We recently compiled a list of the Jim Cramer’s Exclusive List of 9 YEV Stocks. In this article, we are going to take a look at where Dow Inc. (NYSE:DOW) stands against the other YEV stocks in Jim Cramer’s exclusive list.
Recently, Jim Cramer sifted through the S&P 500 to identify stocks that satisfy his criteria: yield, earnings growth, and value. He explained the need behind the criteria:
“In a market with huge year-to-date gains, you got to get a little more selective about what you buy. Which is why I created this three-part test, also known as tripartite test.”
To navigate this market, he developed a three-part evaluation framework, which he refers to as the YEV test. Cramer explained that the first criterion focuses on yield, specifically seeking stocks that offer better returns than the current yield on the 10-year Treasury, which sits slightly above 4%. The second criterion is outsized earnings growth, meaning he looks for companies expected to exceed the 14% growth forecast for the S&P 500 next year. Lastly, Cramer seeks value, targeting stocks priced lower than the S&P 500, which currently trades at around 21 times next year’s earnings estimates.
“We want stocks with higher yields than the 10-year Treasury, meaning 4% plus. We want faster earnings growth than the S&P 500. In the aggregate, that’s faster than 14%. And we want a price-earnings multiple lower than that of the overall S&P 500, which trades at 21 times next year’s earnings, which everybody says is a little elevated.”
While Cramer acknowledged that his criteria was challenging to meet, he successfully identified nine stocks that fit the YEV model. He noted that although the Federal Reserve has created a favorable environment for investors, resulting in substantial market gains, it is crucial to exercise caution when selecting stocks.
Observing the historical trends, Cramer pointed out that October has generally been a strong month for the market, yet he reiterated the necessity of being discerning in purchases. He encouraged viewers to consider these nine stocks as the top tier within the market. He went on to emphasize:
“Now, I want you to think of them as the elite of the elite. Not many companies can give you high yields, cheap stocks, and explosive earnings growth all at the same time… Here’s the bottom line: in a market like this one, you do need to be selective, which is why we’ve fallen back on yield, on earnings and on growth and on value. Okay, now these are all things that are very hard to find right now.”
Our Methodology
For this article, we compiled a list of 9 stocks that fit Jim Cramer’s YEV stocks criteria and were unveiled during his episodes of Mad Money from October 7 to October 10. We listed the stocks in ascending order of their hedge fund sentiment as of the second quarter, which was taken from Insider Monkey’s database of more than 900 hedge funds.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A technician operating state of the art machines manufacturing specialized packaging materials.
Dow Inc. (NYSE:DOW)
Number of Hedge Fund Holders: 32
Cramer talked about Dow Inc. (NYSE:DOW) and its 5.13% yield. While mentioning that the chemical stock has not been performing well, he highlighted that it is flat for the year. He called it “textbook cyclical”, explaining that it follows the pattern of the economy. If the economy goes up, the stock goes up, and vice versa.
Cramer recently discussed the recent improvements in the economies of the United States and China. He noted that the Federal Reserve has begun a new easing cycle, initiating a double rate cut and signaling more cuts to come, with expectations that the Fed funds rate could fall to 3.5% to 3.75% by next June.
Cramer emphasized the importance of this downward trend in interest rates, advising investors not to fight the Fed, as stocks that align with economic cycles often thrive in such conditions. He explained:
“If there’s a perfect time to buy commodity chemical places like Dow and LyondellBasel, it starts when the Fed is cutting, which is right now.”
Cramer also pointed out that the Chinese government has implemented significant stimulus measures, which could help both its domestic economy and global cyclicals linked to it. While highlighting that the company will be publishing a third-quarter earnings report on October 24, Cramer reminded the viewers that the company had “already pre-announced light numbers at the industry conference last month.”
Although analysts at JPMorgan have forecasted weak third-quarter results for chemical companies, Cramer argued that these challenges are already reflected in stock prices and that Dow could see recovery as interest rates decline. He said to “anticipate, anticipate, anticipate”.
“[It] perfectly drives what we heard from Jim Fitterling, the chairman and CEO of Dow when we had him on the show back in July. Listen to this. ‘I think we need to see mortgage rates get to something with a five handle on them so that we can see people being able to get mortgages and being able to move into that market. When that happens, the part of the business that’s slow will pick up pretty quickly, both from construction and then all the knock-on effect from appliances, carpets, and other things that go into the housing market.’ Bingo.
That’s more or less the story here. Of course, Fitterling said all this a couple of months before Dow had to issue a negative pre-announcement for the third quarter, mostly because the hurricane shutting down production. That pre-announcement came on September 12, causing the stock to hit a low for the year. But since then it’s rebounded from $50 and change to $54 and change. Do you expect that to happen during the rate-cut season?
That rebound makes so much sense. Everybody knows that when the Fed starts cutting rates, it’s time to buy the cyclicals. Just that these commodity chemical plays take a little longer to come alive again than say, the housing stocks. Of course, Dow… [is] very much hostage to the Federal Reserve. If you don’t believe we’ll get a steady stream of rate cuts, then they won’t be able to hit the earnings estimates, meaning the stocks are more expensive than they look, and they could be pushed for more downside.”
He encouraged investors to seek high-quality stocks that fit the YEV paradigm—yield, earnings growth, and value—before earnings season ramps up.
“Dow and LyondellBasel, they perfectly fit the bill. And as chance would have it, they’re exactly what the hedge fund playbook says you should buy at this point in the business cycle.”
Dow (NYSE:DOW) is a provider of a diverse range of materials science solutions across various sectors, including packaging, infrastructure, mobility, and consumer applications. Recently, the company shared its earnings guidance for the third quarter of 2024, expecting revenue of around $10.6 billion and operating EBITDA of approximately $1.3 billion.
Jim Fitterling, the chair and CEO of the company, explained that the updated outlook reflects challenges faced due to an unexpected event that impacted one of the company’s ethylene crackers in Texas in late July. This incident has contributed to higher input costs and margin pressures, particularly in Europe. However, there are some positive developments, including improved pricing and feedstock costs in North America, especially within the Packaging & Specialty Plastics segment.
As for the fourth quarter, Dow (NYSE:DOW) management expects to see typical seasonal fluctuations in demand. Throughout this period, the company is committed to maintaining operational and financial discipline while pursuing long-term growth opportunities.
Overall DOW ranks 7th on Jim Cramer’s exclusive list of YEV stocks. While we acknowledge the potential of DOW as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DOW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.