In a recent episode of Mad Money, Jim Cramer examined market trends of the third quarter. He first discussed that while high interest rates and a cash-strapped consumer typically signal good fortune for dollar stores, this time was different.
Dollar stores are grappling with substantial challenges, primarily stemming from inflation. Cramer emphasized that rising prices have made it increasingly difficult for these retailers to maintain their signature one-dollar pricing model.
Moreover, he explained that historically, dollar stores are expected to decline when the economy improves, and that happens when the Federal Reserve begins to cut interest rates. However, a more pressing issue is that dollar stores are now facing more savvy consumers who have discovered better deals at larger retailers.
Cramer went on to discuss the necessity for the stock market to be driven by new companies, rather than relying on established leaders primarily associated with artificial intelligence, which are now experiencing diminished momentum. He said:
“You want to find a bunch of former market darlings? I want you to take a look at the bottom of the S&P 500 for this quarter.”
He remarked on the irony of the situation, suggesting that investors have spent considerable time believing that simply investing in anything linked to AI would guarantee success. He pointed out that recent market activity has shown that backing the wrong AI-related stock could lead to significant losses.
He cautioned that the days of going on autopilot with the Magnificent Seven are over. Those stocks had remarkable runs earlier in the year, but Cramer insisted that it is now essential to welcome new players into the market to reach new highs.
Lastly, he added:
“One thing’s certain, Wall Street, the complex of analysts, money managers, corporate finance traders, they missed out big this quarter, didn’t they? They still act like the new losers will be winners soon enough while the new winners are all one-hit wonders. I say, dream on. This move could be here to stay.”
Jim Cramer’s List of S&P 500 Dead Last Stocks in Q3
Our Methodology
For this article, we compiled a list of 5 large stocks that underperformed during the third quarter and were mentioned by Jim Cramer during his episode of Mad Money on October 1. We listed the stocks in descending 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).
Jim Cramer’s List of Stocks that Finished Dead Last
5. DexCom, Inc. (NASDAQ:DXCM)
Number of Hedge Fund Holders: 64
DexCom, Inc. (NASDAQ:DXCM) is involved in designing, developing, and commercializing continuous glucose monitoring (CGM) systems for diabetes management. The company’s key products include the Dexcom G6 and G7 integrated CGM systems, which facilitate diabetes management. In addition, it offers the Dexcom Share remote monitoring system.
Cramer has highlighted, “Medical device maker, Dexcom, down roughly 41%.” In July, company stock went down after management lowered its sales projections.
Although second-quarter sales increased by 15% year over year, the outlook for the third quarter showed a modest growth expectation of only 1% to 3%. The company also revised its annual revenue forecast down to a range of $4 billion to $4.05 billion, a decrease from earlier expectations of $4.2 billion to $4.35 billion for 2024.
Cramer further added:
“Dexcom practically printed money for years with its blood sugar monitors, essential for people with diabetes. Now though, Abbott’s got a cheaper version that’s selling very well and shareholders are worried that the GLP-1 weight loss drugs will ultimately shrink dexcom’s total addressable market.”
DexCom (NASDAQ:DXCM) faces increasing competition from powerful industry peers, which makes it challenging to differentiate its offerings in a crowded market. As competition intensifies, price competition may become a significant factor, potentially prompting the company to increase spending on marketing and research and development. It could put pressure on earnings and affect revenue growth over time, especially as more companies enter the space.
Furthermore, another reason that is impacting the stock is the fear that the future demand for continuous glucose monitoring (CGM) devices may not remain as strong. The fear is due to the emergence of new, effective medications for treating diabetes and obesity, conditions that significantly contribute to diabetes risk. Companies like Eli Lilly and Novo Nordisk are developing drugs that may reduce the necessity for millions of people to use CGMs.
