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  1. Home
  2. / Investing
  3. / Energy

It's a Thin Line Between Love and Hate

And right now, these stocks are mostly hated.
By JIM CRAMER Sep 28, 2015 | 03:06 PM EDT
Stocks quotes in this article: VALE, RIO, BHP, CLF, FCX, CHK, LNG, GLNCY, CAT, AA, APC, CVX, SLB, ESV, WMB, PBR, VLKAY, XPO, SUNE, WDAY, NOW, SPLK, PANW, FEYE, GIS, CAG, LLY

It's as if everything we once liked we hate and everything we hated we kind of, sort of like and not much more than that, which is why the averages are getting hammered.

That's why I want to spend some time on how and why things are hated, because that will lead and link to how and why things are liked.

First up, commodity risk. It is no secret that China isn't just slowing, its industrial demand seems to be exhausted, which means all companies that produce commodities or are helping extract them are performing horrendously.

Let's start with iron ore. One of the lower-cost producers of iron ore in the world is Vale (VALE), the colossal Brazilian mining company. Four years ago, this stock was at $36. Now it trades at $4. That makes sense; the price of iron ore's been cut in half in the last year alone. The problem is that iron is a big business.

There are two other companies, Rio Tinto (RIO) and BHP Billiton (BHP), that are huge iron ore producers. Then there are lots of other little companies, like Cliffs Natural (CLF), that produce it, too. You need iron to make steel. But we don't need steel, there is way too much of it. So iron gets crushed. Plus, this company's from Brazil, where the real, its currency, is just being annihilated vs. the dollar. So if you own the stock, which is a $19 billion company, down from $100 billion, you are getting killed both ways. The other two major ore producers aren't doing that much better.

Or how about copper? The biggest copper-producing company in this country is Freeport McMoran (FCX). This company, with a stock that traded at $58 and is now at $8, also has a huge oil business. It's been on people's radar screens because Carl Icahn has bought 100 million shares, or 8% of the company. It is somewhat ironic that Icahn has a video coming out warning about a catastrophe in a host of assets, especially high-yield bonds, because Freeport has borrowed $20 billion in high-yield debt. You have to wonder, however, if he isn't going to make up the losses in the shares of this company, down 61%, as well as Chesapeake (CHK), the oil company with shares off 65%, and Cheniere (LNG), which has recently plunged 33%, with hedged bets against high-yield debt.

Again, though, China is the marginal buyer of copper, using 40%, so it's unlikely that Freeport can turn around. The same thing goes for the black hole that is Glencore (GLNCY), a gigantic copper miner that also trades commodities and has fallen 77% this year.

Remember, though, this is Glencore's stock price. Its bonds represent much more of the capital structure and they are down less as a percentage, but much more in terms of amounts.

It's not just the actual miners that Wall Street now hates. The Street used to crave companies that do business in China and few did better than Caterpillar (CAT), which has all sorts of engines and earth movers that the Chinese love. Caterpillar's stock is down more than 30% and its stock yields almost 5%, but it has fallen so out of favor I don't think that it can stop here. Yes, the minerals-and-mining cohort is that bad.

Some are trying to buck the trend, like Alcoa (AA), which is splitting into two companies, one that is, rightly or wrongly, linked to Chinese aluminum production, and one that is more linked to value-added metals. The latter is still in favor, so there is hope.

Second, anything oil and gas. I can't stress how important the hatred for this group is. It extends to every part, whether it be the independent oil and gas companies like Anadarko (APC), or the big oils like Chevron (CVX) or the service companies like Schlumberger (SLB) or the drillers like Ensco (ESV) or the master limited partnerships and pipelines like Williams (WMB), which just got a takeover bid and is still being crushed!

But the worst is Petrobras (PBR), and I keep putting this one in front of you because it is such a disaster. You might look at this state oil company and say, what's the big deal, it is only $23 billion in market capitalization, down from $75 seven years ago to $3 and change. But you are looking at the wrong part of the capitalization structure; it's the $170 billion in debt that I am worried about, something that gets harder and harder to pay as the real loses value against the dollar.

Again, I can't stress enough that Glencore and Petrobras are two of the biggest three worries I have about the market, the third being Volkswagen (VLKAY) and its inconceivable rigging of the diesel energy test. All three could have unfathomable downside. They won't put our country's finances at risk, but they could cause our stock market to drop between 5% to 10% if any or all go under as they are currently configured and need an on-the-fly restructuring.

Third area that was once in favor that's now hated? Biotech. For the longest time, the companies in this cohort were adored by Wall Street because they had two things that people loved: proprietary revenue streams that weren't impacted by foreign earnings and pricing power. The former is still true, but the latter is now being called into question in the political arena because the companies have been aggressive in raising price.

Again, there is no thought right now being given to how important it is for these companies to make a lot of money when they do hit paydirt because they lose billions developing drugs. And some can charge a great deal because they have invented truly special products for a small group of people, which was something the populists in Congress deemed positive when they passed orphan drug laws. Right now, though, there is panic in the stocks because without that pricing power you can't figure out how much these companies will be worth in the future.

Plus, these stocks tend to be owned by hedge funds that are running from them for fear that they will lose their years, meaning fall so far into the red that they can't get back. They are now in bear market territory down 20%, and because they are so highly correlated via ETFs there's no ability for any of them to fight back. They don't have dividends and tend not to have buybacks, so they are like zebras when the lions chase them. They are just prey.

Fourth are the companies that need a ready source of cheap debt to grow. Many of these companies are what's known as roll-ups, companies that acquire using cheap debt that's in part cheap because the Federal Reserve has been keeping rates down. I am not going to blame the Fed for this denouement, though. Some of the roll-ups just spent too much money and did too many deals and now can't raise the capital needed to keep growing. No one wants a shrinking roll-up, that's not why you buy them. Just think about the collapse of Performance Specialty Chemicals, XPO Logistics (XPO) or Sun Edison (SUNE), down 44%, 46% and 64% respectively. They all need a constant source of debt to grow the way they have, and that market, the one that Carl Icahn was most critical of, is giving them fits.

Finally, the market's not a fan of companies that don't have a lot of actual earnings. It now frowns on terrific growers like Workday (WDAY) or ServiceNow (NOW) or Splunk (SPLK) or Palo Alto Networks (PANW) or Fire Eye (FEYE). I don't know when these will come back into favor. But they are hated viscerally in favor of companies like General Mills (GIS), ConAgra (CAG) and Eli Lilly (LLY). It's just become a nightmare for the super-growth stocks, and while they will no doubt come back into favor someday -- they always do -- this is not their day. (ServiceNow is part of TheStreet's Growth Seeker portfolio.)

Yep, five kinds of once-loved stocks that are now hated. Five worries that cause endless problems, including today, and won't resolve themselves until we get lower prices or fixes or both.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Energy | Healthcare

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