Jim Cramer shares his views every day on RealMoney. Click here for a real-time look at his insights and musings.
Cramer: The Rise of the Stay-at-Home Consumer Hurts Starbucks
Posted at 11:38 a.m. EDT on Friday, Nov. 4, 2016
Do you need to go to Wrestlemania if you can play WWE at home? Do you have to spend all of that money at a pro basketball or football game when you can play NBA 2K or Madden? Is it imperative that you spend $12 a throw at the movies and another $8 for candy or popcorn and a soda when Mafia III or Grand Theft Auto is playing at home and you've paid for it in spades?
That's a huge part of this new economy that Strauss Zelnick, the unbelievably good CEO of Take-Two Interactive Software (TTWO) laid out last night, and it's a secular change in behavior, not something that's going to switch back any time soon.
Which is why today it was so hard to figure out what to pay for Action Alerts PLUS charity portfolio holding Starbucks (SBUX) . Out of nowhere Starbucks, long a standout among retailing and hospitality giants, has simply become the best house in a bad neighborhood. It's got excellent cash flow, a boosted dividend and good same-store sales, all of them not what I was hoping for in terms of an upside surprise but certainly better than anyone else. It has a terrific Chinese kicker, as China will become the largest portion of the chain in a short period of time.
All that said, Starbucks has carved out a reputation as the Third Place, meaning that it is the place to go between home and work to enjoy oneself, have a good cup of Joe and something to nosh on and be satisfied.
But how about if you aren't really going out? How about if you goal is to get to work and go home as soon as possible? How about if you don't need a third place anymore, because you are saying at home?
We have always liked Starbucks because coffee can't be Amazon-ed. There are only a handful of retailers that can make that claim. But on the conference call, CEO and founder Howard Schultz talked about an Amazon factor that has to do with actual foot traffic diminishing because of Amazon (AMZN) . People don't need to go out as much if they can shop at home more cheaply. And then there's the overall delivery factor. We have had Patty Doyle from Domino's Pizza (DPZ) on Mad Money multiple times and it is very clear that his combination of inexpensive tasty pizza and technology that drives it to you without having to talk is a winning one. Hugely winning.
Again, though, it is stay-at-home.
So it begs the question: what can and will you pay for the stock of a retailer, even one of the very best quality? I think the answer is ultimately less than you would have at another time, because the stock market is like a supermarket and big investors are going to want to pass up on the aisle of the consumer who goes out and instead focus on other aisles until the stock get so cheap that the numbers that were reported today seem like a blessing.
That does not mean that a stock like Starbucks should be hit. It said many, many good things. It does mean that people will, increasingly, want to avoid stocks that require consumers to go out to buy things and instead will focus on in the stocks of areas of the economy that have the tailwind of the stay-at-home thesis going for them instead of the headwind of the consumer's desire to leave the house to visit any place, including one known as the Third by so many, including me.Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long SBUX.
Cramer: Healthcare Sector Is Hurting
Posted at 6:53 p.m. EDT on Thursday, Nov. 3, 2016
Who owns stocks like Diplomat Pharmacy (DPLO) or Lannett (LCI) ? On a day of total carnage masked, once again, by some benign prices in the averages, I hit up stocks like DPLO, down 42%, and LCI, off 26%, and I wonder what were the owners thinking? Diplomat is the nation's largest independent specialty pharmacy and its sales have been hurt badly by the softness in the hepatitis-C business.
Now let's puzzle through this. I didn't know Diplomat until I hit it up when I saw it was down so much, and I know hindsight is distinctly 20/20, but seriously, if you owned this did you really think there wasn't pricing pressure in the system after what McKesson (MCK) told you last week? Did you not know you were levered to Gilead's (GILD) hep-C drug, which has been under fire for months on end? What did you think you were levered to? Why would it shock you that there would be a shortfall here? This isn't exactly Walgreens (WBA) . (Walgreens is part of TheStreet's Action Alerts PLUS portfolio.)
Or how about Lannett? Here's a company that makes generic drugs. Today we learned that the Justice Department is looking into the pricing of generic drugs to see if there was collusion.
I don't know if there was collusion. That will be up to the judge and jury to decide if they ever bring indictments.
But I would suggest that this time the Justice Department would be going after the people who did the rigging, not the companies themselves, because of the subtle Arthur Andersen doctrine which says the Justice Department shouldn't indict a company for some individuals' actions. That would mean, presumably, that Lannett isn't about to go under.
Now, Lannett did beat its earnings but cut its sales forecasts, so you could expect it to go down even as it told you the remaining quarters would be stronger than this one.
The important thing for me is that this company is selling at a little more than 5x earnings, so either earnings are going to fall apart or, after this kind of selloff, you have a real bargain.
The problem is that this kind of share base is not worth dealing with. I would rather deal with the share base of Amazon (AMZN) than of this one, and that stock has a ridiculous P/E. (Amazon is part of TheStreet's Growth Seeker portfolio.)
