It's getting harder and harder to find stocks with no hair on them.
Hair, in this case means there's something wrong that you didn't think about and it could play havoc with the soon to be reported earnings.
I am not talking about the obvious, the hurting retailers like Macy's (M) or Gap (GPS) and the smashed restaurants like Brinker (EAT) or Bloomin (BLMN) .
No, I am talking about stories like Johnsnon & Johnson (JNJ) . Here a company I like very much, it has the best pipeline in the industry and is one of the few Triple A balance sheets in the world. All systems are go and it's the perfect recession stock. Except it isn't anymore because it has a division that sells knee replacements and with every hospital bed taken you have to hold off on that kind of surgery. I think the stock is down enough from its high and will be able to handle the news. But there is always someone out there, some big shareholder, who doesn't know this and decides the company is a lesser company for not having good knee replacement orders even as we know that one day we won't have Covid-19 to worry about.
Same thing happened with Coca-Cola (KO) . I have always felt this to be the ultimate recession-proof stocks...until an analyst recently came out and said that its bottlers may need support and that could send earnings surprisingly lower. It shouldn't be surprised now but the stock still sells at 20 times earnings and that's certainly an awfully high multiple for a company with an open-ended spending problem.
I ran into this issue with one of our favorite club (Action Alerts PLUS) stocks. AbbVie (ABBV) . It's buying Allergan (AGN) , principally for its Botox franchise as vanity is one of the great secular growth themes out there. But now we are hearing that doctors are loath to do non-essential surgery or procedures of any kind and that includes administering botox to look youthful. Society has deemed wrinkles and crow's feet acceptable for the duration.
Or how about the switcheroo in the split up and merger of United Technologies (UTX now RTX) and Raytheon (RTN now RTX). For the longest time United Technologies has been held back by its Otis elevator division because of China's battle with the coronavirus. That's why we had been reluctant to buy it for the trust. Now, though, Raytheon and United Technologies are one (called Raytheon Technologies), giving you a premium aerospace and defense company, something that's not as great as it used to be, though because of its link to travel, Carrier Global, a strong heating ventilation and air conditioning, or HVAC company, at a time when there's a dramatic downturn in construction worldwide, and Otis, the one division I really want because it's focus is China, the strongest are in the world now that it has beaten back Covid-19. Insane.
Finally there's the best recession proof stock in the food group, McCormick (MKC) , which is doing so well because of the stay at home thrust of this era. However, it supplies spices to restaurants and offers food services to institutions that are pretty much closed for business. That's about 25% of the company's sales.
But there is good news here: the home office m.o. has become so powerful that it can overcome any shortfall in those commercial lines. That makes it a terrific stock, except that there's always someone who doesn't know the exposure which is why the stock got clobbered when it reported.
The good news? After a company reports we all know what's wrong, it's immunized. And that's when you can buy.
(Johnson & Johnson and AbbVie are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
