We recently published a list of the Jim Cramer’s Hidden Gems: 10 Undervalued Stocks You Need to Know. In this article, we are going to take a look at where Foot Locker, Inc. (NYSE:FL) stands against other undervalued stocks you need to know according to Jim Cramer.
With the year coming to a close, Jim Cramer, like everyone else, has a couple of things on his mind. The tail end of December saw significant turmoil in markets as while the Federal Reserve did cut interest rates by 25 basis points, it took a hawkish approach for its 2-25 rate cut cycle. The central bank guided just two cuts in 2025 as opposed to the earlier four, which led to the flagship S&P index dropping by 2.95% on the day of its decision.
Yet, the close of the week would prove to be a boon for markets in the form of the personal consumption expenditure (PCE) index. The PCE is the Fed’s preferred inflation reading, and for November, it sat at 2.4% on an annualized basis. This was lower than the 2.5% that economists had predicted, and as a result, markets took a breather with the S&P closing 1.1% higher on Friday. However, while the flagship S&P index might have pared back some of its losses, the Russell index that tracks 2,000 small-cap stocks didn’t perform so well.
On the day the Fed announced its rate cut, this stock index sank by 4.39%. Yet, while the S&P surpassed a percentage point in gains on Friday, the Russel index lagged it to close 0.94% higher. The small-cap stock index also missed this week’s Santa Claus rally. From Monday to the close of trading on Christmas Eve, the S&P had gained 1.84% to nearly reverse all of its losses since the Fed’s meeting. However, the Russell index ended up 0.78% higher and is still down 3.18% from its Tuesday close before the Fed’s conference.
The fact that small-cap stocks fell sharply after the Fed’s ‘bullish bearishness’ and failed to regain momentum after the PCE data is unsurprising. These companies, due to their lighter balance sheets and localized presence, are more sensitive to economic slowdowns than large and mega-cap stocks. Their dependence on economic performance was clear after President-elect Donald Trump’s win in the November election following which the Russell index soared by 4%.
The last time the index had posted similar and stronger gains was in July when it had gained by 11.54% in the second week. As you’d expect, the bullishness was driven by none other than the economy. Small-cap stocks soared when the consumer price index dipped by 0.1% in June for its first such drop in more than four years. Gains made by small-cap stocks came right when investors had, for the time being, had enough with technology stocks. This was indicated by the broader NASDAQ index gaining just 0.43% while the Russell index had soared by 11.54%.
This searing performance by small-cap stocks didn’t go unnoticed by Cramer. In an episode of CNBC’s Mad Money, the host commented on recent small-cap stock performance trends. Cramer used the rally to highlight the importance of sticking to the stock market instead of just relying on day trading. He outlined that “When you get these kind of rallies, and you get them very rarely, it reminds you that you have to stay in this market to make big money. You can’t flit in, fled out!” Cramer added, “When I say stay in, I mean that you have to be as invested as you possibly can be so you don’t miss monster moves like the Russell 2000 up 3.5% today.”
Commenting on the reasons behind the small-cap stock rally, Cramer posited that “it started when we got that cool consumer price index reading we got last Thursday. No inflation in the month of June, that’s what triggered it!” According to him, the inflation reading was “the first prop of the small-cap rally.” Cramer shared that “Most people are surprised to see that the lowering of inflation could trigger a gigantic rally among so many small-cap stocks.” He dug deeper into the stocks that had gained and pointed out that risky loss-making firms reliant on low inflation and small and medium businesses that benefit from low interest rates were doing particularly well.
According to him “almost all [STOCKS MAKING GAINS] are biotechs” that are “losing money.” Cramer outlined that “If you look at the top 35 performers all of which are up more than 35% since a week, less than a week, including 11 that are up more than 50%, you’ll see that roughly half are biotechs and healthcare companies almost all losing money.”
Since Cramer’s remarks, the Russell index has essentially remained flat and gained a mere 0.90%. This time period has seen it soar after Trump’s election win and then sink after the Federal Reserve’s rate cut update.
Our Methodology
To make our list of Jim Cramer’s hidden gems, we scanned the stocks he mentioned in Mad Money and Squawk on the Street as far back as in August. Then, we picked out stocks with a market value lower than $6 billion, analyzed their performance, and ranked them by the number of hedge funds that had bought the shares in Q3 2024.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds invest in? 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).
Foot Locker, Inc. (NYSE:FL)
Number of Hedge Fund Holders In Q3 2024: 27
Date of Cramer’s Comments: 8-28-24
Performance Since Then: -22.24%
Foot Locker, Inc. (NYSE:FL) is a footwear retailer that is one of the best-known firms of its kind. The market hasn’t been kind to its shares in 2024 as they are down by 26% year-to-date. Foot Locker, Inc. (NYSE:FL)’s stock devastation started in March after the shares tanked by 29% in one trading day. The drop occurred after the firm’s midpoint guidance of $1.60 per share missed analyst estimates of $1.93 and it revealed that its long term profit margin target would be delayed by two years. Foot Locker, Inc. (NYSE:FL)’s woes are related to softer demand for Nike’s shoes, and the stock sank by another 20% in December after the firm projected annual sales to drop at a low end of 1% from an earlier 1% growth. Cramer pointed out in September that the only reason to buy Foot Locker, Inc. (NYSE:FL) would be for the long term:
“Second down retailer hits too close to home. I’m talking about Foot Locker. As a former holding of the Charitable Trust, we bailed on in June. Absolute numbers here were not as strong as ANF’s. Foot Locker still firmly in turnaround mode under new CEO Mary Dillon. I should say relatively new, but they were still better than expected across the board.
“I actually like the quarter. After five quarters of same-store sale shrinkage, Foot Locker returned to growth, up 2.6%. Handily beat the expectations. That should have been enough to keep the stock a little bit higher. Gross margins expanded. That should have been enough. Inventories decreased by 10%. That should have been enough. And they only lost 5 cents per share when Wall Street expected a 7-cent loss. But they still lost money.
“How come the stock lost 10%? Well, first, the stock came into the quarter again, like some of these others, very hot, up 45% from the last time the company reported in May. Second, I think the sellers are basically saying that they don’t believe Foot Locker can make its full-year forecast because they’ll need a couple of strong quarters to make the numbers, especially on the earnings front.
“But having listened to the conference call, management laid out some major positives. Most important of all, Foot Locker’s relationship with Nike seems to have improved substantially. Nike needs them more than Nike thought. That’s very important. It ain’t just old DTC at the end of the day.
Foot Locker’s a turnaround story. It’s going to take at least a couple more quarters to unfold, but it’s going to unfold. Stock may have gotten ahead of itself over the summer, one reason why we sold it for the Charitable Trust, but if you have a longer-term view, I think this is a viable dip.”
Overall, FL ranks 3rd on our list of undervalued stocks you need to know according to Jim Cramer. While we acknowledge the potential of FL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than FL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.
