Competition might be great for consumers, but one particular type of competition is awful for businesses, threatening their stock prices, profitability, and more, Jim Cramer said.
“I’m calling it blindside competition,” the “Mad Money” host said. “And though most investors don’t even realize it or understand it, this is the competition that is playing havoc with the stocks of a few very highly visible companies in this market right now.”
This competition is the kind that drives stocks down even when business does not look so bad. Snap was an easy example for Cramer, who called Morgan Stanley’s Tuesday downgrade of the stock an “obituary” on CNBC’s “Squawk on the Street.”
Since Snap’s initial public offering, Facebook has relentlessly rivaled the social media company, offering free advertising spots on Instagram to companies that pay to advertise on Snap.
And while the app might be popular and cool among young generations, “SNAP is anything but profitable,” Cramer said. “One thing we all know: you cannot compete with free. If you open up a lemonade stand on your corner and you’re charging 25 cents per cup and then a young Mark Zuckerberg in a hoodie comes along across the street and starts giving his stuff away, you’re done.”
But Snap’s stock is not the only one that has been subject to ruinous competition — Blue Apron and Ulta Beauty are also targets, though one may fare better than the other, Cramer said.
And while the IPO market might be seeing an uptick, Cramer worried about the lack of merger and acquisition activity, particularly when it comes to three key groups: energy, consumer packaged goods and retail.
“Each area needs growth in earnings and in sales, or at least one of those, and the only way to get it by now is to actually do deals, do deals with other companies in the industry,” he said.
Depressed oil prices should be spurring some takeovers for the energy space, but if the sector’s big dogs no longer believe oil could stay above $40 a barrel or if they know about pitfalls the market is not seeing, that could threaten the M&A prospects, Cramer said.
Save for the Amazon-Whole Foods deal, the food space has seen next to no major deals. Cramer argued that by pooling their resources, particularly if sales are declining, some consumer packaged goods names could restore hope of staying afloat.
Finally, one way for retailers to survive the dying mall could be to merge with other companies and close underperforming locations, Cramer said.
“What happens without mergers and acquisitions? Pretty simple: you get the free-fire zone we have right now in all of these sectors,” the “Mad Money” host said. “The selling’s done either through ETFs or individual knockdowns and it is brutal. Earnings can’t stop it — we know that after Costco reported that terrific number and its stock still got hit. Only mergers can put an end to the pain. Without them, these three groups are at the mercy of short-sellers, people who by definition have no mercy.”
It may not seem like Constellation Brands, the owner of Corona beer and Svedka vodka, could do much to meaningfully improve its already robust business, but CEO Rob Sands says there is even more to be done.
Between sips of the company’s top-of-the-line wines and liquors, Sands and Cramer discussed one tactic that could still boost Constellation’s business: getting retailers to prioritize its products.
“We call that category management, where we go in and we give advice, objective advice, to retailers about how they should, for instance, set their shelves,” Sands told Cramer on Tuesday. “And obviously, they should be allocating more shelf space to the higher-margin, faster-moving premium items. So, again, our portfolio — Corona, Modelo Especial, Pacifico — these are very high-margin beers, very fast-moving items, and they actually are under-allocated shelf space.”
Constellation Brands’ stock is up over 26 percent year to date thanks in part to its iconic beer brands and its growing liquor category.
But the next step is getting retailers to recognize that, the CEO said.
As investors shy away from the technology sector for fear that parts of it are overvalued, Cramer wanted to make the case for three cloud stocks that he believes have more room to run.
“In the last few weeks, stocks of cloud kingpins like Salesforce.com, Workday [and] Red Hat have all pulled back from their highs,” the “Mad Money” host said. “The problem with the cloud is very simple: a lot of investors don’t understand it because it’s fundamentally about the enterprise, companies, not about the consumer, you.”
Cramer argued that because most people do not interact with the work these companies do on a daily basis, they tend to mistrust their success. In reality, these giants help even bigger names like Amazon and Netflix save fortunes on hardware, cut overhead and streamline operations.
But rather than explaining these cloud players’ fundamentals, Cramer turned to the charts of technician Bob Lang, the founder of ExplosiveOptions.net and Cramer’s colleague at TheStreet.com who helps run its Trifecta Stocks newsletter.
Finally, Cramer turned to the oil and gas space, where he conducted a study to see which energy companies’ stocks are currently trading below their January 2016 lows, when oil prices tanked to the $20s.
“You know what I found? Of the 59 major energy companies I examined, right now 15 of them — more than a quarter of the total — have stocks that trade below where they were at the oil bottom eighteen months ago. When you divide the industry into equipment and service providers versus producers, the servicers are experiencing a lot more pain; 39 percent of energy equipment and service stocks are below their January 2016 levels, compared to only 20 percent of the producers,” the “Mad Money” host said.
Oil service companies are getting hit because they are focusing their efforts on offshore drilling, an industry struggling due to low oil prices that cannot justify conducting more typically lucrative deep-water drilling projects.
Producers like Carrizo Oil & Gas have also been subject to depressed oil prices and investors have written off the stocks out of worry, Cramer explained.
“Why are so many energy stocks down versus where they were trading when oil bottomed early last year?” he asked. “Because in January of 2016, many investors believed oil and gas could rapidly come roaring back, maybe $60, maybe $80, but these days we’ve come to accept the lower for longer thesis. Still, I think there’s value in stocks like a Carrizo, which have a real and I think sustainable rate of return down here, it just might take a long time for them to get the credit they deserve.”
In Cramer’s lightning round, he rattled off his take on some callers’ favorite stocks, including:
Disney: “My take on Disney is this is long term, a long-term good stock. It’s not short term because of exactly what you’re talking about, which is this problem at ESPN. But longer term, I think the problem will be dealt with.”
Alexion Pharmaceuticals: “I like Alexion and I like Incyte. I think both of them could be acquired and they have good enough businesses that I’m willing to recommend them even on a non-takeover basis.”
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Source: Tech CNBC
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