Jim Cramer: Good morning club members and welcome to our first of the year monthly club call. We got a lot of new faces in the club so let me begin the year by welcoming you, telling you about these calls, they're incredibly important. I can tell you there's nothing else like them in the whole investment firmament, that's why I created the darn thing. Because we can speak directly to each other in real time. To provide you with an unfiltered look behind the scenes into how we think, how we learn, and how we analyze the market and apply those strategies into our investments, and for once the market is plummeting when we do the darn call. We do these calls because as a former professional hedge fund manager I always thought that investors had a right to know what went on behind the scenes. I think communication about what and how we think is at the utmost and the calls are the best place to do it. We're trying to teach you to be a better manager of your own money, that's the plan. To do that we have to tell you what we did right and more important I think, even though it's very embarrassing, what we did wrong. So we can learn from our mistakes together to self-improve which has been at the essence of what Action Alerts as well as TheStreet.com are all about and always will be since I founded it, low and behold, 24 years ago. New members and trialers, we work endlessly to try and keep you up-to-date on the markets and our stock suggestions with bulletins and weekly roundups. We provide you with exclusive, straight from the floor market commentary through my daily rundown videos and supplement your own investment process through the creation of our investment indices which breakup our recommended lists into four distinct groups: value, growth, blend, and income, to better suit you.
Of course we provide maintenance on our core holdings and portfolio ratings. In many ways though I think the calls are the best benefit you get from joining the club. They're a special time when we give her all she's got to ensure that we're responding to you in the most direct and interactive way possible. We want to remind members that real portfolio management is at the heart of what the club membership's about. At its core our service teaches our subscribers what it means to run money. Bring you behind the scenes and to not only the what of our day to day training but more important also the why. With analysis that supports our decisions. Helping subscribers make sense of the immense amount of moving pieces day to day that help inform any investment decision. We've been through a lot since we talked last. We got some valuable lessons that we have learned and we want to share with you today about what happened to stocks and what I am now describing as the great bear market month of 2018 which of course was December. We also have a new exciting bullpen name and we will reveal. And of course we want to talk about what I see happening right now in the markets.
But before we get started, I just want to say a few words about a man we lost yesterday, Jack Bogle, an individual whom I had the privilege of meeting and interviewing many times, who is truly one of the great investing minds and he's the creator of the index fund. I have long told anyone who wants to get started in investing to put that first $10,000 that they have saved into index funds, particularly Vanguard where I have mine and my father did before me. Jeff Marks who works with me at the club, and you'll hear from later, worked at Vanguard before he came here and got to meet John Bogle when he was there. What do you do after the $10,000 that you put with the index fund? Well that's what I think you can use your knowledge and some Mad Money, hence the name, to start buying some individual stocks along side an index fund. I believe those with time and inclination and insight can find winners. And I will never relent on that view because I have seen it all too often with my own eyes. That's why we started ActionAlertsPlus.com to augment the index fund and show you how to pick some stocks yourself, trying to give the hobbyist the same tools as the professional has. And like Jack, level the playing field between pros and home gamers. You're going to trade, you're going to invest, at least let me tell you how to do it best. Jack kind of liked that. And I always thought that you can own stocks and own index funds because it's possible to beat the market with some intuition, solid homework and a working knowledge of business and balance sheets. Not only that but I am a living breathing example of it. Before I came full time to TheStreet.com I ran money for 14 years and I compounded at 24% after all fees versus eight percent for the S&P 500 during the same time. When I started TheStreet, Jack was incredibly helpful and supportive because he favored democratizing Wall Street more than anyone I ever met. He wanted the average person to own a piece of the American pie and not have it diluted by high fees, I agree with that. It's a gutsy position, the world is geared to try to have the highest fees possible and to get away with it, usually because they're hidden or not talked about. I think that Jack wanted such low fees that he became a bit of a pariah in the industry. I liked that about him too. I think that a lot of people who praised him today, they didn't like it, they didn't like him. When I started TheStreet I once challenged him in a debate about how if index funds are so great, I was able to beat the S&P 500 by so many years, by so much percentage. He answered the question with a question. He wanted to know how much money I had under management. I told him at that time $500 million. He then wanted to know how I was doing. It was a good year and I was beating the market by a lot. So he asked how much money would I take in the following year when I marketed my fund, how much would I raise? I told him that I didn't market my fund, that you had to be nominated by an existing partner to put money in the fund and that I really wasn't interested in having any new partners. That he said was why I could outperform the averages. He said that many great managers become mediocre managers when they take in too much money out of greed. And almost all of them succumb to the sirens of avarice. He then said that they became when they took in all that money, just closet index funds but high fees, meaning they almost had to underperform the S&P they were mimicking. Because of their fees, he kept saying that, because of their fees they would underperform. Or of course they would make sloppy bets because they have taken in so much money at once that they distort their position sizes and they feel that they have to put money at work no matter what, often at the worst possible times. After the markets had a big run, people come in chase performance and that's when you get the money. I thought it was a very compelling challenge to me and it was a challenge that most money managers cannot meet because they are always in fund raise mode. As long as I kept my assets small and manageable he said my hedge fund's out performance can be explained. He applauded my decision to stay small. And it worked, he wasn't doctrinaire although I could never get him go along with my concept that regular people can and do pick stocks that can beat the market. He just didn't think it was worth it. He also thought I was encouraging people to say you could play in the NBA one day and they couldn't, oh that's Jack. I think that many in the industry extrapolate Jack's legacy far too loosely. Jack was never about double or triple inverse ETFs or about trading ETFs, even about these juiced up sectors ETFs. He was about owning a piece of the American economy and sitting with it through thick and thin. It's really too bad that others try to cash in and distort his work. You want to know something? It is rare that anyone comes up with something huge that changes a landscape forever. It's almost impossible to find anyone who comes up with two ideas. Jack pioneered the concept of the index fund and the concept of the lowest fees possible so it's not too impact performance. These were revolutionary, in many ways out of sync with the industry geared toward excess profitability and aggressive fund raising. Bold and gutsy. Jack was as bold and gutsy as they come, a true fighter against forces so powerful that it seemed silly to take them on but given how big index funds have become you can only conclude that he won the battle and the war. He will be missed and I hope you think of him every time you make your annual index fund contribution. I hope you will do that. I know I will miss him. You know what made him so light and terrific. You know he had a heart transplant later in life in the 60s and he never forgot the fact that he should've died. And he kept his commentary light because he knew he'd gotten a second chance at life.
