Fed Has To Be Careful – Cramer's Mad Money (10/3/18)

Stocks discussed on the in-depth session of Jim Cramer’s Mad Money TV Program, Wednesday, October 3.

The U.S. economy is hot and one of the concerns of the Fed’s chief is to keep inflation under control. Cramer thinks the Fed should be careful as a little inflation might not be bad.

Inflation comes in many forms. For instance, a rise in aluminum prices will raise the price of cans for beverage companies; oil prices are rising and it’s a commodity that the Fed does not have control over; housing is growing but rising mortgage rates are increasing prices; auto prices are going up but mainly due to tariffs.

All of this is not real inflation as the prices might not stick. As the U.S. economy remains hot and unemployment is at its lowest, the Fed is worried about wage inflation. “The real issue here, the crux, is there’s been almost no wage inflation in this country for decades. Income inequality is a serious problem in this country, and it’s a problem that the Fed has absolutely had a hand in creating. How the heck are working people supposed to catch up if our central bank slams on the brakes every time wages incrementally go up?” he questioned.

When Amazon (NASDAQ:AMZN) announced that it is raising the minimum wage, it is still one of the most deflationary companies of all time as it embraces automation and eliminates bonuses. The job market is getting tighter and the Fed should not be eager to curb it by raising rates. That’s why the nonfarm payroll report coming Friday is important.

“I think it would be a grave mistake for them to be so darn dogmatic about rate hikes, which may prove to be unnecessary here,” concluded Cramer.

Autos

If one wants to know what’s working in the auto industry, take a look at the stocks.

Used car company CarMax (NYSE:KMX) is up 14.6% for the year while new vehicle company AutoNation (NYSE:AN) is down 21.9%. This shows that user cars are working while new car sales are stagnant. With aluminum prices going up, new car sales could take another dent.

Where does all this put Carvana (NYSE:CVNA)? It’s an e-commerce platform for used cars which makes buying used cars convenient. They have cut out the middle men and do all the paperwork, give all the information and even deliver the car to your doorstep. What works for them is that buyers can return the car within seven days if they are not happy.

Older people prefer the traditional method of buying a used car at the dealer while younger buyers prefer the convenience of buying from home. Carvana has disrupted the used car business and that’s how they could grow revenue by 127%. They have added 9 new markets making a total of 65 to become a national growth story.

The stock has run up a lot and is speculative due to wild trading. Cramer advised buying the stock in increments as it comes down.

Semiconductor stocks

The semiconductor stocks are under pressure but it’s cyclical. No matter what the stocks do, semiconductors are important as the chips go in everything. Cramer looked at Western Digital (NYSE:WDC) and Micron Technology (NASDAQ:MU), both of which are off 45% and 30% from their highs.

Western Digital specializes in hard drives and NAND chips. Micron specializes in flash and DRAM chips. While both are commodity chips, their products differ. “Theoretically, if you want to get into the flash memory business, all you really need is enough money to build a semiconductor factory,” said Cramer. When demand for these chips goes up, the prices increase and this trades like a boom and bust cycle.

The fundamental difference in WDC and Micron is that WDC is driven by NAND flash sales and Micron is driven by DRAM. As the NAND flash shipments started increasing, WDC stocks started going down. Micron, on the other hand, is disciplined with DRAM shipments and also has a $10B stock buyback program.

This means that as DRAM prices start to go down, the stock comes down and the company starts buying their own stock. “When Micron’s stock goes down, the company will be in there buying it hand over fist with you. When Western Digital’s stock goes down, it just goes down,” said Cramer.

Micron is the clear buy out of the two. The stock may not go up overnight, but it’s in a better position as the stock supply keeps going down.

CEO interview – CyrusOne (NASDAQ:CONE)

The stock of CyrusOne went down on a secondary stock offering at $62/share and has risen from that level. Cramer interviewed CEO Gary Wojtaszek of the REIT that yields 2.9%.

Wojtaszek said that 60% of the investors in the stock are real estate investors and interest rates and bond prices going higher make them attractive compared to REITs. Even with that, the long-term secular trends in the industry outweigh the downside of interest rates.

‘Data’ is the new trend. For companies that do well on data, CyrusOne is the support. “If your kids play Fortnite, they’re playing against kids all around the world, so data is flying around the world. Our customers, which are predominantly Fortune 1000 customers, are deployed everywhere globally. So if you really want to be helpful to the customers’ needs, you have to have a global platform, and if you don’t, you’re really in an inferior position,” said Wojtaszek.

That’s why the data center business is growing as companies are spending to increase capacity. “We look at all the success that we’ve had in the States over the last decade and we feel really comfortable that we’ll be able to export that same success internationally, because all the growth internationally is coming from all the customers that we serve here,” concluded Wojtaszek.

Viewer calls taken by Cramer

Canopy Growth (NYSE:CGC): They are seeing great growth around the world. One has to be careful as all the pot stocks are going up in anticipation.

Enbridge (NYSE:ENB): The entire group is under pressure. Cramer advised staying away from MLPs.

Himax Technologies (NASDAQ:HIMX): The stock is down 40% and Cramer is not a fan.

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