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People “in the business” don’t talk about stocks much anymore. Many have been blown out by the algo guys — those program computer traders — or they have decided it isn’t worth it to be anything but conservative. No heroics, with the exception of the one or two stock hunches or something exciting enough to merit selection. Who can blame them? After a hideous week, one, it seems of many, we are starting to recognize that the 10-year Treasury yield at 4.4% or the 20-year Treasury yield at 4.7% are about as good as you are going to get right now. In an uncertain corporate world, where the Federal Reserve is not going to let up, despite what so many strategists and hedge fund managers think, it’s difficult to have much confidence in stocks. Treasurys are our nemesis. We’ve been stuck in a period of “wrongness” to make up a word that defines how ridiculously incorrect almost everyone who talks about stocks has been. Remember when all we talked about was the 20-year Treasury yield at 3%-and-change signaling an imminent recession? Remember the endless chatter of the tale of the inverted yield curve with its hard landing outcome for the U.S. economy? Could the people who let that thinking color their stock picking been more wayward? The strangest thing is the irony of it all — with the 20-year obviously, at least to me, having to go above the fed funds in yield during this cycle, you don’t need to commit to the 20-year now. Rates can still rise. Why not wait? The federal funds rate is the overnight lending rate that banks charge each other. It’s controlled by the Fed and it’s what everyone talks about when referring to “interest rates.” After the September meeting pause last week, the target range for the fed funds rate remained at 5.25% to 5.50%. Central bankers signaled one more rate hike this year and fewer than previously projected cuts next year. Translation: a higher-for-longer scenario. The problem for me is that the fortunes of the stock market may be twofold. First, I don’t know a soul besides me who agrees with that 20-year versus fed funds rate yield prognosis. They think the fed funds rate will come down or the 20-year yield is already extended. I always feel awkward when I talk about my view because very few believe me even as I have been consistent in 20-year/fed funds rate yield crossover. Second, I don’t know anyone else who believes the economy is so strong that the Fed is correct to keep on an anti-inflation course. I say why not? Fed Chairman Jerome Powell has the luxury of not worrying about the unemployment rate going higher because it is so very low. That part of the Fed’s dual mandate of maximum employment and price stability seems on hold. Powell just needs to worry about the second part, inflation. As long as we can’t find enough workers, why worry about the distant hazards of taking a tough course against inflation? And, why be concerned about a 4.75% yielding 20-year Treasury when you have seen 6% and 7% rates on risk-free paper that didn’t cause much of an economic standstill? So let’s go full circle. Why pick stocks with the alternative being, seemingly, so juicy? There’s a simple answer: inflation is coming down, not fast enough for most but it is coming down. If you wait for a 2 p.m. ET Fed policy statement that says we are on hold, and I mean on hold, not a skip, to buy stocks, you will miss a huge part of the move. It’s just very painful as we saw this past week, to get to the promised land. That means when I try to talk stocks, I don’t have many takers. Classic example: this weekend at a bottle signing for my wife’s mezcal, Fosforo, in New Jersey at Gary’s in Madison — ground zero for people in the business, — I was shocked at how no one was willing to chat me up about any stock save Club name Apple (AAPL). That was because some tough souls were willing to brave the lines at the Short Hills mall to get the new iPhone 15s. I would have hazarded that maybe 30% to 40% of the people I met a year ago near that store were there not for mezcal but for a terrific stock discussion. That’s telling, and it got me thinking. We know it’s the bond competition that’s silenced many who recommend stocks or buy them. But how about specific shares in companies that have bright futures regardless of the bond market, the ones that could explode higher, I mean truly vertical, if we get a couple of good inflation numbers under our belts? Let’s tick some down. Instead of suggesting why to buy — we did that this past Thursday in our September Monthly Meeting for Club members — let’s go over why you would sell them. I want to start with a company that has rarely seemed as pathetic as it is now: Disney (DIS). Can we all stipulate that this is a fine company and was excellent pre-Covid? We know it made a mistake buying Fox assets for $70 billion. We know it’s going to be difficult to buy the third of Hulu it doesn’t own from CNBC-parent Comcast (CMCSA). DIS YTD mountain Disney YTD But I regard those objections as true but dated. Disney replenished its coffers rather quickly. It has a lot of cash now and the theme parks are now at pre-pandemic levels with some exceeding those levels. If the objection is the ownership of linear TV networks, such as ABC, ESPN, and a host of other cable channels, we saw believable interest the other day from Nexstar Media (NXST). If it’s ESPN’s woes and cord-cutting, plus viable competition from Google’s YouTube, owned by Alphabet (GOOGL), and Amazon (AMZN), I say what was Disney CEO Bob Iger doing at Apple’s Vision Pro launch event. Doesn’t that mean Apple might be a legitimate partner for sports, so needed if the mixed reality Vision Pro headset is going to make it? Oh, and the movies and Disney+. Both, I think, are actually on track. No, they aren’t perfect. But they aren’t losers either. Movies tend to make money. Disney+ is targeted to make money next year. In other words, I think the real worries here have to do with a belief that entertainment has become too unpredictable and too expensive. If you are going into a recession, people can’t afford it. I, however, vehemently disagree with the bear thesis. Not because it has some truth to it and can happen, but because the stock at around $80, down $30 from where it was not that long ago, it makes no sense to fret about these concerns. They are off-base at this price. That’s what makes me think, give me a break, it’s a buy. How about Wells Fargo (WFC)? Here’s a bank that sells at 8 times earnings and has a 3.4% annual dividend yield. Now the latter used to be a defense and an