Now let's talk about the market before we get to some broader lessons from the downturn that preceded this year. We are in the midst of a period where we have to walk a tight rope. If we get too strong data like we did from the loan departments of Bank of America and JP Morgan then fed chief Jerome Powell will choose to raise rates a couple of times in 2019 which would surely send us back to macro bear market purgatory. But if we get too weak a set of data, as might be the case by the way because of the government shutdown, companies will miss their numbers and stocks will go lower on micro bear market woes. Fortunately so far we've had enough mixed data since the year began that the fed can't make up its mind. That's exactly what we want. Plus we have gotten a real break, the stock market plunged so far so fast that even when companies disappoint on the top line, as JP Morgan did, and the bottom line frankly, they don't go down as buyers want in because the overall market has gotten too cheap. Even after the rebound, it seems that almost every stock I hit up trades at eight, nine, 10, 11 times earnings. Unless the companies cut forecast, you get an opportunity here even as we are brutally over-bought, to make some money. JP Morgan off seven cents after a weak Morgan Stanley quarter. What does that tell you? Goldman off a buck 35, opportunity. We have a huge earnings calendar ahead and I think that we're going to have a decidedly mixed picture. Companies with lots of international business will not necessarily excel, especially if they are dependent on China or Europe to make numbers. Domestic companies that have benefited from tax reform are now going to be going up against last year's difficult comparisons and that can cause trouble too. The good news though is that these are the reasons why the stock market fell so much in December. The bad news is the stocks have come back so far so fast that you could see us take some hits, like this morning, before we resume our climb from the abyss. Given the fluid nature of things like the shutdown, the earnings calendar, boy we've got a lot of 'em coming up next week, I think it's best to try to focus on some teaching today. Specifically focusing on lessons we learned from what I'm calling again, the great bear market of 2018. Because in a very tight period of time we experienced one of the most hellacious moments of my career. I know there a lot of people who could easily say that the entirety of 2018, after the top in January, basically amounted to a bear market. I think that's too severe. But what I will say is what I have told you many times in our bulletins and in the last two calls. J. Powell's rash comments about the need to hike rates once in 2018 and three times in 2019, something he said in the beginning of October, coupled with Vice President Pence's speech at the Hudson Institute, also at the beginning of October, it made it clear our beef with China has less to do with trade and more to do with stopping Chinese hegemony in its tracks, did indeed create a vicious bear market that left many stockholders once again wondering why do I need these crazy pieces of paper? And others saying that the stock market itself just periodically breaks down under too much selling pressure. So why even try to make any money? It's not worth investing in equities anymore. And you know I could not disagree with that more and that's again why the club's so important but I accept the fact that it's absolutely true. It's absolutely true that stocks do break down, mini crashes, whatever, and I wish there were better rules against it, we don't have 'em. Now I am aware that there are people watching right now who are thinking uh Cramer doesn't complain when the stock market goes up on crazy buying, he only complains when it goes down on nutty selling like we had in December. It's totally untrue. I hate any phony swings either way, always have. The fact is though we have to expect that we are going to have more of these swoons after any bit of really strong data because that will put pressure on Powell to move too aggressively to tighten when the economy might be too weak to handle it. We can't count on him to get it right as he let us down once before, all he looks at is the employment number, I swear, he doesn't talk to companies. He could do it again. Call me wary but ready for his next set of mistakes. Which brings me to the subject of today's talks, the 10 lessons of the great bear market of 2018. What we learned from the actions we took in the heart of the bear and will take again when we get these kinds of setbacks. Notice I said when, not if. I am hoping these lessons will apply to you and allow you to do better in the inevitable big sells offs we will endure together. For the record, I do not think this morning's selloff is one of them because we can't count on a continued run given how bountiful it's been from the bottom but we have to accept the fact that it will selloff. I mean here's an example, United Health, it's down $2.50, kind of no man's land, 2.58 but you know if that went down another four, five, you're going to get a bulletin saying this is your chance.
Alright, without further ado, lesson number one: When you think you're going to have a protracted selloff, circle the wagons around your favorite stocks and have some cash ready to buy more. Remember, while I've given away several million dollars from my charitable trust over the years, I am managing a finite amount of capital. So I can't just say hey when this market gets down to 2200 on the S&P, I'm going to flood the zone with fresh money, I have to go with the hand I've been dealt. Which means that if I want to conserve cash I have to sell something to buy something and I want to upgrade the portfolio into the weakness and protect it. That's what wagon circling is all about. How do you do it? I say look for stocks you have the most conviction in, the ones that you're ready to keep buying with every leg lower because you know eventually when the mindless phase of the selling stops, usually the first two or three days, the fundamentals will matter again. Crucially, don't get caught off guard all of a sudden thinking that every stock that is being put on sale is inexpensive. A lot of people felt that way by the way on Christmas Eve. Trust me, when it looks like all stocks are cheap, and we are due for a bounce, it is easy to start grabbing at losers you would have never even looked at in an up market. Just buy the best of your stocks please, the solid ones. And don't try to average in on every one of your positions. Sell the marginal players even if it incurs a loss. A big loss. You will need the money for other better stocks and you won't have it otherwise. Regard it as a sunk cost, not something that may or may not be taken. Something that already has been taken you just haven't taken it off the table. Consider it taken, do it. Believe me, when you do get that rally the best will bounce. The others, you're lucky if they flat line. Remember pullbacks like we just had don't happen on good news. If the factors behind a good stock that has fallen with the market, not on its own misfortunes, are still in play, you take the new proceeds from the losers and you leg in, not all at once no matter what. It's just too risky to do anything else and when we bought too quickly in the last selloff, we weren't able to buy more of the stocks when they fell because the positions were too big even as we had circled the wagons. I feel that, by the way, that's kind of how unfortunately we handled Goldman Sachs. We bought too high and then when it got clobbered we didn't want to buy anymore even as we thought our thesis was intact. I am proud that we didn't dump it like so many others did but I wish we had left room to buy more. Remember above all else, you have to ask yourself is this stock I'm about to buy just collateral damage, a stock that's going down because of the tug of the S&P 500? Or is it at the heart of the decline? Part of the complex is going to see earnings cut because of what we're seeing at that moment, why we are plummeting. If it's the former, you're likely looking at a long term winner. But if it's the latter, for example stock that's going down because earnings will be hurt by the trade war that's behind so much of last year's bear market, it can easily resurface from a tweet or a presidential, look we had a senator today saying that Trump wants to talk about more car tariffs. I mean, oh my. Well you're probably going to enter the house of pain. We went over how best to do this by the way, in a very important November 28th note where we demonstrated a very good real time wagon circling. As we stated in the alert and I quote, "Selling winners to fund losers is a fool proof way to mishandle one's portfolio and protecting a portfolio from further losses can be just as important as realizing gains. A stock should not be spared just because you do not want to take a loss. That is putting emotion into investing."
