Spot The Tailwinds – Cramer's Mad Money (10/2/18)

Stocks discussed on the in-depth session of Jim Cramer’s Mad Money TV Program, Tuesday, October 2.

To pick winning stocks, one needs a cautious strategy and an eye to see both headwinds and tailwinds faced by stocks.

Case in point is PepsiCo’s (NYSE:PEP) earnings, in which they revised FY guidance. It’s important to note that the guidance cut was due to strong dollar headwinds and not decline in demand for Pepsi products. This is temporary and the rise in aluminum prices will be offset by moving to plastic, and rising labor costs will be offset by moving to self-driving vehicles.

Then there was news of Amazon (NASDAQ:AMZN) raising its minimum wage rate. While this is good news for workers, it will raise wage inflation leading to higher interest rates which is bad for markets.

Despite the strong headwinds, the market is hitting all-time highs. That’s because there are two stealth tailwinds. “One is cyclical, meaning it’s ephemeral, and one is secular, meaning it’s going to go on for a long time. These are hard to see, but I think they’re responsible for much of the market’s levitation,” said Cramer.

The first tailwind is the cyclical boom in hiring which will raise savings and get more money into stocks. Second tailwind is the number of shares available to buy is going into short supply due to M&A and huge stock buyback programs. As there is short supply, the stock prices will go higher.

“You certainly need more than a weatherman to pick stocks, but it sure helps to know which way the wind blows before you pull the trigger,” concluded Cramer.

Off the charts

Cramer went to the charts with the help of technician Carolyn Boroden to review the semiconductor stocks.

The stock of Nvidia (NASDAQ:NVDA) has run $30 to $292. “Boroden says that if you’re not already in this one, you’re probably a little late to the party,” said Cramer. It can run $10-11 more, but the upside is limited. Don’t get caught up chasing it.

Intel’s (NASDAQ:INTC) weekly chart shows that the stock is lagging behind its peers. It has a floor of support at $42. If it goes above $49, it can touch $61. All this comes despite Monday’s 3.5% gain. “If Intel falls below her floor of support around $42.50, all bets are off and she thinks it could go lower. But for now, she thinks the bullish scenario is looking a lot more likely,” added Cramer.

Texas Instruments’ (NYSE:TXN) weekly chart shows that it recently lost $16 from its June highs only to rebound in September. The stock has seen many declines of $16 recently and it has bounced back. “If it happens again, don’t be surprised if the stock reverses after a similar fall,” said Cramer. Boroden thinks the stock can go above $122 if it can hold above $102.

Broadcom (NASDAQ:AVGO) has rallied recently. Boroden said if the stock breaches its ceiling of resistance at $251, it has a lot more upside. “Specifically, Boroden thinks this stock could run to $309 before it hits another ceiling,” said Cramer. The stock has run a lot so the ideal time to buy it will be after a pullback.

CEO interview – Paychex (NASDAQ:PAYX)

Paychex had a good quarter and the company reaffirmed their guidance. Cramer interviewed CEO Martin Mucci to hear more about the quarter and his take on the upcoming labor report on Friday.

Mucci said that the earnings growth of 16% in the last quarter was driven by their portfolio of products that provides HR services for small and mid-size businesses. They use data analytics to drive referrals and target new small business customers.

With rising employment, the labor market has become competitive and Paychex is helping small and medium businesses hire better. “We are definitely seeing smaller businesses, mid-sized businesses that are starting to even waive some of the drug-testing requirements because they are having so much difficulty getting certain employees. You could have someone that becomes a little bit more lenient because it’s so tight out there to hire employees, that’s for sure,” said Mucci.

Commenting on competition from Square (NYSE:SQ), Mucci said that their new payroll system isn’t competitive as it’s not available in all 50 states and doesn’t support both employer and employee.

General Electric (NYSE:GE)

GE CEO John Flannery wasn’t removed due to the pace of the turnaround, but due to the unexpected charges from the struggling long-term health division and energy business. Their long-term care policies were costing the company more than 20 times the premiums being paid. Cramer’s late father had one of those policies.

Former CEO Jeff Immelt faltered with the energy business by buying Alstom’s energy business in 2015, right at the peak of energy prices. This has led to a $23B charge as the power business has underperformed.

Cramer thinks Flannery should have known better as he was an insider. “It was an open secret that the problems at GE were much more all-encompassing than Immelt ever admitted,” he said. “American business has a strange aversion to looking at what actually went wrong in the past, actually learning from history is almost considered a sin to go back and examine a predecessor’s mistakes if you’re coming from the same organization,” added Cramer.

Now that Culp has been recruited as the CEO, he can go for a dividend cut and even do a secondary offering to clean up the balance sheet. “In short, Flannery got fired because the board was in the dark, clueless as to how bad things really were because no one seriously examined the Immelt era,” he concluded.

Stitch Fix (NASDAQ:SFIX)

After Stitch Fix had disappointing results, the stock took a 35% beat as it had run up before earnings. Cramer admitted he got it wrong and advised never to depend on a single piece of research.

Viewer calls taken by Cramer

Spotify (NYSE:SPOT): Wait for Tencent Music (TME) to price the IPO, the stock will come down and that’s the time to buy.

Twitter (NYSE:TWTR): Until they finish the cleanup, the stock will be under pressure.

ADT (NYSE:ADT): Cramer is not a fan and he would cut his losses. He called ADT one of the worst IPOs of the season.

STMicroelectronics (NYSE:STM): They don’t have a real edge. He is not as happy about semiconductor stocks as others are.


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