Merger Activity Is A Bullish Indicator – Cramer's Mad Money (5/28/15)

Summary

  • Popeyes Louisiana Kitchen and Southwest Airlines CEO interview.
  • IPO investing is about caution and homework.
  • Cyber-security and organic food are the 2 hottest trends.

Stocks discussed on the in-depth session of Jim Cramer’s Mad Money TV Program, Thursday, May 28.

Cramer started the show by mentioning that companies are at war with one another. They have two choices; either kill competition and gain customers, or be held hostage by negative overseas events. The overseas negatives like the Greek situation and China slowdown can bring the market down and they have been around for quite some time now. The other bullish force that is impacting the market positively is the mergers and takeovers. Avago’s $37B acquisition of Broadcom (NASDAQ:BRCM) and Charter’s (NASDAQ:CHTR) $56B purchase of Time Warner Cable (NYSE:TWC) are lifting stocks to new levels. “Takeovers plow money, often borrowed money, into the market, which has the derivative effect of creating more demand for stocks when you ring the register on targets, which I am now urging you to do,” said Cramer.

Investors often think of all the merger activity as a sign of a market top. Cramer understands that these transactions are happening due to the low Fed rate and said, “When you examine these transactions, you find that they are both necessary and brilliant. Necessary because these companies need to grow and consolidate or else, and brilliant because these deals actually drive up the stocks of the acquirers.”

For instance, an iPhone, an iWatch or a Samsung Phone have components of different manufacturers built into one single unit. Many companies are competing with each other to be a part of the ecosystem, for which they are spending a lot in R&D to invent smaller and more powerful chips. Their other option is to merge and offer a one-stop shop alternative. “In the end, these deals are all driven by a simple fact; there are too many companies fighting for customers, and those customers are finicky, tough and demanding. The more mergers, the more the power goes to the suppliers,” said Cramer.

CEO interview – Popeyes Louisiana Kitchen (NASDAQ:PLKI)

Cramer is wondering what has stalled the stock of Popeyes Louisiana Kitchen. The stock gained tremendously over the years before peaking at $66 in January. In the recent quarter, the company reported in-line revenues and a $0.04 earnings beat. The company also raised its outlook for 2015, but the stock did not react. Cramer attributed the rising price of gasoline and higher chicken prices due to bird flu, for the stock’s performance. He sat down with CEO Cheryl Bachelder to find out where the company is heading.

Bachelder said that the company has 20 quarters of domestic same-store sales growth and 21 quarters for international. “We are about long-term, steady, consistent, reliable performance, and I believe the market will reward us over time,” she added. She also explained that there is no avian flu for the broiler flock, which is what they use, and hence it has not affected the supply of poultry.

She mentioned that the company has new products in the pipeline. On returning money to shareholders, she spoke about the $50M stock buyback. The company has a lot more room to grow internationally and the franchise model is working well.

Caution investing in IPOs

Cramer reiterated the fact that investors need to exercise caution while investing in IPOs. “Many IPOs can generate some serious cash flow out of the gate, but that doesn’t mean the gains will last,” said Cramer. He cited the example of Castlight Health (NYSE:CSLT), which went public a year ago. Castlight is a cloud-based provider of healthcare related software, which is combination of the two hottest trends. But there were red flags from the beginning.

For starters, it IPO’d at $16, which is higher than the anticipated price. The stock roared to $39, and since then it has been downhill and is about $8.85 now. It was valued at 31 times 2014 numbers, which made it more expensive than both Salesforce (NYSE:CRM) and Workday (NYSE:WDAY). The company was losing money when it went public and is losing money even today.

There was already much competition from other providers who were offering similar services for free. It was always tough for Castlight to make a profit in such a scenario. The numbers deteriorated consistently and stock kept getting hammered. The stock got downgraded eventually.

This is a clear case of what not to buy.

CEO interview – Southwest Airlines (NYSE:LUV)

After the American Airlines (NASDAQ:AAL) CEO interview, the group plummeted the next day and has been crushed in the last week. The airlines are adding more capacity, which means there will be more competition. On the same day of the interview, Southwest Airlines CFO Tammy Romo confirmed that they are increasing the capacity by 7-8%. Should investors be worried about this or are they overreacting? To find out, Cramer interviewed Southwest CEO Gary Kelly.

“Our competitors are always complaining about Southwest, and we are just going to continue to focus on running a great airline, and offering great customer service. So our plans have not changed,” said Kelly. They are in process of adding more seats. He added that over the long-term, the industry has matured. They cannot grow faster than GDP, and they do not plan to either.

They are going to grow the seat-miles by 7% and they will manage that for the rest of the year. Their fleet-growth over the last four years has been flat. On the $1.5B stock buyback program, he said that the company is trying to return value to shareholders. He also said that most of the expansion is by making use of idle capacity which is bringing down the unit cost.

Kelly mentioned that there has been some weakness in the economy and the traffic in the second quarter has not been as strong as expected, but they are satisfied with the second quarter progress and they expect the business to pick up in the second half.

Investing trends

If a theme is strong, the money will flood into it. Cyber-security and organic foods are 2 powerful trends which are attracting a lot of money.

Palo Alto Networks (NYSE:PANW) reported a strong quarter on Wednesday. Many think the stock is expensive and Cramer is of the opinion that it deserves to be expensive. “As the premier best-in-breed of cyber-security companies, it stunned investors with 55% revenue growth and 8% higher sales from the previous quarter,” said Cramer. “This may be the single hottest stock I follow,” he added.

Palo Alto’s CEO Mark McLaughlin mentioned in his interview, that cyber-security has become a board of director-level issue. This means that more attention is being given to cyber-security and it is a growing trend. Cramer likes the stock along with CyberArk (NASDAQ:CYBR), FireEye (NASDAQ:FEYE), Fortinet (NASDAQ:FTNT) and Cisco (NASDAQ:CSCO). “When you have got a shortage of stocks to play a particular theme, the pure plays can levitate for a very long time,” said Cramer.

The same thing is happening with natural and organic food. There is a shortage of pure plays and hence Cramer is watching Hain Clestial (NASDAQ:HAIN) and WhiteWave (NYSE:WWAV).

High growth and cyber security equals scarcity value, and when you have scarcity in any business, demand will always overwhelm supply and thus the price of merchandise goes higher.”

Viewer calls taken by Cramer

Twitter (NYSE:TWTR): “I think Twitter thinks it’s doing well and maybe that’s the problem.”

Sirius XM (NASDAQ:SIRI): “Sirius has a lot of issues outstanding. It’s ok and I would hold on to it.”

SunEdison (NYSE:SUNE): “The company is doing very well. But you should take some off the table and let the house’s money run.

Ambarella (NASDAQ:AMBA): “Every time GoPro (NASDAQ:GPRO) does something right, people buy Ambarella. It’s time to take some profits off the table.”

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