Number two, even in a big selloff you cannot lose your discipline to price. And you cannot be afraid to trim a winner that has run too far too fast. In November when we grew concerned about the overall strength of the market, we had to make some hard choices about raising capital. Two examples come to mind, Danaher and Abbott. These are two of our favorite stocks. Still we felt like we had no choice in part because both had some exposure to China. So we took some profits in both names to preserve some nice gains. Did we want to sell these stocks? Of course not, these are winners not losers. As I have always said, you should never subsidize losers with winners. However, we felt that these stocks were vulnerable and could come down and we would be kicking ourselves when they did. Sure enough the stocks plummeted and then recovered somewhat for their December lows. But they were below where we sold them. More important, others stocks we liked got crushed and we were able to put that spare capital obtained from the temporarily inflated prices of Danaher and Abbott to better use, buying the down and out stocks of totally intact bullpen names. We kept our discipline about the need to trim stocks that have moved up on little news. The discipline remember, I don't know if you'd recall, well that's the one we talked about when we said we made a mistake on not trimming more Facebook when it ran to the 200s on nothing. I wonder if we hadn't reviewed that Facebook case study so thoroughly, would we have done the right thing this time? But we did, The obsession with our mistakes paid off.
Three, you cannot be afraid to cut and run on a losing position because in a bear market you'll always lose the battle. But use the bear to buy the stocks of a long term winner that's crushed by market forces. Not that long ago we expressed our disappointment to you about the stock of WestRock which we have bought to capitalize off of the soon to close Corrugated acquisition as well as robust eCommerce market that needs cardboard boxes to ship pretty much everything. We liked the almost 4% yield and we really liked the idea that this current generation is rebelling against plastic and switching to paper, WestRocks belly win. But when the company missed its quarter and additional Corrugated supply came on, we knew we were in trouble despite the yield. In a bull market you can battle a stock like WestRock, trading around it, betting that demand could accelerate, even if supply takes off. In a bear market a company like WestRock has no chance whatsoever of rallying because investors will presume it will miss quarter after quarter, especially when you are fighting the fed through rate increases, that make the company's dividend stream and yield less valuable. So we took the loss, oh it was a painful loss. We had talked to you about buying the stock here in one of these calls. But we put the money to work buying the stock of a company that didn't have cyclical underpinnings of WestRock. We bought Palo Alto Networks, PANW, which protects enterprises from cyber theft which are all around us, a lot of them from China and North Korea and Russia. Now there have been fears that new CEO Nikesh Arora, I knew him when he was at Google, might be inclined to do big dilutive acquisitions because he had this reputation at his previous employers of doing that, even if I think that's a fatuous view. That wariness of a new CEO plus the crushing of the high multiple stocks brought the stock of Palo Alto down even harder than WestRock. But we were able to use the bear to buy Palo Alto shares as low as 164 as we knew the story was intact. Now Palo Alto stock is at 202. WestRock, it is still below where we sold it, just as we figured. Use the bear to upgrade your portfolio not to downgrade it. Don't fight the bear, work with it.
Four, always keep your bullpen fresh because you will never know when your bizarrely low price targets will be met by a cataclysm of selling. When everything is hunky dory and stocks are flying, you should be hunkering down. Researching stocks and acknowledging that while you may have missed some of these on the way up, a huge decline could bring them back to levels that you need to be ready to take advantage of. That means you have to constantly update your bullpen and be ready. We have researched Palo Alto, Viacom, Cisco, CVS, and Five Below and were ready to pounce when they cracked. Now I like all of these but for a moment let me address CVS because it's bugging the heck out of me and probably you. I know this one has been a tough own. It's a company I've always liked, waiting for the stock to go down and I think its merger with Aetna will end up being a terrific value. Right now though it is getting hit with so much headline risks that it may seem like it is not worth it. There's a federal judge who has no authority to block its deal yet he's trying to block it anyway. There are newfound competitors who aren't going to deal with CVS's pharmacy benefit manager because they compete. There are questions about how well CVS's Larry Merlo can integrate these two gigantic companies with two very different cultures. But that's why the stock of the fantastic company that is CVS now sells at nine times earnings with a 3% yield. Last week I was at the JP Morgan healthcare conference and CVS wouldn't give clarity about the numbers for the combined company. That caused money managers to presume the worst, that estimates have to come down. And as I just said with WestRock, if numbers are coming down, that stock will go lower until they are done coming down. Which is sadly not yet the case for either WestRock or CVS. In that sense it was a bullpen name where we were ready for the selloff. It hasn't paid off yet, it's been brutal. Again though, when I look at the combination of CVS and Aetna, I say I am willing to wait in part because it is an all domestic company in the healthcare field without a lot of cyclicality and in part because it is so despised that when Merlo figures out and lowers expectations which I think he still has to, well then I think it will be ready to take off. Has it bottomed? I think it's trying to bottom. I will tell you that if this one gets to $60, right now it's at 63, if this one gets to $60 we will buy more and we'll buy more with alacrity.
