Top 10 Market Negatives – Cramer's Mad Money (10/4/17)

Stocks discussed on the in-depth session of Jim Cramer’s Mad Money TV Program, Wednesday, October 4.

The market’s winning streak is increasing, and the bears will catch up eventually. The Mad Money host gave his list of 10 negatives that can hamper the bull rally:

  1. Banks: If the non-farm payroll report is weak on Friday, then the Fed will drop the idea of raising rates in December, which will impact the bank stocks, especially when they are due to report in two weeks.
  2. Rails: Rail stocks have gone far ahead of themselves. Despite the president’s support for coal, its outlook is grim and cargo shipment has barely picked up. On top of that, the rails have been downgraded. “CSX’s (NYSE:CSX) stock is up 44% for the year, thanks to the miracle man at the helm, Hunter Harrison, and it seems so overdone that even I, a railroad fan, have to say enough is enough,” said Cramer.
  3. Semiconductors: If the prices of flash memory chips roll over, it will affect semiconductor stocks like Western Digital (NYSE:WDC), and that will have a pin action on the rest of the group. Apple (NASDAQ:AAPL) suppliers’ stocks are also taking a beating on iPhone worries.

  4. Aerospace: If the top stock Boeing (NYSE:BA) does not beat consensus and raises guidance in the upcoming results, which will include the Rockwell Collins (NYSE:COL) acquisition, then there will be aggressive profit-taking.

  5. Starbucks (NASDAQ:SBUX): Cramer expects Starbucks to decline as the company undergoes structural changes.

  6. FANG: The FANG stocks have been down lately. Facebook (NASDAQ:FB) is in the middle of an investigation, Amazon (NASDAQ:AMZN) has the Whole Foods acquisition, Netflix’s (NASDAQ:NFLX) raises growth concerns and Alphabet (NASDAQ:GOOG) hasn’t revealed much about its self-driving car.

  7. Chemicals: The hurricane will complicate the earnings for top chemical companies. “There are always some investors out there who haven’t factored this stuff in,” Cramer noted.

  8. Machinery: Construction stocks have been rising, but Cramer thinks they cannot keep up their pace after earnings.

  9. Oil: “The oil stocks have had quite a run lately. Call me nervous about number cuts,” added Cramer.

  10. Cloud: Cloud stocks have been running, and Cramer thinks the companies should talk about how the industry is adopting the cloud, else there will be profit-taking.

“So, for those of you who think I’m a Pollyanna and an aggressive cheerleader and an all bull all the time guy, there’s my list of worries. You know about what I’m concerned about. Doesn’t mean that these stocks can’t go higher. But the bottom line is that the strong action in so many stocks has turned into a headwind for the stocks, a self-fulfilling headwind, which means we’ll need to get some extra blowout numbers if these names are going to continue to advance,” he concluded.

Automatic Data Processing (NASDAQ:ADP) and Bill Ackman

The proxy fight between ADP CEO Carlos Rodriguez and activist Bill Ackman is heating up. Ackman is pushing for board seats to improve the business model of the company. Cramer interviewed Pershing Square’s Bill Ackman to know his take on the matter.

“Our new question for ADP is, why is it that ADP has lower labor productivity than all of their competitors?” asked Ackman. He added that the company generates $160,000 per employee, compared to $224,000 per employee by its competitors. “When you think about ADP, it has enormous scale versus the competitors. So, if anything, they should have more efficiency,” he added.

ADP competes in 25% of the business with PayChex (NASDAQ:PAYX), which manages its expenses and has better margins, which are used to invest in technology. Ackman expects ADP to mimic that strategy. When Cramer posed the question of why Ackman has gone after ADP, he said that it is a great company with good performance, but it has massively underachieved its potential.

“I think the advisors who advise companies on defending themselves from activists, they say, ‘Look, you don’t want to show that you’re even open to what they have in mind, because if you do, then a lot of new people are going to come into the stock, a lot of more event-driven investors, and they’re going to make it inevitable. You’re going to lose a proxy contest,'” added Ackman. His previous conversations with Rodriguez were cordial, but once Rodriguez went on TV, his behavior towards Ackman changed.

Conflict aside, ADP is a symbol when it comes to his mission as an activist investor. “When the founder is around and in the boardroom, you’ve got a major shareholder there, companies don’t lose their way. It’s typically after the founder steps off the board, retires, passes away that the board becomes more professionalized. There’s no one in the boardroom that owns a lot of stock in the company. And they get a little complacent. I think what activism is about is putting major shareholders in boards of directors so even though the founder is gone, there’s someone there watching the store,” Ackman explained.

The proxy battle will come head to head at ADP’s annual shareholder meeting. “I think shareholders, really, all they care about is, is there an enormous opportunity to improve this company? Can adding a major shareholder to the board increase that probability? And I think the answer that we’re hearing is ‘yes’,” said Ackman.

Tyson Foods (NYSE:TSN)

Tyson’s stock went down 30% in the last year, but has moved up 20% in the last three months. Cramer called it a great house in a bad neighborhood. The company has managed to transform itself though it is in an industry which is troubled. After series of good quarters, the stock is gaining momentum.

“In superhero terms, I’d say Tyson got its powers by mutating. The company changed in some big ways, and it’s quickly resulted in better numbers,” said Cramer. The company’s problems started in a poultry price fixing scheme in 2016. The issue still exists, but it less relevant, as Tyson has evolved in execution strategies.

It has new initiatives, a new leadership team, a goal of using only antibiotic-free chicken, and focuses on healthy, treated animals. All these are paying off. Apart from that, its $3.2 billion acquisition of AdvancePierre Foods has given Tyson exposure to its ready-to-eat product line and convenience stores, which are outperforming the supermarket.

The stock trades at 13 times only, despite all the positives. “Now the company has taken the first steps toward transforming itself. It seems to be in great shape. Even though the stock has skyrocketed in recent months, I think it’s got more room to run,” said Cramer.

DexCom (NASDAQ:DXCM)

The stock of medical device maker DexCom went down by more than 30% last week. Cramer investigated as to what went wrong with a name he was bullish on.

“DexCom’s problem is pretty straightforward. A week ago, we learned that gigantic company Abbott Labs (NYSE:ABT) had received FDA approval for its new FreeStyle Libre Flash glucose monitoring system for people with both type 1 and type 2 diabetes. And in many ways, this represents a major competitive threat to DexCom,” Cramer said.

He added that he had underestimated the risk from Abbott Labs. That doesn’t mean DexCom is out. The company is the leading maker of glucose monitoring systems, and hence, analysts noted Abbott is the only one to offer blood sugar monitoring without the routine finger prick. DexCom has faced these challenges previously as well and has come back. The company will be able to stand up against Abbott and offer a product of its own eventually. DexCom will have to increase promotional activities, which will cut into its gross margins.

The company has a next-generation product set to debut this year, and it seems to be more accurate than Abbott’s product. The fact that DexCom is the only company to have received Medicare reimbursement will work in its favor.

“Anyone who’s owned this stock has been obliterated by the Abbott news, and that’s terrible. Mea culpa, again. But at these levels, I believe DexCom will be able to rebound, even if it might take some time,” Cramer concluded.

Viewer calls taken by Cramer

CarMax (NYSE:KMX): Cramer doesn’t recommend shorts on the show, but he thinks AutoNation (NYSE:AN) should be shorted as a pair trade.

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