Sector Rotation Is Inevitable – Cramer's Mad Money (9/5/18)

Stocks discussed on the in-depth session of Jim Cramer’s Mad Money TV Program, Wednesday, September 5.

Even the best stocks do not go up in the same line. Holders of tech stocks would be in pain on Wednesday as the entire tech cohort shed points. This was a clear case of rotation where investors rotated out of the tech stocks, especially FANG, into other stocks. Sector rotation is inevitable.

Nasdaq has climbed 16% in 2018 mainly due to the strength in FANG stocks. The huge 16% gain is a reason good enough for a drop in September which historically is a month for selling. S&P500 is up 8% and Dow up 5%, which shows the reason for rotation as investors go bargain hunting in these indexes.

The industrial stocks gain from rotations like these. 3M (NYSE:MMM) has undergone pressure from the Chinese trade war and auto-market related pressures to report a great quarter. Facebook (NASDAQ:FB), on the other hand, has been going down amid Senate testimonies. Facebook trades at 23 times next year’s earnings while 3M trades at 20 times. Facebook deserves a higher PE multiple as it has much faster growth.

“But not many investors have faith in Facebook’s ability to meet those estimates. When I listened to COO Sheryl Sandberg testify about the need to get more rigorous about policing bad behavior, all I could think was, ‘Holy cow, that’s gonna be expensive.’ So, what’s happening at FB? Costs are going up; revenues are slowing down. That’s a recipe for earnings cuts, not increases,” said Cramer.

“If you owned all tech, you probably felt like today was, indeed, the end of the world. That’s why I’m always telling you to own a diversified portfolio. Rotations are inevitable. Keep calm; carry on,” concluded Cramer.

CEO interview – RH (NYSE:RH)

RH posted good earnings and yet the stock declined post earnings. However, analysts liked the company’s positioning. Cramer interviewed CEO Gary Friedman to hear more about the quarter.

Friedman said that despite the decline on Tuesday, the company’s long-term outlook remains intact. “The way you have to think about this business today is that most retailers just re-conceptualize or evolve the front-end of their business. We’re re-conceptualizing the back-end and then we’ll pivot back to more accelerated growth next year on what we believe will be the most profitable and capital-efficient platform in our industry by far,” he added.

He spoke about the company’s new location in Manhattan, calling the showroom a statement of “who they are and what they believe in”. The experience for consumers combines food, wine, art and design.

Friedman commented on the rise in online shopping, “I think it’s going to be seen as kind of the lost decade of retailers. The capital allocation over the last 10 years and people creating an unnatural shift to move their business online, there’s massively deteriorating operating margins,” he said. With Amazon capturing half of the US e-commerce market, big box retailers are scrambling to sell their products online.

“We do over $1 billion online. You know, people think, like, ‘He talks about retail stores, he doesn’t believe in online’. Online is just another channel,” said Friedman.

He also noted that he owns 27% of the stock and has made 4 purchases in the last 14 months. The company has been buying back shares.

Lululemon Athletica (NASDAQ:LULU)

Lululemon reported such stunning earnings in the last quarter, that it shocked the street. Cramer said this happens once in a while where the analysts are caught off guard and this was one such instance and that even without the company having a CEO.

The company’s same-store sales grew 20% with expanding revenues and gross margins. There were a lot of things that shone in the earnings report.

Their digital business was roaring; their retail stores showed huge gains; and the sales accelerated for the fifth quarter in a row. The company is attracting a lot of male customers and is making inroads in China with local culture and fashion.

This shows that the company is well-positioned for yet another excellent quarter.

CEO interview – Honeywell (NYSE:HON)

Honeywell raised its guidance and announced the spinoff of two of its divisions. Cramer interviewed CEO Darius Adamczyk to find out what this means for Honeywell.

Adamczyk said that the company regularly reviews their business and asks the question what does not align with the Honeywell brand. They are spinning off businesses that do not fit with the brand even though they are terrific businesses.

Their transportation business will be spun off as Garrett Motion and their home and low voltage distribution business will be spun off as a company called Resideo. Both businesses are strong. This will lead to Honeywell having lots of cash which will be used for M&A, buybacks, dividends and investments in aerospace.

He also added that as e-commerce grows, their 2016 acquisition of the automaton-focused Intelligrated is paying off. “It’s been just a terrific growth business. I mean, when you think about 50-100% booking rate increases, top-line growth of 20% plus, I think it’s very, very exciting. This is a nice pickup for us because it’s coming at the right time.

He also added that Warehouse automation is huge and is being driven by e-commerce. “It’s a trend that I believe is going to continue not just in North America, but throughout the world, and it was a great pickup for us,” said Adamczyk.

The impact from tariffs will be modest on Honeywell. “Obviously, we plan for the worst and hope for the best. I remain optimistic that things will get resolved because I believe the world’s No. 1 and No. 2 economy will come together and arrive in agreement. But where it will impact us, we have plans in place around supply chain, around pricing, around movement of some of our goods – all those things are already in place and we’re ready,” he concluded.

Viewer calls taken by Cramer (NASDAQ:JD): PRC is manipulating many stocks. Cramer doesn’t trust Chinese stocks.


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