Five, in a bear market you have to take advantage of and scour the market for unique super high growth opportunities that have gotten cheaper. Look for those high flyers with high price to earnings multiples that are contracting because of the bear market and not any slowdown in the company itself. Use capital from cyclical companies with possible earnings impairments to buy these compressed multiple growers. The best example here, we swapped out of Emerson, a terrific cyclical company at $68. But one with a lot of China worries and some real concerns brought to life by management in the last conference call and it's really worrying us. We took the Emerson proceeds and bought a stock we featured in the last call, Five Below, with a strong regional to national retail story that is going to be able to grow no matter what happens to the international economy. Consider it the polar opposite of Emerson. Five Below is an expensive stock because of its high growth rate. But the price to earnings multiple got crushed during the December crash. We are now at nicely on Five Below but we'd still be way down on Emerson if we had held on. Classic example of what you must do.
Six, in troubled times don't sell stocks with an inconsistent management team and instead go for seasoned CEOs who know how to handle their enterprises no matter what the environment. Early in the fall Textron reported a quarter which showed some surprisingly bad execution in its industrial segment. And we should have immediately blown it out because your first loss, as I like to say in the book Real Money, is your best loss. We rationalize by saying that there's so much optionality here, so many things that could go right, that it is worth holding on to the stock and perhaps it could be taken over, maybe it could restructure in a way that ameliorates the pain of the losing divisions. But in a bear market there are very few portfolios managers who will stick with a company that executes poorly. Because if they can't deliver, at better than expected earnings in good times, well how are they going to beat the forecast in tougher times? Remember we stumbled into the bear market because people assumed the economy would be crushed by the fed taking random industrials down with it. The result, we were annihilated and it became one of the stocks that when we circled the wagons, were left outside the circle. We used this stock as a source of funds to be able to buy the stock of Cisco, the C-S-C-O kind, which is run by Chuck Robbins and will be far more able to navigate the vicissitudes of the moment. Cisco right now is perhaps my favorite stock in the trust. And I can't emphasize enough how the company's being run in uncertain times. And partly because Robbins has taken share and taking names in cybersecurity and in the internet of things food chain. It's the opposite of Textron. A secular grower with a management team you can back on. Had I just said that I am not going to settle for an inconsistent management team and I'm going to take the loss on Textron as soon as I saw the flawed execution, we would have saved much more money, yeah a lot of it. We didn't. I made a mistake. But I didn't compound it by letting the money lie fallow along with Textron's stock and its management team for that matter.
Seven, in good times owning the best houses in a bad neighborhood can make a rough go of things. But in bad times there are no good houses in a bad neighborhood. We learned this the hard way when we chose to buy the best oil service company and the oil company that did so much money it could buy back stock. Schlumberger and Anadarko, betting that somehow they'd be able to free themselves from the ETF shackles in a rally. A bear market doesn't allow that to happen. Plus we have also learned the hard way that owning a commodity play in this market is for traders not investors. And we are not and don't want to be traders. We are holding on now to both stocks waiting for higher prices as we think oil overshot on the downside and belongs in the 50s to 60s where these companies should fair decently. Especially if we get a deal with China which is what oil trades on every moment. It is important to point out that some sectors are just completely uninvestable in bear markets and are related to economic slowdowns and there is none worse than crude.
Eight, when the market fundamentals seemingly go out the window, sometimes technical analysis, technical analysis can truly be helpful. We came into the downturn with one of the highest cash positions the trust has had over the past decade. We came out of the bear with the lowest cash position we had in ages, yep we took the most out before fortunately we didn't like the market and put the most in. Yes we put that much cash to work. We got to about as low as I will allow barring a true crash crescendo of selling and total washout. How did we know it was worth plunging like that? Well there were a host of things but you know what was really key? We used the S&P's oscillator, the one I pay for, that's how. I huddle with the S&P people to get 30 years worth of data to see what is happening when you get to minus 12 where the oscillator went in the downturn, the answer with the exception of the Great Recession, where there was systemic not cyclical risk, you had to buy stocks. That's right, other than one period where the republic was really in peril, you needed to buy stocks at that minus 12 level and you had to do so with gusto no matter how painful. That's the kind of touchstone that I gravitate to because it has been so consistently right. There was simply too much selling pressure so you had hold your nose and do some buying. It gave us some fabulous prices.
Nine, don't lose sight of what can still work and don't give up if it's even in the realm of possibility that something could go right. It's not everything is slated or must go wrong despite what you might hear on TV or read on the web. We had been adamant that the economy had already peaked when Powell ham-fistedly said he needed to raise rates dramatically to perhaps even overshoot to cool the US economy. Those were dangerous words and we felt he didn't understand the power of them. We were right. At the same time we warned people that the trade war with China was much more serious than they realized. But once everyone almost universally agreed that Powell's wrong and that the trade war would never end, it was important to try to think about how things could work out for the better. Because over the many years I've been investing, that's almost always been the case, the Great Recession being the one outlier where it took four or five years for many stocks to get back to where we were before that crash. Still, the evidence is on the side of progress and you have to invest that way. Something that both John Bogel and Warren Buffet, two of my icons, have and would say. So we recalibrated and figured out that Powell would be rational and would blink and that the trade talks could possibly go positive. Because the president doesn't want a recession. Everyone was too positive when we got negative. But when too many were negative we had to force ourselves to think constructively. Not positively just constructively. It worked, as it often has. Here I know we are very different from the average hedge fund manager who's always pressing the negative bet right into the bottom. Even as we are shackled in so many ways, we know that being intellectually flexible and not to dig in our heels on a negative scenario simply because it sounds so compelling and intellectually honest. In the end the negative case often lacks the rigor it seems founded upon because people in power do change their minds and invert their disasters and they're so often predicted and so rarely play out.
