Downside is containable
I just don't think investors are willing to see another big slide without jumping in.
By Jim Cramer, TheStreet
You always need to fret when the S&P 500's proprietary oscillator breaches five, and when it soared to six and change after Friday's session I marveled that it could have gotten there so fast. Of course, a couple of weeks when the S&P roars 3% will do it every time, especially when a lot of it came when no one expected it.
But how worried should we be? Now that we have seen the fourth quarter of so many companies -- a quarter that got stronger throughout the market -- it's not clear that the worry includes more than a fear that a 15 multiple on future earnings might go to 14, with 13 always a possibility but not a likelihood when you consider that so many estimates are based on the economy continuing to stumble along both here and in Europe, the latter being a source of weakness for just about every company.
What really struck me, though, is how low the multiple is for so much of tech. Hewlett-Packard (HPQ) had one of the best quarters out there and it is selling for 11 times earnings, for heaven's sake. What is that all about? With more than $2.5 billion in stock bought back and a positive outlook for so many of the company's businesses, I find that multiple unfathomable. But Intel (INTC) and IBM (IBM) have very similar multiples and these companies are throwing off cash and coming off remarkable quarters too.
Sure, companies such as 3M (MMM) and United Technologies (UTX) at 15 and 14 times earnings perhaps deserve a shade lower, but they are more cyclical and they are more Asian and they are coming back faster.
Whole ends of this market seem out of whack with the improvement in the world's economies and the pumped-up nature of our own nation's financial health. Our banks are trading at the same level they were when they were considered barely able to pass the stress tests, with the best ones actually lower or about the same as where the secondaries were to pay back TARP. Does anyone really think that things are worse than then, especially with the decline in the rate of foreclosures? Of course, the usual caveats: workouts, tax break on purchase, lower rates. But one must ask, OK, are any of these equal to a point tick down in unemployment? I don't think so.
Should we be fretting about the collective 9 multiple in the oils, with Exxon (XOM) being the standout at 11? Isn't Exxon always the standout, beloved despite its slow growth and low dividend? With yield support and actual growth in reserves, the group's not dangerous.
Natural gas could be dangerous, but the bid underneath that comes from foreign oil companies wanting to drill here and the inevitable huge growth in reserves makes them less dangerous when you consider that natural gas prices are low. What happens if they go to $6? Of course they are kept down by a surfeit of domestic gas and the future ridiculous superfluous imports of liquefied natural gas. Call me less concerned than most.
The consumer product "safety" stocks are hanging at their usual 16 times earnings level. Even in a cyclical boom they aren't going to trade through 14 times earnings if history is the judge. Most of the drug stocks continue to trade in a band of 8 to 12 times earnings, and even though they will be hobbled by a strong dollar they don't seem to have far to fall. Let's see what happens with GlaxoSmithKline (GSK) after the Avandia revelations in The New York Times. But do you fear Pfizer (PFE) at 8 times earnings? And yes, I am well aware of the generic threat. You want real low valuations? How about Gilead (GILD) at 13, Cephalon (CEPH) at 11? Sure Celgene's (CELG) at 22 times, which I find overvalued vs. Gilead, but Revlimid's the hottest drug out there.
Retail? The best, like Ross (ROST) and TJX (TJX) -- and by best I mean the most consistent -- are at 13 times earnings. I am not a buyer of Nordstrom (JWN) at 18 times earnings, but is Coach (COH) at 16 times that outrageous, even though my hedge fund friends say it is? They are shorting it. That seems a bit dicey to me.
Yes, Home Depot (HD) and Lowe's (LOW) weighing in at 19 times makes for worry. And I sweat about Kohl's (KSS) at 16 because there isn't all that much there in terms of growth. The sector's not thrilling. But it's not dangerous, either.
Lots of other sectors need a strong worldwide economy, from auto and aerospace to steel and lumber, but I think we'll get it -- and in the meantime, costs have been taken out radically so upside exists.
So, we are overbought. So, we could get hit on any number of President Obama's lashings. I just question the downside here and question whether people are willing to have another 8% slide without jumping in earlier.
Maybe that's the most wishful of thinking because if you recall there were no bids underneath when the market was cascading, and it stopped only when people recognized that the earnings weren't that bad and that President Obama couldn't roll the Congress anymore with the Massachusetts outcome (although he sure tried with his tempestuous Volcker Rule lash-out on capital).
After all, we were able to withstand the discount-rate increase, which truly signals the beginning of the rate rises, which I think will come in lock step with the employment gains I am expecting.
I just think that the downside from working off the overbought nature is containable barring the usual threats from exogenous events overseas that cannot be gamed or stopped in the usual peril of our times.
At the time of publication, Cramer was long Intel, Gilead, Home Depot and Cooper Industries.
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