attraction. I get that. It isn’t either now. If the Fed is going to take us into a recession, you can’t own a bank stock because that’s the kiss of death for credit. WFC YTD mountain Wells Fargo YTD But how about if business just stays at these levels? I think they sit there and buy back stock. Wells Fargo CEO Charlie Scharf has taken the company’s share count down to 3.7 billion from 4.4 billion — that’s about 16% — and can just keep buying without stretching the balance sheet. He’s got plenty of money to increase that dividend, too. Again, I think the objections don’t hold water at $41 per share. You can hold it, and bet (1) that investment banking comes back (2), that lending stays strong or (3) that earnings increase and dividends and buybacks increase even faster, which would be Scharf’s way. Is there really that much risk versus reward here? I just don’t see it. Let’s tackle Salesforce (CRM). Recently this company had a gigantic upside surprise that took the stock to the $230s. Now it is below where it reported the surprise at $205. What’s happened in between? CRM YTD mountain Salesforce YTD I can tell you from my work out West, there’s been a big pick-up in sales as companies are actually using the artificial intelligence generator that is Salesforce’s Einstein. Maybe people don’t understand Einstein. It’s just a nickname for a platform that allows you to ask your data anything or have your repetitive tasks be done by AI, or have predictions of potential sales both for the Salesforce team and its customers. I think Salesforce is pulling away from the crowd. It’s become the go-to for almost every industry. It’s solidifying its lead. And I know this because I spent three days trying to be sure about it. Have the bears? Have they done the work? I don’t think so. Perhaps, they are betting that inflation will accelerate. Isn’t that a difficult outcome given the numbers? Are they betting on a hard landing? Perhaps, but Salesforce has done well in slowdowns. Again, I can’t figure out, now that the upside surprise gain has been erased, what the heck they are concerned about. Or consider Mexican beer powerhouse Constellation Brands (STZ). STZ YTD mountain Constellation Brands YTD Here’s a company that was doing well before Elliott Management, the tremendous activist fund, took a position in STZ stock. Bill Newlands, a strong CEO, not only didn’t fight Elliott, he embraced them, which has typically meant some solid returns. At the prompt of Elliott, Constellation put William Giles on the board, who was once the long-time CFO of Autozone (AZO). Giles helped run the biggest buyback as a percentage of the float of any company I know. Now, Constellation Brands has a Nov. 2 Investor Day meeting, suggested by Elliott, where I think the company can announce that it’s putting its very big wine and spirits business on sale. It would allow Constellation to take the money and return it to shareholders in a colossal buyback. And, what’s the stock done during this period? NOTHING. Again, what do the bears know? That Modelo is not doing well? Nope. Because of the Bud Light debacle, it’s the No. 1 beer in the country. That Corona’s not selling well? It sells best when it’s hot and boy is it hot around this country, especially Texas, it’s largest market. That it’s not selling well at retail? It’s gaining doors more rapidly than any time I can recall, and again, from my time running Bar San Miguel in Brooklyn, New York, I know about beer distribution and my competition. I can’t think, again, other than that nasty bond competition, there’s a reason for disliking this stock. I know I could go on and on — but let’s take another, a stubborn one, Coterra Energy (CTRA). CTRA YTD mountain Coterra Energy YTD Here’s a company that’s been incredibly shareholder friendly, that has the lowest cost of natural gas in the country, that has a CEO in Tom Jorden who is the envy of the industry. Additionally, Coterra has a chance to profit extraordinarily from any sort of cold winter anywhere in the world because nat gas prices are now at an international level thanks to our liquefied natural gas build out. Coterra also sells at 7 times earnings. Oh — and just in case you say, nope, I want an oil company, not a natural gas company, Coterra can change its stripes any time it wants because it can run its business 50-50. That’s how much oil it has because Coterra is a combination of the old Cabot Oil & Gas and Cimarex, a premier oil producer. While up at $30 or $31 per share, I would say this one might be overbought versus the commodities it trades it. But at $26, where it closed Friday, I am sorry, that doesn’t make sense. And, if you ever thought there would be consolidation again in this industry, this would be the number one candidate to be bought. I could go through this exercise for pretty much every stock we have save FootLocker (FL) and Ford (F), the former because it is mall-based and the latter because of the unions and its high cost per unit as well as the changeover to electric vehicles. Every one of them, I mean every single one, it is hard to find a definitive bear case beyond the high 20-year Treasury yield. That leaves me with two thoughts: One, what happens when the Fed is done, and two, what happens if I am wrong about the 20-year and it actually goes down in yield? The answer? We win either way. Now that’s a good risk reward. (Jim Cramer’s Charitable Trust is long AAPL, DIS, GOOGL, AMZN, WFC, CRM, STZ, CTRA, FL, F . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Traders work on the floor of the New York Stock Exchange during the opening bell, Aug. 21, 2023.
Angela Weiss | AFP | Getty Images
People “in the business” don’t talk about stocks much anymore. Many have been blown out by the algo guys — those program computer traders — or they have decided it isn’t worth it to be anything but conservative. No heroics, with the exception of the one or two stock hunches or something exciting enough to merit selection.
Who can blame them? After a hideous week, one, it seems of many, we are starting to recognize that the 10-year Treasury yield at 4.4% or the 20-year Treasury yield at 4.7% are about as good as you are going to get right now. In an uncertain corporate world, where the Federal Reserve is not going to let up, despite what so many strategists and hedge fund managers think, it’s difficult to have much confidence in stocks. Treasurys are our nemesis.
We’ve been stuck in a period of “wrongness” to make up a word that defines how ridiculously incorrect almost everyone who talks about stocks has been.
Read the full article here
