7. 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.
