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Cramer’s final thoughts of the year: Understanding multiples
userJanuary 2, 2023
A multiple of the price/earnings ratio indicates a recession. But the multiple says something similar for 2022. We’ve all read dozens of articles about what 2023 will bring. I think most people are sincere. Their only drawback, as usual, is that they don’t touch the stock itself. They might say that the S&P 500, which currently trades at 18x returns, could trade up to 16x returns, even if returns are relatively stable. Alternatively, we can say that if the final interest rate is 5% of the Fed Fund Rate of the Federal Reserve, the returns he could be 14x. However, these analyzes do not tell us how the S&P achieved its goals. So I want to attack the S&P’s target thesis by looking at some stocks that show the predictions are useless. Let’s start with his two stocks, Johnson & Johnson (JNJ) and Nucor (NUE). One of my favorites in the club’s portfolio, the pharmaceutical giant’s J&J is trading at 18 times his expected earnings in 2023. In the event of a recession, stock prices will rise rather than fall. Because a recession will likely mark the end of his Fed rate hikes. Now let’s look at Nucor, the world’s number one steel producer. With a profit of $28 this year, he is projected to drop to $12 next year. While it’s struggling with the quadruple earnings it’s currently trading in, it’s clear that the stock market is gearing up for a deep recession and Nucor’s earnings will be more than halved.But where will that earnings come from? Huh? The biggest revenue sector is infrastructure, which should go higher rather than hurt given the new federal spending kick next year. It’s all contained and Nucor rules. Subsequently, Nucor also has exposure to heavy oil and gas through its pipeline and heavy equipment businesses. At the same time, Industrial Caterpillar (CAT), due to demand, he sells at a profit of 18 times. It mocks his four times in Nucor. Given these end markets and dramatically higher multiples of his CAT, something has to give. something is wrong I think Nucor’s 2023 earnings forecast is too low. My point is that the most cyclical stocks are trading as if they are collapsing, but the heavier equipment traditional cyclicals are not just trading higher, they are much more Highly traded. My conclusion is that JNJ’s pitch is “correct”, Caterpillar et al. That’s it. So why not buy Nucor? Because you think you can lower it. On the other hand, the auto sector has been cast a heavy shadow and is expected to plunge next year as demand for cars falters. I think the market is seriously misunderstanding the proposition. With supply constraints and rising interest rates, people are holding off on buying cars and trucks because they are unnaturally overpriced. Ultimately, I think cars will stay strong in a recession. So the best compromise is Ford (F), which should make the most sense barring another supply shock from China. Added a position at Ford on Thursday. Still, all things considered, let me point out one more thing. If Caterpillar or Deer (DE) drop to a lower level, it makes a lot of sense to buy. Another perplexity: aerospace. The recession should dry up demand for aircraft, but alternatives are essential. The club that owns Honeywell (HON), which makes cockpits and airplane engines, is 24 times more profitable, while Raytheon Technologies (RTX) is 21 times more profitable. The latter are most likely underestimated as a result of Russia’s war in Ukraine. Are these justified? They are the highest multiples across the market, including club-owned Apple (APPL) and Alphabet (GOOGL). It could all meet along the way. A large cap reduction is seen. Semiconductors are a shifting target, albeit on a downward trend, with the exception of NVIDIA (NVDA), which is out of the picture at 44x revenue. All but the fastest growing companies can trade at around 16-17x profits. This will be the rough premise for next year — soft goods will have higher multiples and cyclicals will have lower multiples. Controversial stocks are tech stocks poised to disappoint, should a so-called liquidation event finally occur. (For a complete list of Jim Cramer’s Charitable Trust shares, see here.) Subscribers to Jim Cramer’s CNBC Investing Club receive trade alerts before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling shares in his charitable trust portfolio. If Jim talks about his stock on his CNBC TV, he will wait 72 hours after issuing a trade alert before executing the trade. The investment club information above is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duty or obligation exists or is created by your receipt of information provided in connection with The Investment Club. No specific results or benefits are guaranteed.
Nucor Corp. steel bundles for sale at Thompson Building Materials in Lomita, California, USA, Thursday, August 30, 2012.
Patrick Fallon | Bloomberg | Bloomberg | Getty Images
A multiple of the price/earnings ratio indicates a recession.But multiple says the same thing in 2022.
https://www.cnbc.com/2022/12/30/cramers-final-thoughts-for-the-year-making-sense-of-multiples-.html Cramer’s final thoughts of the year: Understanding multiples
