How To Play The Selloff – Cramer's Mad Money (10/10/18)

Cramer reviews stocks with activist investor interest.

Starwood Property CEO Barry Sternlicht thinks the economy is not as strong as the numbers show.

Instead of Dropbox, buy high quality stocks on pullback.

Stocks discussed on the in-depth session of Jim Cramer’s Mad Money TV Program, Wednesday, October 10.

The selloff on Wednesday showed panic by investors and when that happens, Cramer takes out his selloff playbook to give investors rules to play by to navigate it smoothly. “I don’t see it ending any time soon unless we get some major concrete changes,” said Cramer, as he saw sellers outweighing buyers 10-to-1. He gave the causes of the selloff and the remedies.


The Fed keeps talking about raising rates and a strong economy, while in Cramer’s opinion there is weakness if one finds it. “I am sick and tired of a Fed that reverts to a non-rigorous, non-homework-oriented approach every time things look good. It’s like they unlearned all the lessons of the Great Recession,” he added.

  1. Mortgage rates at 5% were the highest in years. Due to the slowdown in buying, the housing trade has gone down which will push home values lower.
  2. Industrial companies like PPG Industries (NYSE:PPG) and Trinseo (NYSE:TSE) have signaled a slowdown and that auto sales have peaked. This also led to a decline in auto stocks like Ford (NYSE:F).
  3. There is a slowdown in construction lending which will be seen in the bank earnings reporting Friday.
  4. Basic building blocks of the economy like packing materials are dropping in price. “No one ever seems to notice this kind of telltale sign of a slowdown until it’s too late,” said Cramer. There is also a glut in supply of semiconductors.
  5. The trade war with China is weighing on the economy and the stock market is collateral damage.
  6. The strong dollar is squeezing into earnings.

Selloff remedies

  1. The Fed chair needs to go back on his comments and say that he will take a data-driven approach. The President keeps talking about the Fed’s stance which makes Fed chair talk about the dangers of the hot economy. “Shame on them. I don’t want 2007 again. You don’t want it either,” said Cramer.
  2. The oil price needs to go down. The rise in price due to sanctions on Iran is creating a shortage. “If oil doesn’t come down, there’s no saving the industrials and the transportation companies from commodity inflation,” said Cramer.
  3. The transportation costs need to go down and for that, the country needs more truck drivers. The current regulations put a cap on working hours creating labor shortage.
  4. There has to be reassurance that things are not spinning out of control in the trade war with China.

“When the Fed tightens, you need to accept the fact that the stock market is going to go down if it tightens too aggressively. And it is going down. Then it makes sense to do some selling,” said Cramer. It’s worth taking a profit and buying the stocks of high quality companies in incremental amounts. There could be an oversold bounce but it won’t last.

Be patient and selective as full employment and life in the economy will make it worth buying stocks.

Activist investors

It’s worth taking a look at companies where activist investors have got involved.

Nelson Peltz took a stake in PPG industries (PPG) but Cramer is still skeptical as the company called out rising costs and raised the prices of their products by 10%. Their end markets are not showing signs of improvement and hence Cramer took a pass on this.

Starbucks (NASDAQ:SBUX) went higher after activist Bill Ackman got involved with the company. “The problem here is that I don’t think Ackman necessarily has anything to offer. His presentation offered nothing new or revelatory: China should be getting better. U.S. can get better. All obvious stuff,” said Cramer. “Activists work best when management is doing a bad job. Starbucks has good management — I think CEO Kevin Johnson is slowly but surely righting the ship and doing it the right way. I hope he’s just not distracted by Ackman,” added Cramer who likes Starbucks on its own merits and not due to activist involvement.

Campbell Soup (NYSE:CPB) saw activist investor interest from Daniel Loeb. In this specific case, activist Loeb can make a difference as he tries to replace the board of directors and turn the heavily-indebted company around. “Anyone who’s followed Campbell knows that this current board has helped to destroy an immense amount of value, as the stock’s been one of the worst performers in the food group for over the past decade,” said Cramer. “As much as I believe in Loeb’s ability to effect change, I’d rather just buy a food company that’s doing well,” he added.

CEO interview – Carnival (NYSE:CCL)

The stock of Carnival is down 12% from its highs. Investors are worrying about rising fuel costs after the company’s earnings. Cramer interviewed CEO Arnold Donald to hear his take on rising costs and competition.

Donald said cruise lines are great value for vacationers in any economic environment and that he operates the company with a long-term view. There are short-term bumps and peaks but they have navigated through it.

He also added the fuel prices fluctuate every year and they operate across the globe by diverting the ships where the demand is high. He said that Carnival is special and they are doing everything to educate investors about it.

CEO interview – Starwood Property Trust (NYSE:STWD)

Starwood Property is a REIT that yields 9.2%. Cramer interviewed CEO Barry Sternlicht to find out his take on the economy and the valuation of their company.

Sternlicht said he doesn’t understand the market’s valuation of their company. They offer a portfolio of safe dividend yield, the largest commercial lender that is not affiliated to banks and a loan to value ratio of 62% which can lead to making more money as interest rates rise.

Commenting on the economy, he said construction costs are rising due to material and labor, and new construction starts are going down along with high-end residential property prices coming down. He added that tariffs will start showing an effect by 2019 and the economy is not as strong as the numbers show.

Viewer calls taken by Cramer

Dropbox (NASDAQ:DBX): The stock was upgraded and it is off its highs. Cramer would take a long-term view to buy stocks of high quality companies.


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