10 and perhaps most important, know thyself. This tenant is probably the most, let's just say significant one, the biggest take away of the rules. I cannot tell you how many times I have seen people panic and sell at lows because they took on more risk than they could handle. And simply were not prepared to weather the storm. If you know your risk tolerance and allocate your funds accordingly you cannot only remain calm in a downturn, more importantly you could stay focused on the long term and hopefully take advantage of the situation, not run from it. Knowing thyself is especially true for older members. If you were sitting there in December worrying that the pullback could derail your retirement, then you're probably taking on way too much risks than you should. When the bear takes hold it's too late to start planning. So do your planning right now when the market is up, you're feeling good and could see with clarity, without the fight or flight emotion impacting your decision making. I pride myself on my ability to take pain and to act rationally in a downturn. But if I fear risking my retirement money because I do not have enough time in my life to make it back, I should be rethinking my risk reward levels. Use this time right now to go over what you did in the downturn emotionally. If you felt at all overwhelmed or stressed out to the point that it interfered with your thinking, with your thinking, take action now when the market is higher and do some selling.
So to recap, lesson number one, when you think you're going to have a protracted selloff, circle the wagon surrounding your favorite stocks and have some cash ready to buy more of them. Lesson number two, even in a big selloff you cannot lose your disciplined price and you cannot be afraid to trim a winner that has run too far too fast. Three, you cannot be afraid to cut and run on a losing position because in a bear market you will always lose the battle but use the bear to buy the stock of a long term winner that's crushed by market forces. Four, always keep your bullpen fresh because you will never know when bizarrely low price targets were met by a cataclysm of selling. Five, in a bear market you have to take advantage of and scour the market for unique super high growth opportunities that have finally gotten cheaper. Six, in troubled times don't settle for stocks with an inconsistent management team and instead go for seasoned CEOs who know how to handle their enterprises no what the environment is. Seven, in good times only the best houses in a bad neighborhood can make a rough go of things but in bad times there are no good houses in a bad neighborhood. Eight, when the market fundamentals seemly go out the window sometimes technical analysis can truly be helpful. Nine, don't lose sight of what can still work and don't give up if it's even in the realm of possibility that something can go right. It's not everything is slated or must go wrong despite what you might hear on TV. Number 10, know thyself. If you know your risk tolerance and allocate your funds accordingly, you cannot only remain calm in a downturn, more importantly you can stay focused on the long term and hopefully take advantage of the situation. We hope you take these 10 lessons to heart. We are constructive about the market right now but we are justifiably scared and scarred by what occurred at the end of the fourth quarter. You now have our takeaways and unfortunately I bet that they come in very much handy in 2019.
And with that I would like to do, what I want to do of course is take your questions but first I want to introduce the new bullpen name that I suspect we might be picking up into what I perceive to be another tech related downturn centered again on a slowdown on mobile phones, a downturn that has nothing to do with the exciting company. As always I want to introduce Jeff Marks to talk about it. As Jeff and Zev Fima work closely with me and often answer your questions and help guide you along to our thinking. Jeff welcome back to the show.
Jeff Marks: Thank you.
Jim Cramer: Alright so Jeff before we get started, you worked at Vanguard and I know you got to spend some time with Jack Bogel. What was it like?
Jeff Marks: Yeah so I had the privilege of meeting with Jack a couple of years ago early on in my career and he was exactly as you described, just very thoughtful man, very philosophical, very accessible to his employees. All my team at the time had to do is email his secretary and we were able to set up an hour and a half meeting and that's just who Jack is, right? He was always thinking about his employees, the average American worker and what he could do to better their lives. He will be missed. He was a titan in the industry but the way he structured Vanguard he could have been a billionaire if he chose it to be for profit for him. But instead he put the mutual back in mutual fund and a lot of people are better off because of it.
Jim Cramer: He's genuine!
Jeff Marks: Yes, and as you said too, he believed in the American economy. You hear him speak and people always ask him what type of allocation should I invest in? Well, stocks, bonds, domestic, international, he always preferred domestic equities because that's where the innovators are coming from, our country and that was a very big proponent of his investment thesis.
Jim Cramer: He liked that total market return too, the one that has all the stocks. I loved him so much and did what he said. I am in index funds, I mean obviously we pick stocks for ActionAlerts but I know, he was so funny when he was telling me Jim you're encouraging people to do things they can't do. I don't mean funny but I mean he said it kindly. I mean there's people who could slam me, what I was really trying to do, I said Jack listen were just trying to, once they get the money in, they got to keep putting in the index money in, they're going to buy individual stocks.
Jeff Marks: Right, and he set the foundation and then on your side you can look to invest in innovative companies and we have an innovative company that we're going to discuss today.
Jim Cramer: And this is a great prelude, but when I go out west, I go out west four times a year, I see new companies and this is a typical bullpen situation that we're about to talk about. It's a stock that's run too far too fast. It's a stock at its all-time high but we are doing the work on it betting that we're going to get a selloff and we'll be ready and the stock is Twilio. That's T-W-L-O. It's run by a remarkable guy, and I do like so much, Jeff Lawson. It's a $10 billion market cap. It is at its all-time high as we speak and why do we like it?
Jeff Marks: So Twilio, that's going to be communication platform as a service, right? What they've done is they've democratized the communication channels such as voice, text, chat, and video. Basically acting as a backbone or building block of many disruptive technology companies out there, ones that are changing a lot about the service industry. They're really the foundation that are enabling real time communication between both the business, customers, and clients.
Jim Cramer: Okay so give me some of the clients so people know better what they do.
Jeff Marks: Yeah, so they're across all different types of industries both startup and global enterprises. For example, Airbnb it's a huge client of theirs right?
Jim Cramer: Becoming public.
Jeff Marks: It's going to be public this year. Yeah exactly, so if you think about it like this, if you're traveler, if you're unfamiliar with Airbnb, if you're renting out your apartment or a living space of yours, probably your biggest worry is going to be confirmation. I know if I'm traveling at a distance, I want to make sure the place where I'm renting from knows I'm coming and if I'm trying to make some money on the side by renting my property, I want to make sure someone's coming. So what Twilio enabled Airbnb to do is to link that communication between the renter and the traveler to ensure that confirmations are being made on a timely manner. So they're reducing a lot uncertainty and that's why Airbnb works. Another huge customer is Lyft. So you know, Lyft the ride hailing company, very similar to Uber. If you've ever taken a Lyft, there's a feature there where you could call your driver, right? Maybe you want to discuss the pick-up location, something like that. Have you ever wondered how you can call your driver without sharing your phone number? That's Twilio, that's what they're doing. That's what they're enabling these companies to do.
