(The following is the continued text from Jim Cramer's keynote speech at The Deal Economy Event on Dec. 5.)
Read Part I here.
What's the fourth theme? The bounty that comes from a very weak Antitrust Department that seems to bless deals that would be vetoed out of hand by any Republican administration. The biggest beneficiary? The airlines.
The combinations that have been allowed in the airline industry have, for the first time, let these companies earn their cost of capital and THEN SOME. It is the single best time ever to be in the airline business because of a dramatic decline in competition and I can't emphasize enough that you need to invest in this area that I have formerly found to be totally uninvestable.
I had favored Delta (DAL), which I think can easily advance some 50% from these levels if oil stays tame, although its ownership of a refinery allows for a very favorable cost advantage. But the ridiculously anti-competitive merger that was the US Airways-American Airlines deal, I think could lead to a double in the next 18 months for the combined company, which will trade as AAL. History has shown that when airlines are allowed to merge, the synergies are awesome and the possibilities for fare increases remarkable and seemingly endless.
Previously, when we have had these combinations, they ultimately ended badly for shareholders because discounters came in to compete and ruin the margins. But this time there are many things working against the potential discount entries. First, they need new planes and the lines for planes from Boeing (BA) and Airbus are ridiculously long. You can't get a Dreamliner until 2020 and the queue for the 777 is already beyond the reach of a startup.
Normally, startups would simply purchase old planes and get things up and running instantly. But the old planes now use too much fuel and fuel can equal 50% of the costs of operating the airline, which is just too prohibitive to compete with the majors, which are outfitted with the latest and least-jet-fuel-consuming aircraft.
There is one formidable discounter out there, Spirit Air (SAVE), but Spirit, run by Ben Baldanza, a frequent guest on "Mad Money," has no desire to compete with the majors because one of the reasons why the majors are so profitable has to do with their willingness to drop routes that are unpopular for their high costs of operation, but extremely popular for the low-operating cost Spirit. SAVE, as the stock's symbol tells you, doesn't want to compete against the big dogs. It wants to go where they won't fly.
Yes, the airline business is that exciting right now and until this year I hadn't recommended an airline stock since 1985 when I burned my client base at Goldman Sachs with an ill-fated recommendation to buy the now-bankrupt and soon-to-be up-and-running American.
You want a real sleeper? Consider Volaris (VLRS), the Mexican discount airline that is doing the same for Mexico that Spirit's doing for this country. I think it's a steal as it has done next to nothing since coming public earlier this year, but the country's growing by leaps and bounds.
A fifth theme that will make you money in 2014? Think stealth tech and the power of innovation. When we think of tech we think of Microsoft (MSFT), Intel (INTC), Cisco, Oracle, IBM and even Apple (AAPL), companies that were at the forefront of innovation, but now seem to be content with simple line extensions with smaller form factors, although Apple's so cheap it is still worth owning.
To get real innovation these days, real progress, you have to consider companies like Colgate (CL), which is taking tremendous share from Procter (PG) and Unilever (UL), particularly in the emerging markets as it develops new products that the locals love. Other stealth tech plays to examine? How about Under Armour (UA)? This Baltimore-based apparel company is rolling out new products literally quarterly, with properties that keep you warm or monitor health in ways that you couldn't dream of just a few years ago. It is a factory of innovation.
But perhaps the most inventive major tech company out there is none other than the once-sleepy Wilmington, Del. colossus DuPont (DD). Double D is developing the most new products and reinventing itself on the fly, going from being a boring old chemical concern to being a company that feeds the world and develops health and safety devices that are pulling it away from the pack.
Dupont's hard-charging CEO, Ellen Kullman, is shaking up the company in ways that would be inconceivable not that long ago, getting out of prosaic slow-growth businesses and into proprietary products that don't need strong economies around the globe to propel sales. Next year she will be spinning off her last commodity business, her boom-or-bust Ti02 franchise, a classic little-value-added product line that makes whiteners for things like toothpaste and paint. I think the new Dupont, with little commodity exposure, will see a dramatic lift to its price-to-earnings multiple as it goes from being a boring GDP play to a secular growth company.
Ride the Four Horsemen of Biotech
Sixth theme? Biotech. Our old-line drug companies, with the exception of Johnson & Johnson have gone from venerated institutions with breakthrough science to simple creators of me-too line extensions and shrewd marketers of old drugs.
In their place have come the four horsemen of the big pharma apocalypse: Biogen-Idec (BIIB), Celgene (CELG), Gilead (GILD) and Regeneron (REGN). Each has some blockbuster franchises that are right now generating billions in sales for these companies with new drugs waiting in the wings that will produce wins for years and years to come.
