During the October Monthly Meeting, we had the opportunity to address questions from our Investing Club members. Below, you’ll find the answers provided by Jim Cramer and portfolio director Jeff Marks, revised for clarity and optimized for SEO. Let’s dive in!
Question 1: Why do rising interest rates have a negative impact on technology stocks? (Rod)
Jim Cramer responds:
“When the Federal Reserve started increasing interest rates, we made it clear that we prefer companies with profitability, cash flow generation, and a commitment to returning cash to shareholders. These characteristics help offset the risks associated with higher funding costs that come with rising rates. Mega-cap tech companies have been able to weather the storm because they earn substantial profits. Take Nvidia (NVDA), for instance. While the initial rise in rates impacted the company, it proved resilient by attracting more orders from customers.”
Jeff Marks adds:
“Typically, the present value of a company is determined by summing up future cash flows discounted at a certain rate. This rate is often based on Treasury yields. As interest rates increase, the present value of each cash flow decreases, resulting in a lower stock price. Additionally, funding costs matter for growth companies, particularly in the tech sector. Higher rates make borrowing for growth and expansion more expensive, especially if the company doesn’t have enough cash on hand. That’s why we emphasized the importance of owning profitable companies with cash flow generation when the Fed began hiking rates.”
Question 2: Why haven’t oil company stocks seen the same increase as the price of oil? Is this due to a lag effect or fears of a slowdown offsetting higher oil prices? (Todd)
Jim Cramer explains:
“I believe the oil rally was a short squeeze that has now subsided. Personally, I don’t think oil deserved to reach the $90s because it lacked the necessary economic growth. President Joe Biden’s failure to replenish the strategic petroleum reserve prevented him from unloading oil. However, I do think Russia sent oil to China, thereby keeping it off the market. Surprisingly, our own producers did not follow suit. The artificially driven short squeeze engineered by traders and countries fell apart when we discovered there were no bids and insufficient oil supply. In our portfolio, we have Coterra (CTRA), a natural gas play, which has been edging higher. CEO Tom Jorden made the right call by focusing on natural gas, and the results speak for themselves. If you don’t already own Coterra, I believe you’re making a mistake.”
Jeff Marks adds:
“The market likely anticipated that oil was nearing a short-term peak, which explains why oil company stocks weren’t priced as if oil was heading towards $100. However, if the disconnect between oil stocks and the commodity price persists, we might witness increased merger and acquisition discussions as larger companies consider acquiring independent ones. We recently saw this play out with Exxon’s interest in Pioneer (PXD), and the deal was finally announced on Wednesday. As soon as our trading rules allow, we plan to sell our PXD stake.”
Question 3: I’m concerned about Apple’s decline. Is it time to start trimming or should I continue to “own it, don’t trade it”? (Donald)
Jim Cramer references:
“Many years ago, when Apple (AAPL) was trading in the $20s and $30s, Shark Tank investor Daymond John appeared on ‘Mad Money’ and recommended the stock, stating that it was a winner worth holding onto. Just recently, John was back on the show, expressing his belief that Apple’s upcoming product, the Vision Pro, will be another game-changer. He sees an opportunity for Apple to partner with ESPN and bring content onto the Vision Pro mixed reality headset.”
Jeff Marks affirms:
“I’m still in the ‘own it, don’t trade it’ camp. This approach has served us well over the years, weathering rate hikes, pandemics, and trade wars. It has been more profitable to hold onto Apple throughout these events rather than trying to time the sell-off and buy-back. Our Club analyst, Zev Fima, recently presented us with the math behind this strategy.”
Question 4: I’ve held Salesforce on your recommendation and have had a solid gain. However, the stock has fallen around 10% in the past month, mirroring the decline in the Nasdaq. Do you still think this is a good long-term hold? (Peter)
Jim Cramer states:
“Salesforce (CRM) CEO Marc Benioff strongly believes that artificial intelligence will lead to increased profits for companies, resulting in more job opportunities. The stock saw a jump when the company announced a better-than-expected quarter. Some argue that the business is weak, but I see it as flourishing.”
Jeff Marks supports:
“Yes, I do. Salesforce has made significant progress in expanding margins and increasing free cash flow, all while maintaining steady revenue growth of around 10%. This is impressive considering the uncertain macro environment. The company has effectively managed dilution through buybacks. As the leader in customer relationship management, Salesforce’s generative AI tools have the potential to drive additional growth.”
Question 5: Considering the government’s antitrust challenge, is Amazon considered “dead” money? (John)
Jim Cramer responds:
“FTC Chair Lina Khan’s antitrust case against Amazon (AMZN) isn’t strong – her arguments simply don’t make sense. Khan has had a grudge against Amazon since her law school days, and I believe this case will quickly be dismissed as baseless.”
Jeff Marks adds:
“I don’t think Amazon is ‘dead’ money because I don’t see any significant outcomes resulting from the antitrust challenge. If anything, breaking up Amazon into separate entities could potentially unlock value for shareholders. Additionally, despite improving profitability and cost management, if AWS and the retail business were independent, they would face increased scrutiny to expand margins and grow profits.”
Question 6: What are the odds that Costco will distribute a special cash dividend within the next 12 months? (David)
Jim Cramer shares:
“I spoke with Costco CFO Rich Galanti, and he made it clear that it’s only a matter of ‘when, not if’ the company decides to distribute a special dividend. We love Costco (COST) because it doesn’t face the same theft problems as other retailers. It’s one of my absolute favorites in our portfolio, and it has been performing exceptionally well.”
Jeff Marks predicts:
“I’d lean towards ‘over’ on the special cash dividend because Costco seems to be content with collecting a 5% interest on its cash reserves. However, I’d take ‘under’ on a membership fee hike.”
Question 7: Can you explain the concept of trading around a core position and provide an example of how and when to do it? (Peter)
Jeff Marks elaborates:
“A great example of trading around a core position is what we did with Eli Lilly (LLY) recently. It has been a core holding since we first purchased it because we believed Lilly had the best growth potential among large-cap pharma companies, thanks to its robust pipeline. However, occasionally, when a stock becomes a ‘crowded trade’ and gets overextended in the short term due to excessive bullish sentiment, we trim our position. We recently sold some shares a few dollars below $600. As anticipated, the stock corrected and dropped to the low $500s over the following weeks. While we didn’t repurchase the sold shares at those lower levels, the cash proved beneficial during the market downturn last month. Now, with the positive attention received by GLP-1s, specifically diabetes/weight loss drugs like Mounjaro, the stock appears poised to surpass the $600 mark. There’s an imminent expectation that diabetes drug Mounjaro will receive approval for obesity treatment.”
Jim Cramer adds:
“When you have a core position in a company based on a long-term thesis, it’s wise to take advantage of significant price movements. By trimming a portion of your holdings, you can free up capital to be reallocated within the portfolio. We recently did this…”
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