Jim Cramer: That was amazing when I found out that it was this company that did it. I realized they are a platform, the next big one.
Jeff Marks: Yeah, so think about it. They have security, people security in mind, just enabling real time communication and I think developers from all over, they're falling in love with Twilio, they can't get enough. And it's a word-of-mouth company too where the legend of Twilio is spreading.
Jim Cramer: Yeah, so I visited the headquarters the last time, two times ago, and I said teach me to code and they actually literally, they had a guy, a great code master taught me the code and I said look we have a new restaurant called The Longshoreman, my wife's the general manager, her friend Michelle Ewan's the chef, and we have two brick oven pizzas, it's on Columbia Street.
Jeff Marks: Yeah, it's fantastic.
Jim Cramer: Thank you.
Jeff Marks: I've been there.
Jim Cramer: Thank you. And we had two pizza ovens, so I wanted to push the pizza today once we get names. And the way you could do it is you can use Twilio. You buy a phone number and you use Twilio and you push the phone number to people, and they can find out the pizza of the day or you can push the pizza of the day to them. I mean small business has no ability to do this thing without Twilio and it's all Twilio. And I learned how to do it, it took me two hours and now my wife says we're not ready yet to use it at The Longshoreman but hopefully, it's so popular.
Jeff Marks: The pizza of the day will go out, so many people so fast. Can you handle it?
Jim Cramer: I know, but I think we'll be able to. We want to build a lunch time business, but Jeff was great, and then I gave a description of what I did. I spoke to people at Twilio and we filmed this thing and I think it's a remarkable company but it's like Palo Alto, remember we waited, of course we waited down 30 points for the darn thing and then we started buying but we're up on the position. We can't buy Twilio here, it's up three. It's at all-time high. But this is what we look at when the markets fly. So we are ready for the next downturn.
Jeff Marks: Yup, exactly. And to think they have a lot of ties with Salesforce. So it's one of those names where they're not too sensitive to the economic conditions. It's one where because there are tons of startups and businesses expanding, they need Twilio because they're the ones that, as you said, they're the ones enabling all these communication channels. And communication is key right, that's what these businesses focus on, it's the customer, it's communication, so very important.
Jim Cramer: Jeff Lawson's a good friend of Marc Benioff. They used the one-one-one formula, you know, give away 1% of the company's money, individual's money, and George Hu H-U his name, he's the chief operating officer and he was a very high level Salesforce guy. I like George very much. Communicate a lot with him. Communicate a lot with Jeff. Feel like we know the company pretty well and I think that people have to recognize the market cap is too small for the opportunity. It's that kind of stock. It's not a PE stock, it sells at a thousand times earnings but this is what we're looking at and we'll be ready.
Jeff Marks: Yup, we'll be ready. I mean there's a catalyst up ahead. They are acquiring SendGrid, it's going to fill the gap and allow them to do a lot more email capabilities. So again it's something to look forward to because there'll be a lot of cross-selling, they'll be enabled there. Right, 12 times sales evaluation. It's not cheap, we can't tell you it's cheap, it's at an all-time high now but again that type of pullback, this is definitely a name.
Jim Cramer: Look, when we bought Palo Alto what I wanted to do, Nikesh Arora, the new CEO, he had bought a lot of stock and then the stock flew. And we said if the stock ever got back to where he bought it we would start buying. We did and then it went down 40 points from when he bought it. But we kept buying on the way down because we had such a conviction that it's a secular growth story. That's how I feel about Twilio. So let's wait 'til Twilio comes in and you're going to get an email saying we're about to pull the trigger, alright?
Jeff Marks: Very good.
Jim Cramer: Alright thank you Jeff. So now, oh let's get to your questions and I promise to keep this call under 60 minutes because the last couple times we went over, there's a lot of people with a lot of things to do, it wasn't fair. And I didn't leave enough time for the questions.
So this one's from Robert in Idaho, he asks, "What do you think of Salesforce.com's prospect for 2019?" I think they're going to crush it. Now I spoke to Keith Block, he's the Co-CEO, nuts and bolts guy, Patriot fan, and he is tracing out a multiyear vision of what Salesforce can do with all these different clouds. You know we use Salesforce at TheStreet and it's been terrific for us. I think CRM is the ultimate customer is always right story. I give you one example of what they do for those of you who don't follow it that closely. Bank of America has by far the biggest number of digitized clients and the digitized clients, they like the product and more important the bank makes a fortune off them verses the paper, It's like 1/10 of a paper transaction. And Salesforce has been integral to how they have so many customers. I'm always shocked to see the new customers, they're so diverse and Net-a-Porter was a new one that we were talking about. My wife can't stop shopping there, she drives me crazy. But they have a great customer relations product and that's again Salesforce. Salesforce is the backbone, a lot of what you see when you buy online but they're also doing a lot of things with the big cap companies that are in the enterprise. They're brought in when say an Accenture says you need to have good technology. They're against SAP and they're against Oracle and they're crushing them in this customer relations management. So I really like the story. I think that it was great that Marc gave Keith a Co-CEO job. I say that because Marc's a big think guy, strategy guy, and tactics being done by Keith, and Keith could do both if he had to. I was going back and forth with Keith last weekend and he was very sympathetic to when the Eagles lost. Shocked me. Texted me that condolences, kind of liked that.