Biogen Idec has a world-class multiple sclerosis franchise, including a new drug that's just approved and that's almost certainly going to reach blockbuster status next year. Celgene, just upgraded by UBS, has got a leading blood cancer drug franchise with Revlimid, but watch for its anti-pancreatic cancer and anti-rheumatoid arthritis drugs, which could allow this $164 company to have $17 in earnings power in 2017. That makes it cheaper than any of the big pharma stocks. It could rally 50% and still be less expensive than Pfizer (PFE) or Merck (MRK) when it gets there.
Gilead may have the first cure for Hepatitis C, which is responsible for about 50,000 deaths each year and has hobbled hundreds of thousands more. I think this drug, which stems from Gilead's initially-reviled but now widely-hailed purchase of PHARMASSET for $11 billion a couple of years ago, even as it had only 90 employees and no revenues to speak of, will be the biggest new entrant of 2014.
Regeneron's a company that may have the most exciting product portfolio of any of the four horsemen. Currently it sells Eylea, which is a maintenance cure for maculate degeneration, a condition that affects hundreds of thousands of people around the globe. Sales for this drug continue to exceed expectations every quarter.
But the real excitement for Regeneron is a new class of anti-cholesterol drug that can be taken by those who can't tolerate statins. The new rules about the need to take anti-cholesterol drugs regardless of your cholesterol count will play right into the hands of this soon-to-be-approved medication. I think Regeneron could have multiple years of outperformance. And if it doesn't? I think Sanofi, its partner and minority owner, buys the whole company for a huge premium to where it is trading now.
Focus on Shales
Final theme? Oil and gas. We hear a lot about this revolution in our country and there are multiple ways to play it. I think we have to focus on the success of four shales, the Bakken in North Dakota, The Eagle Ford and Permian in Texas and the Niobrara in Colorado. These are the most oil rich plays, with both the Eagle Ford and the old Permian being the biggest beneficiaries of the new form of horizontal drilling that's allowing us to find much more oil than we ever thought still existed in this country.
The Eagle Ford and the Permian can best be played with EOG (EOG), although some would say that Pioneer Natural (PXD) has the biggest repository in America. Scott Sheffield, the CEO of Pioneer, has declared on "Mad Money" that his part of the Permian contains the second biggest oil field in the world, topped only by the largest field in Saudi Arabia.
If he's right, and we will know in 2014 if he is or not, you could see the stock advance 30-40% after a couple of excellent quarters where guidance is raised and production increased dramatically.
But my favorite, the independent that might be the next major, is Noble (NBL), which dominates the Niobrara and also has the biggest natural gas field perhaps in the world adjacent to Israel. This field, the Leviathan, is incredibly important because it is able to break the stranglehold that a newly-threatening Russia currently has on the natural gas market in Europe. I think it's a double.
More aggressive types might want to buy Linn Energy (LINE) ahead of its closing of the Berry Petroleum deal next month. That company with its almost 10% yield, should be able to travel from $30-36 in a short period of time once that deal's finished. EOG and Pioneer are natural takeover targets, particularly the former now that the man who built it, Mark Papa, is stepping down this year. It's up 50% on a takeout at a minimum.
Best Ideas from AAP
I can't leave you without some ideas that my charitable trust, Action Alerts PLUS, has recently been buying. Our biggest position is Johnson & Johnson (JNJ), a company I featured last year as a breakup candidate and which I believe is, at last, on the verge of doing so. This is a stock that's rallied some 30% under Alex Gorsky, the hard-charging CEO who has had to spend the last 18 months cleaning up from his processor, but is now ready to grow the company and split off laggard divisions.
We like Emerson (EMR), the next big industrial that we think is ready to roar on a turn in China. Finally, there's the position that I think has the most short-term potential but nobody really champions and that's Bank of America (BAC) because it's finally gotten its litigation woes behind it and is now focusing on growth with a terrific deposit base to work from.
Morgan Stanley (MS), an excellent performer in the last year, still has a lot of upside too.
Can 2014 repeat the performance of 2013? I have no idea.Can the stocks that fit these themes beat the market? Ah hah, I think they could have the same success as last year's picks although, unlike last year, I sure don't have the luxury of speaking to you at the lows of 2013. I know if any of the deals I alluded to finally happen we could have a shot at beating last year's performance.
Considering that the stocks of the acquirers foften rise as much as the targets these days, you would think that the cyclical trough in M&A will now be upon us. To this I say anything's possible ... but, above all, do not hold your breath.
Best of luck to all in 2014.