Guilt by association. Guilty until proven innocent. No, I am not talking about the parole board debating the release of O.J. Simpson. I am talking about today's stock market, where we saw a host of companies' stocks just get hammered as sellers decided what the heck, I am not sticking around for a conviction. I am out of here.
Yet, as it is so often with this market, you can't really see the losses from the surface because the money simply rotates from one place to another and never leaves the stock supermarket.
These are two incredibly well-run chains. The last quarter was a particularly strong one for Home Depot, where it delivered the requisite monster upside surprise in sales and earnings and gave you fantastic guidance and threw in a $3.75 billion buyback.
Weirdly, the stock just kind of hung there on the good news and meandered downward over time despite these excellent results, the best of the major retailers.
It sure looked like a buying opportunity given that Home Depot does well as long as the price of housing continues to climb, which it has, and there's increasing household formation, which there is.
Then out of nowhere, Home Depot and Lowe's were hit by a one-two punch that decked their stocks and left people wondering if it's worth even bottom-fishing given the guilty connotations. The first punch? A slowdown in do-it-yourself house painting mentioned by Sherwin Williams (SHW) on its call and kind of accepted as true by PPG (PPG) in its report, which signaled weakness in performance coatings.
Paint's important to the big-box retailers. In the last quarter, paint sales were up at Home Depot but not as much as other categories. Have things gotten worse? Judging by the words of Sherwin Williams, the largest paint company, absolutely. That could mean numbers for Home Depot and Lowe's have to come down and not just because paint sales are weak. Perhaps people are all of a sudden not spending as much fixing up their homes as they were, for whatever reason?
That alone would bring out sellers.
But then there's the second punch, one that sent both of these companies' stocks to the canvas: Amazon (AMZN) is moving into the appliances business. It's going to partner with Kenmore, the best brand left at Sears (SHLD) , to deliver appliances, replete with Alexa voice-activated instructions.
This is the stuff of nightmares to companies like Lowe's and Home Depot, as they derive 11% and 8%, respectively, of their sales from appliances.
Now, let's understand each other. For all we know, these companies haven't seen anything significantly new in paint sales. Maybe other brands are doing better. And a Sears press release on a Kenmore tie-up with Amazon doesn't necessarily mean booming sales.
But we all know that doesn't matter. Just think back to when Amazon announced it was buying Whole Foods (WFM) . We know that right after the news of that tie-up, Costco (COST) reported fantastic same-store sales, pretty much twice what Wall Street was looking for. What happened? The stock opened up big, really big, and then ended up being down. Why? Because people figured this is the beginning of the end of paying a lot more for the earnings of Costco because now it has real competition from Amazon Prime. The price to earnings multiple -- how we gauge how much investors are paying for earnings -- has been shrinking ever since. It's gone from 30 to 26.
And it's shown no sign of stabilizing yet as Costco was over-loved going into the news.
Then there's the sad saga of Blue Apron (APRN) . Investors in that neophyte public company have seen an almost 40% decline since it came public as Amazon intends to compete directly with them.
We've already seen what Amazon can do to the stores in the mall: decimate them. We have seen what they can do to food. Do we now have to wait to see what they can do to washers and dryers?
Just like with Costco, all the analysts quickly defended Lowe's and Home Depot, telling us not to worry. However, just like Costco, it sure didn't matter.
The issue, again, isn't that either big-box retailer will see its earnings crushed by the intrusion. It's that investors don't feel like paying 17 times earnings for the stock of Lowe's and 21 times earnings for the stock of Home Depot with Amazon on the prowl. It's too dangerous.
I know I am not immune to this kind of thinking. This morning my charitable trust bolted from a small position in Walgreens (WBA) . We had sold a bunch of stock much higher when it announced it was buying Rite Aid (RAD) , but then we watched it roll down as people began to fret that Amazon will start hawking prescription drugs. I know I used to buy my vitamins at Walgreens. Now I get them delivered monthly by Amazon. Cheaper. Easier. I was not going to wait around any longer to hear that Amazon's going to roll over that mighty chain. So we told club members of Action Alerts PLUS we had had enough. Guilt by association is a powerful concept.
So why doesn't the market roll over on this kind of news? How can it hang in there when big, visible companies have their stocks rocked by this kind of disruption?
Easy. The money just goes where it's more lucrative. A couple of days ago, I told you that Johnson & Johnson (JNJ) and United Health (UNH) reported absolutely amazing quarters, works of art. Yet they were rewarded with so little love. Today was National JNJ and UNH Love Day. Hey, there's a day for everything else, how about those two behemoths?
So now their stocks took off and they had plenty of fellow travelers including Abbott Labs (ABT) , the medical device maker that delivered a superb beat and raise, the first of many big ones for Miles White, the fabulous CEO, after a series of acquisitions. (Abbott Labs is part of TheStreet's Action Alerts PLUS portfolio.)
In all three cases, it is not too late to do some buying as these rotations are never one-day affairs. The love extended to the biotechs where two of my favorites, Celgene (CELG) and Regeneron (REGN) , just keep powering higher. Those, too, still represent opportunity, given that they have done nothing for ages and the price to earnings multiples have been under pressure for several years.
What makes me so confident about this rotation besides the fact that I don't see Amazon developing drugs any time soon?
Simple: Washington's stunning dysfunction plays right into the hands of all these companies. Perhaps Obamacare is dying, as the Republicans say, but most people who were selling these stocks for the last year thought that there could be price controls and a huge rollback of insureds, both of which would stunt the growth of big pharma and the healthcare system.
Guess what? Washington's embarrassing, pathetic shenanigans amount to nothing less than a price-to-earnings booster for all these stocks. They are the big winners now that it's fairly clear that nothing is going to change any time soon when it comes to healthcare.
Feeling left out by the rotations? Panicked by the declines? Wait a few days until calmer heads prevail. However, understand that the guilty taint has proven to be difficult to shake if your company is in the sights of Amazon. And it sure doesn't help if sales are potentially slowing, too.
Eat, Drink and Talk Money With Jim Cramer
Meet Jim Cramer at an exclusive reception at his Bar San Miguel in Brooklyn, N.Y., on Tuesday, July 25, from 6:30 to 9 p.m. ET.
The evening will start with a screening of Jim's CNBC show Mad Money. Afterward, Jim will join the party fresh off of the CNBC set to mingle, take photos and answer your investing questions.
Tickets include dinner, drinks and an autographed copy of Jim's book Get Rich Carefully.
Click here for more information or to buy tickets.
Where: Bar San Miguel, 307 Smith St., Brooklyn, N.Y.
When: Tuesday, July 25, 6:30 to 9 p.m. ET