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Cramer: Perhaps We've Gotten Too Negative on Retail?
How bad can Macy's (M) really be? How awful is Target (TGT) ? What can you really do about Kohl's (KSS) ? Is Nordstrom (JWN) for real when it says it wants to go private after this current Amazon (AMZN) rampage?
Is this really the end of the off-price retailers like Action Alerts PLUS charity portfolio holding TJX Cos. (TJX) , and Burlington (BURL) and Ross (ROST) ? How did Costco (COST) become doomed? Just forget about Bed Bath & Beyond (BBBY) ? Write off AutoZone (AZO) and its ilk? Stick a fork in Best Buy (BBY) ? Bury Kroger (KR) ? Chuck CVS Health (CVS) and Walgreen's (WBA) ? Hang on to Walmart (WMT) some way, somehow?
I think, in the wake of Amazon Prime, we are still trying to figure out what to do with this group of companies that has so many sellers in it. Perhaps, as Target's positive pre-announcement might be signaling, we have gotten too negative on the group?
It's a great test of the moment. More important, though, whenever I see an en masse sector decline like this, I always like to step back and see what the decline is really saying.
First, what it's not saying. Nobody is saying that these companies are going out of business. Their cash flows are still pretty good, their sales, while not electric, aren't falling off a cliff.
Second, nobody is saying that, at least right now, their dividends are suspect. I do believe that their buybacks are probably going slower and their spend for e-commerce is going faster, with much of it not producing anything other than cannibalization of bricks and mortar.
Third, as spectacular as Amazon's Prime Day was, there will still be plenty of people who shop at bricks-and-mortar shops, especially for the things that don't make for easy shipping: plants, chipper shredders, and, for now, steaks and dairy.
Fourth, I do not think that every stock in the group has to trade down to mid-single digit price to earnings multiples as is the case of with Macy's or Bed Bath, the two that the market perceives as most vulnerable to the Amazon grim reaper.
But I have only seen this endless selling phenomenon a couple of times in my life, and when I see it, the pattern is signaling something the stock market is very bad at discounting and very bad and being rational about. These declines mean that 2018 will be a down year for these companies versus 2017.
Time and again, when you see endless liquidation, you can almost count on estimates for 2018 being below estimates for this year.
Classic case? Christmas. I think that these stocks are all saying that next year's Christmas will be worse than this year's and that this year's might be worse than last year's.
It's taken some very heavy mental lifting to get portfolio managers to understand this "down year" conundrum, and they seem to get it almost one by one, with each revelation producing more selling.
That's because of the changing metrics that had been used to predict sales. Typically, we would be huge buyers of these stocks based on job growth, low interest rates and easier credit creation, all of which we have in spades. Those are perfect reasons to make this group one of the strongest in the market.
But it is an unwritten law that no portfolio manager can ever buy a stock where the numbers are going to be down year over year, whether it be in oil, gas, copper, autos or now retail.
Let's take Kohl's, ostensibly a decent operator generating a huge amount of cash and a good dividend. Right now, the street is predicting $3.68 for this calendar year. For next year, it is predicting $3.56. Under what guise can you own shares in that company if that's the trajectory? How do you put a price-to-earnings multiple on a company when the earnings are slipping? Kohl's, when you consider it that way, is simply a wasting asset.
Macy's earned $3.15 last year. This year? It is projected to earn $2.87. That's why there's a relentlessness to the selling. You just can't buy a stock for a 7% yield if the earnings are going to be down. Bed Bath? It earned $4.61 last year; this year? It should earn $4.05.
Portfolio managers would rather be caught dead than be caught in a stock where the numbers will have that kind of progression.
Now, today's a crucial day because Target is putting up a defense that this is not the case. It says it sees positive comps, not a decline as the street is forecasting. This is going to be the test of the down year thesis.
I wonder if people will believe. We will know soon enough. The group is oversold and perhaps too hated. Target can trigger a rally, or at least a short-cover rally in the group.
But if it doesn't, then you can bet we won't try to discern winners from loser.
They will all be losers now.
Originally published July 13 at 7:24 a.m. EST
Cramer: With Netflix, Metrics Are a Different Matter
He then goes on, though, to say he has been consistent in valuing the company based on the discounted present value.
You know what?
I am thrilled that he is honest enough to say he has been consistently wrong since he slapped a sell on the stock three years ago when Netflix traded at $63.49. It is now at $158.
But I am dismayed that he is sticking by his methodology that caused him and his acolytes to miss almost 100 points in this stock. He writes: "We have consistently valued stocks under our coverage based upon the discounted present value of their future cash flows."
That, my friends, reminds me of the definition of insanity, doing the same thing over and over again expecting different results, as Albert Einstein once informed us. It's been obvious for ages that Netflix, the stock, doesn't fit into the four-walled paradigm of discounted present value any more than Jackson Pollock or Roy Lichtenstein paintings fit into the paradigm of realist or even impressionist works. The artistic equivalent of Pachter would deny the $165 million price that a Lichtenstein went for or the $140 million that a Pollock traded at. You see, at a certain point, if your prism is wrong, you need a new prism.
I don't mean to pick on Pachter, even as I like how that sounds. But periodically there are stocks that defy the traditional metrics and you have to scrap those metrics. Netflix trades, as you would know from UBS' preview report today, on content tracking and subscriber growth. You literally would have to estimate how content drives subs worldwide and for that, UBS is helped by its UBS Evidence Lab, which, while sounding like NCIS UBS, is really an articulate way to measure downloads and worldwide loosely based on successes like 13 Reasons Why, House of Cards and Orange Is the New Black.
When I interviewed CEO Reid Hastings in one of my trips to San Francisco, he explained that one of the great secrets behind the immense love for Netflix has to do with how few series are ever canceled. Wedbush's Pachter seizes on how there have been some cancellations of late, which does call into question its gigantic content budget, north of $6 billion for 2017, substantially more than its competitors, so it can't afford failures. "Spotty execution" for expensive originals, Pacheter points out, does put the future at risk as the company does burn a lot of cash.
I say that given all the original content the company puts out, the failures will have to increase. That's the law of large content, so to speak. Still, the record is darned good, much better than everyone else and that matters, especially when worldwide numbers are at stake and some content plays extraordinarily well in other countries and does boost sign-ups. I always remember Hastings telling me they produce films by matching what worked with what can work, as in "if you liked Scarface you will like Narcos."
At any given time, there are stocks in the market that can't be valued by traditional metrics as you will miss the big picture. Right now there are three: Amazon (AMZN) , Tesla (TSLA) and Netflix. Amazon has made it difficult to judge what it's worth because how much will you pay for world domination both in retail and in web services. If Tesla's a tech company, not a car company, maybe the valuation can be justified. Netflix? Content and sign-ups.
Knowing the metric has always been the key to stock-picking performance. Wedbush has clearly picked the wrong metric. Sometimes that's all that matters.
Originally published July 12 at 11:36 a.m. EST
Eat, Drink and Talk Money With Jim Cramer
Meet Jim Cramer at an exclusive reception at his Bar San Miguel in Brooklyn, N.Y., on Tuesday, July 25, from 6:30 to 9 p.m. ET.
The evening will start with a screening of Jim's CNBC show Mad Money. Afterward, Jim will join the party fresh off of the CNBC set to mingle, take photos and answer your investing questions.
Tickets include dinner, drinks and an autographed copy of Jim's book Get Rich Carefully.
Click here for more information or to buy tickets.
Where: Bar San Miguel, 307 Smith St., Brooklyn, N.Y.
When: Tuesday, July 25, 6:30 to 9 p.m. ET
Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.