The tech sector is not overvalued.
Oil will continue to trade in a range for some more time.
Don’t buy Ford stock.
Stocks discussed on the in-depth session of Jim Cramer’s Mad Money TV Program, Wednesday, July 5.
The retail and auto sectors are two of the most important, and they are not performing well. “For the longest time, this kind of concentrated selling could bring the entire market down; makes sense given that autos and retail are so heavily linked to the overall economy,” said Cramer. “Because there have been some fundamental changes in the U.S. economy that are not being acknowledged by many people on air, on web, whatever, and they’re allowing the market to blossom without the traditional spurs of retail sales or autos,” he added.
There are 10 groups that are contributing to the market, keeping it afloat despite the poor performance of retail and autos. Travel and leisure, healthcare, capital goods, oil and gas derivatives, the stay-at-home economy, defense, aerospace, housing, e-commerce and the banks are the ones that are working based on the 52-week high list that Cramer follows.
Travel and leisure is working due to millennials spending on experiences. “Whatever, travel and leisure stocks, everything from hotels and time shares to airlines and cruises, live on the new-high list, and with good reason,” the Mad Money host said. Washington has got nothing so far on healthcare reform, but insurance providers, medical device makers, hospitals, biotechnology companies and pharmaceutical giants are doing well.
The capital goods group has seen good earnings, thanks to the improvement in the global economy and the group’s investments in emerging markets. While oil and gas is struggling, companies who use these as resources are enjoying lower costs and improved earnings.
The stay-at-home economy is roaring, with content creator and video game maker stocks rallying. Defense stocks are rallying, given the recent North Korean missile test. The aerospace sector is seeing a huge order book.
Housing is rising. “It accounts for only about 10% of consumer spending, but the demand for housing is off the charts versus the supply, which explains why the homebuilders endlessly hit the 52-week high list, even though the overall housing start numbers aren’t that strong and rates are going higher,” Cramer noted. E-commerce group is on the rise as consumers shift the way they shop. Lastly, the bank stocks are rising on the action taken by Fed.
“So, here’s the bottom line: it’s true, autos and traditional retail may be weak. But these 10 other sectors can justify an awful lot of strength, certainly enough to make it possible for the stock market to plow higher, even without the usual suspects helping us along,” he concluded.
Is the tech sector overvalued? The pundits and fund managers would want to make you believe it is overvalued. But if one looks at the top 10 performers of the sector, there is more upside left.
Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA) top the list with 59% and 34% gains respectively in the year. These stocks have rallied as the world expands into digital entertainment and video games, thanks to powerful graphic chips and the rise of eSports.
Adobe (NASDAQ:ADBE) is third on the list with a 37% gain in the year. Its SaaS model has given the company higher gross margins, and the move into AI opens up another category where it could grow. “Adobe’s price-to-earnings multiple of 34 may seem reminiscent of the dotcom era, at least until you do the homework, at which point you realize that valuations would’ve made it one of the cheapest tech stocks around in 1999 or 2000,” Cramer explained.
Red Hat (NYSE:RHT) is fourth on the list with a 36% gain in the year. “The company just had a big uptick in earnings because their platform allows for an instant shift from cloud to cloud. Red Hat, like Adobe and the gaming stocks, is simply misunderstood by a marketplace that still has trouble getting its head around the massive savings from the cloud versus old-fashioned, on-premises software or hardware,” he added.
Next on the list is Autodesk (NASDAQ:ADSK), which is up 36% for the year. Its only competition is pirated copies of its own software. As the company transitions to the cloud with a SaaS model, it is unpirateable, and hence, the opportunity to grow is immense. Cramer thinks it deserves the 39 times P/E multiple.
Semiconductor maker Micron Technology (NASDAQ:MU) is next on the list. “Unlike the other tech winners, Micron is well understood. There’s no mystery here. Despite a remarkable earnings beat, Micron’s stock actually had the audacity to decline 5% on the news. Micron is the company that’s widely considered to be the most similar to the winners of the dotcom era in the prospects, and also has the stock with one of the lowest price-to-earnings multiples in the entire market,” Cramer said.
The digital payment processor, PayPal (NASDAQ:PYPL), is next. “PayPal is generally seen as the ultimate winner in this space because it’s so beloved by a word everyone’s really tiring of – millennials. It’s the fastest grower in the industry, and the company hasn’t even had the time to begin to monetize its Venmo cash transfer system that teenagers can’t get enough of,” said Cramer. He thinks the stock has long-term upside.
One of the Cramer’s favorite stocks is Nvidia (NASDAQ:NVDA), which has seen a massive gain in 2017. It is a part of many red-hot areas in technology. “My fear now, after this pullback, is more about missing the next leg up than being obliterated by the next leg down, because Nvidia’s chips are at the center of the hottest trends in tech, from artificial intelligence to gaming to Bitcoin,” he added.
Lam Research (NASDAQ:LRCX) has seen 34% gain in 2017, and many believe it is overvalued. “In fact, I believe Lam has a pretty clear runway to be a strong performer in 2018, given how its best-of-breed machines are experiencing incredible demand.”
Last on the list is Broadcom (NASDAQ:AVGO). It is not just about Apple (NASDAQ:AAPL) using the company’s chips, but Broadcom is also pushing global adoption of 5G wireless networks. “Thanks to a series of brilliant acquisitions, CEO Hock Tan has put together a fabulous company that’s become integral to mobile, not just Apple,” said Cramer.
Cramer thinks compared to the dot-com era, tech stocks today deserve the valuations.
Off the charts
Cramer went to the charts to check the direction of oil with the help of technician Carley Garner.
She said oil has been trading in a range for some time now, and it comes down to the low $40s every time it tries to surpass $50 mark. More so, the speculators and analysts have been wrong, which has created betting momentum in both directions.
Historical patterns show that oil may move pass $50 later this month, but that too will be short-lived. Unless the demand for oil rises, it will not be able to break the ceilings of resistance at $49 and $51.
Cramer thinks it’s the supply that is controlling the oil prices, as any move above $50 leads to the companies increasing production, sending the price lower again.
Viewer calls taken by Cramer
Ford (NYSE:F): No. Stay away from this name.
Wells Fargo (NYSE:WFC): Cramer’s trust owns Wells Fargo, and the rise in the stock price was a good chance to make a profit.
Enterprise Products Partners (NYSE:EPD): It has a good balance sheet and is a level-headed company. It’s worth holding this one.