Alright, Anuj N. writes to me, "What's the latest thought on Nvidia? "Would you wait to see the quarter?" Yes, now Nvidia as Zev and Jeff are going back and forth on Nvidia, now we sold this darn thing more than a hundred points ago, when we said that it was going to miss the quarter. It was brutal teach-in by the way. You got to go to the teach-in, they're really good. Then a lot of, of course, clowns on the internet, clowns on Twitter were saying he buried us in Nvidia. Buried us in Nvidia? I mean like, I felt awful. I named my dog Nvidia for heaven's sake and I had to sacrifice this dog Nvidia. Now at 150 here's the deal. Sells at 20 times earnings, it's off the bottom of 124 which was hellacious, that was the Christmas Eve massacre. But here's the problem, 40% of it is gaming and gaming's really slowed. I don't know if you've seen EA. I don't know if you've seen Activision Blizzard. We have to wait for this quarter because we have to see the flush out of the cards that were bought for Bitcoin, or actually in this case for another crypto currency but more important, if it's too linked to gaming and not to autonomous driving and to the data center and to machine learning and artificial intelligence, it will still be too soon. Jensen Huang's a genius. The Turing chip is great. I guess what you're hearing is I want to pull the trigger but I want to see what happens.
Alright this is from Kevin M. in Naples, Florida. I love Naples, okay. "I trimmed some of my Apple position after their January pre-announcement and I want to buy those shares back. Will I be too late if I stick to the wait 30 days after pre-announcement rule?" Nah, Apple ain't going anywhere. I mean, as I said they can't go anywhere at least for the first 30 days. Look we just got what is a brutal pre-announcement and every day, like Taiwan Semiconductor once again it causes the stock to go down. Every single piece says that January's bad, December's bad, November was bad, and I don't expect it to turnaround but if you get a trade deal, you'll pay 170. If you don't get a trade deal, you will pay down here. I'm not going to say pull the trigger, I'm not. And I really like this stock. And I'm not going to say that because, the reason why I'm not going to say is because I think the stock can go back under 150. And I know that seems splitting hairs but I think it could happen.
Alright Sandra G. in Marlton, New Jersey. Wow okay, where my grandparents used to live. "Do you still feel as strongly about CVS Health in light of the split from Walmart?" It's going to cost them seven cents. Look I don't want to see anything bad about the stocks we own ever. That's a dream world. It's a dream world if you think you can own a stock and just expect that the news flow will be fabulous. This stock yields three. Sells at nine times earnings. Merlo's a good manager. He gave a bad presentation. He wouldn't give us any sort of, let's say outlook or forecast, he's going to do one. It's going to cost people to cut numbers and the stocks could go up on it. And that's the way I'm looking at it.
Rob M. from Bentonville, Arkansas. Hey man just go buy Walmart. I've been trying to buy it, it's killing me. When it was in the 80s I wanted to pull the trigger, but you can only own so many retailers because retail's hard. And speaking of retail, "The club has been recommending Five Below but I am concerned that its market cap of about $6.5 billion is rather close to Macy's market cap of $7.4 billion. Do you think Five is still a buy at these levels?" Remember you always go with the balance sheet of Macy's. Macy's got a lot of debt and Five Below is a pure growth company. I like Five Below. The great Peter Lynch, another one of these icons like Jack Bogel. The great Peter Lynch has always said the same thing, if you could get a company that's got a regional and national story, in other words, it works in Philadelphia, it's going to work in Sacramento. Okay, if it works in New York City, it's going to work in LA. And that's Five Below, and I think that it's just a great concept. It reminds me of Dollar General, during the old days. I mean Dollar General when it became public was worth a fraction of what it is now. Reminds me of Dollar Tree and there's just so much of green field, so the answer is buy it.
Robert N. in Morton Grove, Illinois writes, "Can you please discuss the reasoning behind the recent Raytheon trims? Are we looking to sell more on the strength or could this become a buy again or a pullback?" We discussed this question earlier. We were thinking that it goes up after the shutdown ends. The stock seems to have found some footing here. It's been brutal and horrible and the reason why we were selling some is because it wasn't as good as the ones we were buying. It's a classic wagon circler. It's been a disappointment even though, the last quarter actually good, but it didn't matter because what happened is people decided that since the democrats won, you're not going to get as much money for defense, they can't get the wall, to rely on Congress it got to be too hard. And this group's gotten to be too hard. So we did some selling. Now we're waiting for some sort of government shutdown to end and we will probably offload the stock.
Dave W. in Edmonton, Alberta. Canadian. "I've been following your commentary on Goldman Sachs for the past few months and increased by holding every dip. Given the big move this week, should an investor take some profit or let it run?" No, Goldman Sachs is still just at the tangible book value. Goldman sells at eight times earnings, that's repulsive. I mean I really got to tell you, there'd been a sad moment for Goldman. The Malaysian thing is awful. But I think they got their arms around it. I think that the government doesn't let them say more. The government simply isn't going to close Goldman. The reputational risks, I did my checking, the deals in Asia, there's been no let up. There hasn't been any reputational damage, that's a lot, people think there has been. The business is more run like bank than it has in the past. And there's just so many smart people who work there, they'll figure it out. The stock goes higher.
Frank Z. writes, "Can you please provide an update on DowDuPont?" Yeah I can. Here's the problem with DowDuPont, it took so damn long. It should've been broken up already. It turned out to be too hard. Ed Breen's working around the clock to do it. Yields 2.7 but we let it go down. We shouldn't of, I guess I kind of felt and still believe in Ed Breen. But there's no denying that this stock was at 77 last year, now we did sell some. But we should have booted it, and we didn't boot it because Ed Breen's there and we think that once he breaks it up it is worth more. It may end up being four, five companies. But it's been painful. We're up, I mean we bought it very low but I'm abject about it, we held on when we should have been the seller.
