Cotton collapse is boon for apparel stocks
Clothing companies that raised their prices to offset soaring materials costs will see their margins expand as the fiber gets cheaper.
I am talking about the price of cotton, which has plummeted to become one of the worst of all the horribly performing commodities after a truly stellar run. On Monday, cotton was down the limit, yet did you hear anyone mention it? I didn't.
This retreat, something that was self-correcting on the basis of new plantings, has wiped out the big gains of the year -- the ones that threatened to crush Polo Ralph Lauren (RL), VF Corp. (VFC) and Phillips-Van Heusen (PVH) as well as Under Armour (UA), Jones Group (JNY) and Lululemon Athletica (LULU). Nobody seems to care, even as these companies have put through price increases that look like they have stuck, according to retailers.
These companies are going to have amazing margin expansion because they are not going to roll back those price increases. Why did we hear about margin contraction for months when cotton was on the way up but nothing as it has come down? And "come down" certainly is a dainty term for this crash.
We haven't heard of other commodities collapses, such as in corn and wheat, and their impact on the bottom lines of the big consumers of these grains, chiefly restaurants. It is great news for those companies, as I highlighted on last night's "Mad Money."
Nope, the asymmetric nature of the reporting is pretty stunning. When commodities prices come up, they crush consumers and we take numbers down for buyers. When commodities get crushed, we presume that consumers are weak and we take down the numbers for buyers. You simply can't possibly be right both ways.
But, as usual, this negativity will produce upside surprises -- somewhat akin to Nike's (NKE) last night, as the world' s biggest athletic shoe company dazzled the market with the top line -- and that's where the opportunity comes in.
I would take advantage of it before the quarters are reported, when we will see the impact of the price increases on the bottom lines. Sales remain strong across the board, as we know from the big retailers, all of which get a boost from much lower gasoline prices. This sector may be the cheapest I can recall it at a time when sales are rising and costs are falling, reversing the trend of the past two years.
Definitely worth seizing on it, even after Nike should get things buzzing -- if only because, of course, the futures are being brought down because of all the usual European shenanigans.
At the time of publication, Cramer had no positions in the stocks mentioned.
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A quick glance at a 10 year graph of cotton prices and a 5th grader could tell you that it was a bubble that was going to pop.
Cramer, Are you smarter than a 5th grader?
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