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 Sweetgreen, Inc. (NYSE:SG) 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).
Sweetgreen, Inc. (NYSE:SG)
Number of Hedge Fund Holders In Q3 2024: 25
Date of Cramer’s Comments: 8-26-24
Performance Since Then: -3.89%
Sweetgreen, Inc. (NYSE:SG) is a specialty restaurant firm that has sought to carve out a place for itself in the salad market. The firm stands out from its rivals through a well-developed vegetable supply chain through which it promises fresh raw materials. Sweetgreen, Inc. (NYSE:SG)’s shares are up 201% year-to-date as they’ve benefited from automation plans that improve margins and reduce kitchen errors. However, the stock is down 3.9% since Cramer’s remarks as Sweetgreen, Inc. (NYSE:SG) has struggled primarily on the back of a bearish Goldman Sachs note in August which cut the firm’s average operating income forecasts for the next couple of years by 12%. Back then, the stock had peaked at $42.2 while Goldman kept the share price target at $40. Here’s what Cramer said in August:
“Quick—what’s the best-performing restaurant stock in the Russell 3000 this year? It’s not Wingstop, which is having another great year, up 46%. It’s not Brinker International, the parent of Chili’s, up 54%. It’s not even Cramer favorite Cava Group, the standout IPO of 2023, up 129% year-to-date. No, the best-performing restaurant stock this year is Sweetgreen, the salad chain, which has nearly tripled in value. That’s impressive, especially considering this has been a tough year for restaurants and Sweetgreen looked like a dud not long ago. Sweetgreen went public in November 2021, right near the peak of the growth stock boom, at $28 per share.
“The stock doubled in the first two days of trading, reaching the mid-50s, but then, like many 2021 IPOs, it collapsed, hitting a low of around $6 in March of last year, down nearly 90% from its highs. Although I’ve been critical of Sweetgreen since its IPO and advised caution regarding unprofitable companies, this year’s rally took me by surprise. So, what changed to make this stock such a winner? First, Sweetgreen has been consistently generating earnings before interest, taxes, depreciation, and amortization (EBITDA) positively in four of the past five quarters, which is unusual and indicates the company is moving in the right direction on the profitability front. Second, same-store sales growth, a key measure of performance, has improved significantly.
“After slowing to 13% in 2022 and 4% last year, same-store sales growth re-accelerated to 9% in the last quarter, with projections of 5-7% growth for the full year. Sweetgreen has achieved these results by focusing on healthier meals and a more affluent customer base, giving them an advantage in a broader quick-service industry facing pricing pushback from lower-income consumers. They’ve also improved their loyalty program and digital ordering system. Previously, Sweetgreen was overly focused on salads, but last year they began offering more varied options. They introduced new protein dishes, like a chicken burrito bowl with no leafy greens, and a miso salmon plate. Their recent spring menu included a caramelized garlic steak. These changes have attracted new customers and increased traffic, especially during dinner hours and weekends. Sweetgreen’s innovation in menu offerings and efficiency improvements, including investments in automation and the “infinite kitchen” concept, have boosted their margins significantly. Their restaurant margins are now 10 percentage points higher than the fleet average, which is substantial.”
Overall, SG ranks 6th on our list of undervalued stocks you need to know according to Jim Cramer. While we acknowledge the potential of SG 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 SG 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.