Where am I going here?
Simple: These stocks and dozens like them in the health care sector seem to have no underpinnings whatsoever and have shareholders who have done no homework or are scared of their shadows or have no idea about stock markets.
It's pretty darned insane.
In the end, generics, specialty pharma, biotechs, big pharma, medical devices, health maintenance organizations, pharmacy benefit managers and contractors are all under fire. If you own them, how do you not know that? We have one for Action Alerts PLUS, Allergan (AGN) --our only health care position, thinking that we have to have something and it is the cheapest of the big pharmas, and it doesn't matter. Not one bit.
It's a terrible group. If you don't love what you own, sell some. Buy it back later, lower. Don't just stand there like Bambi.
It's painful to watch, but it must be excruciating to have happen to you.Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long AGN and WBA.
Cramer: You Have to Give Facebook Some Time
Posted at 7:24 a.m. EDT on Thursday, Nov. 3, 2016
Three little words trumped everything fantastic on that Facebook (FB) call last night. Three little words undid staggering revenue growth of 56% to $7 billion based on a ridiculously fast growing 1.8 billion monthly average users, of which 1.2 billion check it every day, which helped the company deliver an unbelievable $2.4 billion in GAAP net income and $2.5 billion in free cash flow.
"Meaningfully", as in ad revenue growth rates will come down "meaningfully."
"Aggressive", as in 2017 will be an aggressive investment year.
And "substantially", as in there will be substantial capital expenditure growth.
It didn't matter what had happened in the past, including similar guidance about slowdowns to come or that on this same call the company projected toward the lower end of expense guidance.
Nor did it matter that the average ad price is actually going up, so even if the company is going to restrict ad load to preserve viewer experience there could still be more money made.
Nor did it seem to matter to anyone that as Facebook makes video its priority, it dramatically increases its total available addressable market in advertising, allowing it to capture an ever larger portion of the $1.0 trillion dollar worldwide ad spend.
Hmm, a $7.0 billion quarter--as large as that is--still leaves plenty of improvement as there's $250 billion up for grabs, and you are reaching 16% of them right now daily.
Your penetration could be much higher. You just need more form factors to reach them and keep them on longer. That's exactly what Mark Zuckerberg and company spent most of the call telling you they are developing. It's also what they are spending aggressively to do.
There has nary been a dime yet spent at this company that didn't somehow put it on a course to reach more viewers for longer periods of time and there is no reason to doubt that its need to spend "aggressively" including "substantial" capital equipment to handle the traffic that it generates won't increase those figures.
The takeaway on the forecast was that "meaningful" meant "material" or perhaps even "extremely material", which implies "listen Wall Street, take down your numbers." Given that forecasts are everything to a stock, these three words amounted to a forecast cut in many peoples' minds.
That's why the stock, which is in the Action Alerts PLUS portfolio, sank from $125 to $118 within seconds after these three words, which were all in one paragraph, were uttered.
How is that possible? OK, in the parlance of Wall Street materiality has tended to mean 10%.
So if you have a meaningful slowing in growth rate, what happens? Put yourself in the shoes of those who are using a $7 earnings estimate in 2018 and are therefore comfortable owning the stock because its revenues grow at 50% and it still isn't even at 20x 2018 earnings.
Now, take those earnings down by a minimum of 10%, the definition of materiality, and you get $126. That's where the stock was when the company reported.
It can't stay at $126 if we just learned this news. It has to go lower. Now, add in two more elements. Why would the company have to invest aggressively and spend substantially? When you are in a negative mindset, as traders were last night, you presume that 1) the newly loved and soon-to-come public Snapchat must be taking share and 2) the world of advertising is tapped out and Facebook doesn't want to be the one-trick cellphone pony that these same analysts think the deplorable Apple (AAPL) has become.
Put it all together and meaningful, substantial and aggressive are all code words for "we aren't doing as well as you think because there is a ton of competition, so take down your numbers as we surrender to the vicissitudes of the ad market. "
Now, let's step back for a second. Let's temper those words. Let's say what really happened here is the CFO is simply saying, "ah shucks, things are great, but you know what, I don't think things can stay this great, although they sure have."
Then what happens? I take my $7.00 estimate to $7.50 based on these blowout metrics that were reported and I give it a little higher price-to-earnings multiple, say that of a PepsiCo (PEP) --which grows at one fifth of Facebook, by the way -- and next thing you know I have a $165 stock on my hands that is selling at $118.
Big difference.That's what's happening today. People are deciding which is which. I am betting it's the latter. So far, I am wrong. But I have been wrong for $100 on this one if you judge it instantly. And right for $100, if you give it some time. Give it some time. I think I will be right again.
