The media may be promoting AT & T’s ((T.) – Get the report Decision to Merging Time Warner with Discovery Communications ((CHOOSE) – Get the report as a “transformation business,” but Jim Cramer told Mad Money viewers on Monday that AT&T should never have bought Time Warner. In fact, he described the original $ 85 billion deal as one of the stupidest deals in history.
What does a telephone company have in common with the media business? Apparently not much, given the final sale price, which puts AT&T on a ton of debt and cuts the dividend by more than half.
Cramer said there was never any synergy with the AT&T-Time Warner merger, and the only one who found out was Time Warner. “The whole thing was a clown show.”
However, there are some lessons to be learned. First, anything is possible in American companies and you will never hear an apology for losing a ton of money. Second, never reach for stocks with high dividend yields. As we saw today, big returns are being cut. Finally, there are no arbitrators in investing. AT & T’s board of directors could have stopped this unfortunate takeover, but not.
Investors looking for deals that make sense should consider Salesforce.com ((CRM) – Get the report Buy Slack ((JOB) – Get the report;; Nvidia ((NVDA) – Get the report Acquisition of ARM Holdings ((ARMH) ;; or advanced micro devices ((AMD) – Get the report Purchase of Xylinx ((XLNX) – Get the report. Salesforce needs Slack to compete with Microsoft ((MSFT) – Get the report. Nvidia needs ARM to break into wearable devices. And AMD desperately needs Xylinx to diversify its portfolio.
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Executive decision: Generac
Jagdfeld said that everyone takes power for granted until they no longer have it, especially at home. But power outages are increasing, both in frequency and duration, he said, which was caused by three things.
First, we are decarbonising our power grid, which increases volatility. Second, we’re electrifying everything from heating to vehicles that increases demand. And third, climate change is making severe weather events more common, be it summer heat waves or brutal winter storms like the ones we’ve seen in Texas.
The answer to our aging and evolving power grid is to create microgrids that can include solar power, batteries for short-term outages, and generators for longer-term outages.
Generac is also the leading provider of backup power solutions for the telecommunications industries that are spending a lot of money on 5G wireless capacity.
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Cloud software stocks
Cloud software stocks have pulled back sharply from their highs, averaging 19%, but that doesn’t mean they’re worth buying. Cramer dived into these software-as-a-service inventory to assess the damage and determine if further pain will occur.
The losses in this group were staggering, Cramer noted. Of the 75 names he looked at, the average declines were 37%, with 26 causing losses greater than 40% and 15 of them showing greater than 50% declines. Despite these losses, fundamentals remain strong. So he said the “rule of 40” still applies to the valuation of cloud stocks.
The rule of 40 says that a company’s revenue growth plus its EBITDA margin must be greater than 40. This gives a company two ways to win. You can have a lot of low margin growth or high margin with less growth. When a cloud stock shows neither growth nor margins, investors need to be clear about control.
Stocks like Coinbase Global ((COIN) – Get the report, Square ((SQ) – Get the report and Etsy ((ETSY) – Get the report All pass the rule of 40, but Cramer warned that Coinbase is bitcoin-tied and Etsy’s quarter was seen as problematic. Other stocks like Roblox ((RBLX) – Get the report, Airbnb ((ABNB) – Get the reportand Roku ((YEAR) – Get the reportAll trading in sales more than 10 times when estimates for 2022 are used.
That still makes these names too expensive if you don’t think long term. He suggested buying these names only if they continue to decline, noting that they could still have a long way to go before they bottom out.
Executive decision: Hydrofarm
For his second “Executive Decision” segment, Cramer also spoke to Bill Toler, Chairman and CEO of Hydrofarm HYFM, the hydroponics supplier whose shares have increased 9% so far this year.
Toler said Hyrdofarm is a 44 year old company that sells everything farmers need to grow all types of crops indoors. They have supplies, equipment, lighting, soil, and fertilizer that are primarily sold through retail channels. Your products improve yields and reduce costs.
When asked about cannabis, Toler estimated that around 75% of their sales came from this single industry. He said the cannabis industry all moves indoors, where it can control quality, consistency, and safety, while getting up to four harvests a year.
Interest rate hikes are not the answer
In its no-huddle offense segment, Cramer offered an alternative to raising interest rates to contain inflation. His solution? Let inflation take its course.
Raising interest rates comes with trade-offs, including a slowing economy and rising unemployment. However, letting inflation run is the better option as most of the inflation is due to temporary bottlenecks.
Inflation in minerals like copper should correct itself if, for example, China’s economy cools and lumber prices could be lowered by adjusting tariffs on Canada. Plastic plants will soon be back on stream to curb inflation, while oil producers will soon add capacity to curb oil inflation. Even the real estate market is likely to cool as more people return to the office.
With so many temporary shortages going on, there just doesn’t make sense to raise interest rates, Cramer concluded, which is why Fed chairman Jay Powell is unlikely to do so.
Here’s what Jim Cramer said about some of the stocks callers offered during Monday night’s Mad Money Lightning Round:
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At the time of publication, Cramers Action Alerts PLUS held a position in CRM, NVDA, AMD, MSFT.