Alright, what's your power ranking of the FAANG stocks? Holy cow! Netflix reported tonight, I mean would all these analyst really upgrade it and they tell you they're going to raise price and then screw you on the quarter, I don't think so. But it is a $153 billion. Amazon's my favorite, I make everybody know that. It's the largest position. It think it's terrific. A lot of times when the markets run a lot I say okay should we take some off the table? We did take some higher. It went 2000, we didn't sell some. That was a mistake. But I like Andy Jassy, I like Jeff Bezos. And I still like Amazon. I think it's terrific. Alphabet? What can I say, Alphabet is doing, not giving you a ranking but Alphabet has become a quandary for me. I really think that they should come on TV, they should explain themselves. They should talk about what are they doing with Verily? What are they doing with these Moonshots? What are they doing with autonomous Waymo? What are really they doing about trying to make it so it's better bargain? Just say something for heaven's sake. And their lack of saying something has what's kept the stock down. Why do we own it? Well you know what, it's got great growth. It's inexpensive. I was talking about my friend Stephanie Link who use to help me run ActionAlerts, and she was saying, "Jim it's their fault." And I agree. To own a stock just because it's cheap isn't good enough but I don't have another solution. I just think that they've got good growth, it's cheap and that Ruth Porat, who's the CFO, will do the right thing. And then Apple, because I'm using the new FAANG with double A, I just described it as cheap but it's got the 30 day rule. It's not going to do anything during this period. I've been talking about them merging with Epic. I've got a lot of feedback on that. Epic apparently doesn't want to ever sell. But I think this healthcare initiative along with the watch is very important. And then we talked this morning about selling some FAANG, out of some Facebook. And here's what we said. Oh geez it was up a dollar and a half earlier. Here's what we said about Facebook. We think it's cheap. We think that it's still getting a lot of business, I mean take a look at the business Snap's losing. Instagram stories are very powerful. But most important, we haven't had any headline risk and this is a headline risk stock and I feel that as long as we, I think everybody exhausted themselves. It's kind of like the piece today about Goldman, I said alright I'm getting tired of reading about Malaysia. Well I think we all got tired. We got fatigued by Russia, Cambridge Analytics, whatever. Does that make them good guys? No. Would the stock be higher if they fire someone at the top? Yes. Did they take ownership of how bad they were? I don't think so. So therefore I think we can get 20 points but I don't think it's going to go back to 218.
Alright number 10. "Do you think Brexit will effect BP?" And the answer is no. What impacts BP is the price of oil. Am I impatient with BP? Well look, at least it yields six. It's got the highest yield of any of them and it is very safe, they just raised it. Am I disappointed with it? I don't know. I mean it's not hurting us. Royal Dutch is the same, same yield. It's discouraging that we own these oils and they're not moving. But you know what, we're going to hold, we're going to stay the course from here.
Alright here's one. How should we think of the future of the oil and gas industries as an investment class overall? Particularly since there might be a growing divide between the new generation of investment managers and how they may feel about fossil fuels. So are oil and gas, the next generation's tobacco industry? I was talking about this with my friend and writing partner Matt Horween. Yes, the answer is yes it is. That's how I've come to view this thing. I literally do believe; I've been saying it's coal but tobacco's a good example. And one of the reasons this stock have no lift is because the new portfolio managers, I think, they can't explain to the clients why own something in oil. I think it's been a big reason why the stocks went down harder than they did when oil went down to 26. Wasn't that something? It's generational. Number 12, "What is your opinion on the rumor that CBS and Viacom may merge? Would it be favorable to shareholders of Viacom this morning?" Great piece of research out by MoffetNathanson, saying that CBS and Viacom will definitely merge. I think that this was a great catalyst and I couldn't believe that Viacom's stock didn't go up on it. It's kind of disappointing frankly. Viacom would go up nicely on this and I think that people should recognize that the combination of the two would be powerful. I like Viacom more than ever. It's way too cheap and the Nathanson piece makes it clear that when they merge it's going to go up and go up a lot.
Okay so Rick M. from Fairport, New York says, "Should investors be worried about the government shutdown affecting the market?" Yes, I did all this work about all the shutdowns and said about how meaningless they hadbeen and ultimately stocks rallied but none of them have been 27. None of them have been 27 long and I think that we're in trouble. I think the consumer stocks are as I said this morning in Real Money, they're a little worrisome. And I just want to be very, very careful right now in adding a consumer stock unless it's like Walmart.
Okay number 14, Brian W. says, "What's your favorite stock in your bullpen right now?" This is very hard by the way. American Express reports tonight. Constellation did not report a great number. Take Two being brought down by EA. FireEye back to even but you know what? We own Cyber, I'm giving you, this is how I think. But we own Palo Alto. Ralph Lauren but we know that there's issues in high-end clothing even though I think they're good. Clorox hasn't come down. Proctor reports this week, hasn't come down. American Electric Power, you know what, I need to see a big dip in that one. Home Depot, negative commentary this very morning, very morning, from JP Morgan saying that the number's too high. VMware I had essentially put on the other day. I think VMware is a go. It's another one like Twilio if it comes down. Remember you got to add back the dividend and you'll see it's at all-time highs. Southwest Airlines, eh fence. Splunk is a yes for me if it comes down. Workday is a yes for me if it comes down. United Technology reports next week not sure. XPO Logistics is a little controversial, kind of getting my arms around it. Mastercard hard to own it same time you own Paypal. Adobe Systems one of our cloud kings, interesting. Visa hard to own while you own Paypal. So of those you can see there are very few that right now I want to pull the trigger on, which is one of the reasons why we introduced Twilio. McDonald's if it came down really does intrigue me. VMware if it came down intrigues me. Home Depot got to do work, we need it more de-risked.
Okay Lafayette, Louisiana, we've had him before, Robert E. He asks, "What guidelines should we use in the selection of ActionAlertsPLUS stocks for our own portfolio? For various reasons it is not feasible to own every AAP." You got to find out what's suitable. We've got the different ranking or the different indices which tell you how much risks I think you're taking value versus growth. I try to give a good pastiche. Probably you don't want to own more than 10. It's a recommended list, that's why I always say it's a club and recommended list. It is not a portfolio that we run that you should own a piece of. It's not an ETF. You got to look at the stocks, make up your mind what's suitable. As I said, know your risk profile, know thyself and I think you'll make the right choices.
Alright, I went 58 minutes. I did it, I didn't go over 60. First call of the year so maybe I'm doing the right thing. I want to thank my wife Lisa for putting up with me this week because of the call, including the 3:00 a.m. wake up call to do it after going to bed at 11. Thank heavens for coffee. I wish I had some Yuban, that's what I drank in college. I want to thank obviously Jeff and Zev. I think it's going to be a good year for the club. Those who are trialing, I hope you join. Those who are faithful, thank you very much and happy new year.