Cramer: Don't Just Stand There Like Bambi; Sell Something
Posted at 7:13 a.m. EDT on Friday, Nov. 4, 2016
There's carnage all over the place now. But the special place in purgatory, the worst circle in hell, is in health care. Take the stocks of two companies that you may have never heard of but are total mainstays of what was once the most thriving industry in health care. Smaller companies involved in the making and selling of drugs, either proprietary or generics, have just been decimated.
Yesterday we saw a level of selling that pretty much took my breath away. The two worst of the day? Diplomat Pharmacy (DPLO) and Lannett Co. (LCI) , two former high fliers that have come crashing down to earth in spectacular fashion, as yesterday seems like the big give-up after multiple days of give-ups.
Who owns stocks like these? What kinds of holders do they have? I had to ask myself that, because yesterday DPLO crashed 42% and LCI lost 26%. I wonder, what were the owners thinking? Could they have not seen this coming at all?
Consider these facts.
Diplomat is the nation's largest independent specialty pharmacy and its sales have been hurt badly by the softness in the Hepatitis C business.
Now, let's puzzle through this. I didn't know Diplomat until I hit it up when I saw it was down so much, and I know hindsight is distinctly 20-20, but seriously, if you owned this did you really think there wasn't pricing pressure in this part of the health care system after what the drubbed drug distributor, McKesson (MCK) , told you last week?
Did you not know that you were levered to Gilead's (GILD) Hep C drug, which has been under fire for months on end when, if you had done any homework, you would have known that the company had endlessly told you of its importance to its earnings? What the heck did you think you were levered to? Why would it shock you that there would be a shortfall here? This isn't exactly Action Alerts PLUS charity portfolio holding Walgreens (WBA) .
Or how about Lannett? Here's a company that makes generic drugs. Yesterday we learned that the Justice Department is looking into the pricing of generic drugs to see if there was collusion.
I don't know if there was collusion. That will be up to the judge and jury to decide if they ever bring indictments.
But I would suggest that this time the Justice Department would be going after the people who did the rigging, not the companies themselves, because of the subtle Arthur Andersen doctrine which says that the Justice Department shouldn't indict a company for some individuals' actions. The doctrine came about when Justice indicted that giant accounting firm for one of its office's work in Enron and thousands of people lost their jobs.
Under the Andersen doctrine, Lannett isn't about to go under, so if you knew about Gilead and you knew about the doctrine, you shouldn't be selling down 25% especially after the stock was down 32% going into the day, unless you were totally clueless.
Lannett did beat its earnings, but cut its sales forecasts; so you could expect it to go down even as it told you that it said the remaining quarters would be stronger than this one. Still, how could you not have been prepped for this? What kind of owner wasn't ready for this disappointment?
The important thing is to remember that those people who are bailing down here are now selling shares in a company that is selling at a little more than 5x earnings. That means either earnings are going to fall apart or, after this kind of selloff, you have a real bargain.
The problem is that this kind of share base -- not the company, but the share base -- is not worth dealing with. The share base is more of a problem than the company itself because the share base has done no homework and is continually surprised and each time it is surprised, it sells.
If that's the case, I would rather deal with the share base of Growth Seeker portfolio holding Amazon (AMZN) than of this one--and that stock has a ridiculous PE and, with total up and down, a massive surprise factor.
Where am I going here?
Simple: these stocks and dozens like them in the health care sector seem to have no underpinnings whatsoever and have shareholders who have done no homework or are scared of their shadows or have no idea about how stock markets work. They are surprised by everything!
It's pretty darned insane.
In the end generics, specialty pharma, biotecs, big pharma, medical devices, health maintenance organizations and pharmacy benefit managers and contractors are all under fire. If you own them, how do you not know that?
We have one for Action Alerts PLUS, just one, Allergan (AGN) --our only health care position, thinking that we have to have something and it is the cheapest of the big pharmas, and it doesn't matter. Not one bit. The darned thing goes down every day even as it is cheaper than Bristol (BMY) , Lilly (LLY) , Merck (MRK) , Glaxo (GSK) , Pfizer (PFE) , Astra-Zeneca (AZN) and Johnson & Johnson (JNJ) , and is a faster grower than all of them! Doesn't matter. It's getting killed.
This is a terrible group. If you don't love what you own, sell some. Buy it back later, lower. Don't just stand there like Bambi. Don't stand there, because the other people who own them can't be trusted. They will sell on a moment's notice.
It's painful to watch, it must be excruciating to have happen to you. I know that, because I am public, I have been pilloried about owning Allergan for the trust even as we have told people who read the bulletins it is going to $180 and we can't step aside and get back in because of our rules, which make us frozen pretty much every day and we aren't a hedge fund. We said $180 when it was at $230. We picked $180 because it will be at such a huge discount to the others that we have to put it away for the long term, even as it had to cut numbers because it chose not to raise price for non-core drugs.
All I can say is: I, at least, know what we own.
But, the big caveat: clearly others don't. And they, not Allergan, are the enemy.Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long WBA, AGN.