peltz, to do something just like this deal. But Breen was all ears to Peltz's plans, and when Liveris called he was immediately inclined to do this deal even as he had just become full-time CEO the very month the talks began.
So what makes me like this deal, which should close in the second half of 2016? I like the three different companies that Liveris and Breen intend to create: agricultural chemicals, material sciences and specialty products. As we told subscribers to Action Alerts PLUS, the service that accompanies actions in my charitable trust, each of these businesses will be a leader in its respective industry. The $19 billion agricultural company offers among the most comprehensive and diverse portfolios in the industry, reaching a broad range of end markets. Management specifically pointed out that the seeds and crop protection businesses would be unparalleled, basically saying the marketplace should like this company a heck of a lot more than the current industry leader, Monsanto (MON).
Remember, I always tell you that the market likes a pure play, and before this deal Dow was being pulled down by this ag business. Together with DuPont's business, though, you have a one-stop agricultural powerhouse that, when commodities regain their strength, will be the stock money managers will lust to own.
The $50 billion material sciences business combines technology offerings that can provide innovative solutions for customers in the packaging, construction and durable-goods markets. Dow's performance plastics, materials and infrastructure businesses will dovetail perfectly with DuPont's in the same area.
Finally, the specialty products -- Dow's electronics materials and DuPont's industrial biosciences, nutritional and health and safety offerings -- will give you a company that looks a lot like the fabulously performing 3M (MMM - Get Report). People love 3M, including me, it's owned by the trust. I am naturally drawn to this company, too, and it's still just on the drawing board. (Dow Chemical and 3M are part of TheStreet's Action Alerts PLUS portfolio.)
The new company, DowDuPont, intends to unlock $30 billion of market value with the establishment of these three new companies, and I wouldn't doubt it given both CEOs' records for creating wealth for shareholders and Breen's tactics in particular for developing value in the Tyco break-up.
It's not enough just to shuffle the deck of two companies. Liveris and Breen are going to cut out costs and duplications and bring out synergies. Those are overused words, but there is a ton of overlap between the two businesses and the CEOs can pick and choose which plants they want opened and which ones can be closed. Management used a $3 billion cost synergies figure. I think that's a low-ball and there will be much more in savings.
On a managerial level, Liveris will serve as executive chairman and oversee the specialty materials company; Breen's going to be CEO and oversee the other two companies.
This whole combination and distribution will most likely take several years to pull off. It's also no slam dunk when it comes to antitrust issues, as its agricultural business does eliminate some needed competition.
So you will have to wait for a long time to see the real fruits of the merger.
But we have decided we want to hold on to Dow for the trust because you are being paid to wait with a more than 3% yield and we would have bought stock today had we not been restricted from purchasing it because I talked about it this morning and the trust's rules prohibit trading that day in a stock that I mention on air.
While I am at it, I want to salute Peltz for his persistence in making something happen here. Last summer, after Peltz was rebuffed from the DuPont board after a bitter proxy fight and the stock fell more than 20 points on the news, he urged viewers at CNBC's Delivering Alpha conference to stick with DuPont because he wasn't giving up pressuring for higher returns. I was incredulous but I said stay the course because Peltz has the best track record of any activist we could find when it comes to making money with his ideas after he's taken a stake. He never wavered and the stock, when you include dividends, has come all the way back to where it was when he lost the proxy fight.
Congratulations to all involved who put this deal together and sorry the stock market couldn't give you more of an instant reward for your efforts. We have a not-so-hot tape right now, not much working, but one day DowDuPont will seem like a pretty darned good idea. Just don't let that day be when the stock's up substantially from this nasty session where the deal was revealed.
Posted at 7:06 a.m. EDT on Friday, Dec. 11, 2015
The perfect ones just cost too much. The wounded ones don't get better. And the ones on the fence seem like they are about to fall to the wrong side.
I am talking about the retail and restaurant group. This is a moment where companies like Dave & Busters (PLAY - Get Report) -- the eat, drink and be merry while playing and watching games restaurateur -- is putting up amazing numbers, but at 29x earnings that's a full price tag for its almost 9% comparable store growth.
The first has to have everything continue to go right if it isn't going to get obliterated, and the second can't get it right - so how in the world does it go up?
Then there is Costco (COST), where you have terrific comp numbers, but a series of one-time-only issues, which added up to a total clobbering earlier this week.
I see this dichotomy everywhere. Do you want to own Macy's (M - Get Report) at $38? It is so cheap versus where it was during the summer, but there is no catalyst, here, and it is going to be 60 degrees on a key weekend before Christmas. Here's a stock that is selling at 8 next year's earnings. Only 8x earnings!
But you know what that means? It means it isn't going to come anywhere near making those estimates. This extremely low-multiple situation is an example of a stock that might turn out to be more expensive than just about any retailer, even as it is sitting so low as to be astonishing.
In other words, the cheapest stock might be the most expensive.
It's the same thing in restaurants. You have this incredible anomaly where the most expensive restaurant stock is Chipotle (CMG - Get Report) at 36x earnings, even as it is going to have a double-digit drop in comps this quarter. That's a recipe for disaster. But it is the most telegraphed short in the world. It is so telegraphed that even as we were hearing of another E.coli outbreak in Seattle and increased sickness at Boston College -- 141 have come down with the norovirus after visiting a nearby Chipotle -- the afterglow of a perfect appearance on the Today Show yesterday morning by co-CEO Steve Ells kept the stock roaring higher.
I mean, honestly, does anyone really think they can analyze the stock of the heavily shorted Chipotle, with declining comps and slashed numbers, as it is soaring at this moment? Insane? Inane? Who knows anymore?
There are some restaurants we like for the Action Alerts PLUS portfolio, because of the lure of special situations. Panera (PNRA) is rolling out Panera 2.0 nationally throughout next year, and the numbers are so improved that we are waiving any worry over the price to earnings multiple. We keep thinking that the Qdoba division of Jack in the Box (JACK - Get Report) is going to see some good sales from Chipotle's decline, but the company has said it hasn't happened yet. Could that be because millennials think of Chipotle as fresh and natural first and then as Mexican second? Or does it just take more outbreaks to realize that Qdoba tastes good, too?
No matter, that chain's too cheap.
But cheap is relative. I like that Yum! Brands (YUM - Get Report) is splitting into a Chinese-based YUM and a rest of world YUM. However, the same-store sales for its KFC chain were disappointing in November - down 3% -- so who needs that? Perhaps only someone who just has to believe it will improve, there. Maybe that's a reasonable assumption. Maybe it's not.
Throughout all of this period, there is only one constant in this group: the big institutions love the turn at McDonald's (MCD - Get Report). They like the 3% yield. They like the turn in earnings that suggest the 24x forward numbers may ultimately be much lower. They love the balance sheet. And they love the CEO, Steve Easterbrook, because he turned Europe around and he will do the same in the U.S. This stock has the most faith from investors -- even as it is up an astounding 25% for the year.
To me this is a group that defies rationality in the same way that the weather is defying rationality -- something that also has to be playing havoc with both Under Armour (UA - Get Report) and Columbia Sportswear (COLM - Get Report) earnings, in the same way that it did for Lululemon (LULU - Get Report).
You have to make your peace with the perfect and the overpriced, and you have to avoid the values. It's the quintessential market that has become bifurcated into the loved and the hated -and the twain just refuse to meet.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long COST, JACK and PNRA.