Ithaka Group stated the following regarding DexCom, Inc. (NASDAQ:DXCM) in its Q2 2024 investor letter:
“DexCom, Inc. (NASDAQ:DXCM is a medical device company focused on the design, development, and commercialization of continuous glucose monitoring (CGM) systems, primarily for people with diabetes. Diabetes is a chronic, life-threatening disease for which there is no known cure. DexCom’s CGM system is superior to traditional fi nger-stick tests because it provides users with continuous data (including glucose trends and time spent in hyper or hypoglycemia) versus a snapshot in time. Dexcom’s stock suffered despite a solid earnings announcement that beat Street expectations across the board. The fall in the stock price was likely due to missing elevated buy-side expectations following multiple quarters of accelerating fundamental growth.”
4. Super Micro Computer, Inc. (NASDAQ:SMCI)
Number of Hedge Fund Holders: 47
Super Micro Computer, Inc. (NASDAQ:SMCI) is engaged in developing and manufacturing high-performance server and storage solutions. The company provides a wide variety of products, such as complete server systems, modular blade servers, workstations, networking devices, and various server subsystems.
Its offerings also include application-optimized server configurations and essential management software. Beyond hardware, it focuses on services like integration, configuration, software upgrades, and technical documentation.
Cramer mentioned the company and said:
“… The S&P component that finished dead last for the quarter, down 49%, was none other than Super Micro Computer, a partner of Nvidia that’s integral to the data center plumbing we need for artificial intelligence.”
Recently, Super Micro Computer (NASDAQ:SMCI) faced challenges that impacted its stock performance. For example, on September 26, a report from The Wall Street Journal indicated that the Department of Justice is investigating the company, though neither the DOJ nor Super Micro has confirmed this inquiry.
However, it is not the first time that the company has been investigated. In 2020, the Securities and Exchange Commission fined the company $17.5 million for accounting issues related to revenue recognition practices.
On October 2, Barclays adjusted the price target on the company stock to $42 from $438 due to expected near-term gross margin pressures. The firm maintained an Equal Weight rating on the stock.
Cramer also said, “Look, Super Micro Computer’s a good company even if its stock went to insane levels earlier this year.”
On September 23, before the stock split, Loop Capital lowered the price target on Super Micro Computer (NASDAQ:SMCI) to $1,000 from $1,500 but kept a Buy rating. The firm highlighted the company’s efforts to achieve gross and operating margins of 14% and 10%, respectively. The analyst suggested that the significance of the company in the field of generative AI is often “underappreciated”.
Scout Investments, Inc. stated the following regarding Super Micro Computer, Inc. (NASDAQ:SMCI) in its Q2 2024 investor letter:
“Super Micro Computer, Inc. (NASDAQ:SMCI) was the top detractor to returns in the second quarter. Super Micro designs and manufacturers server solutions based on modular and open-standard architecture. This modular approach combined with a strong engineering culture helps the company to supply the market with advanced servers and rack-scale compute solutions quickly. After an impressive return in the first quarter, the company offered disappointing near-term earnings guidance, though we do not believe its long-term opportunity has diminished. We expect continued strong growth for several years, although the range of outcomes is quite wide; it is difficult to forecast AI server market growth with precision.”
3. Dollar General Corporation (NYSE:DG)
Number of Hedge Fund Holders: 42
Dollar General Corporation (NYSE:DG) operates as a discount retailer across various regions in the United States, including the southern, southwestern, midwestern, and eastern states. It provides an extensive range of products, catering to diverse consumer needs.
Its offerings include consumables such as cleaning supplies, paper goods, packaged foods, and perishables. Additionally, the company stocks a variety of snacks, health and beauty products, pet supplies, and tobacco.
Cramer mentioned that the stock was the fourth worst-performing one on the S&P 500. He added:
“Dollar General and Dollar Tree certainly haven’t distinguished themselves as real bargains when it comes to their stocks or their merchandise.”
Dollar General’s (NYSE:DG) primary customer demographic consists largely of households with annual incomes below $35,000, accounting for approximately 60% of its overall sales. This demographic has faced challenges due to rising inflation, which has impacted spending capacity.
Consequently, during the second quarter, the company reported a modest growth in same-store sales of just 0.5%. Operating profits experienced a significant decline of around 20%, leading to a drop in per-share earnings from $2.13 in the previous year to $1.70. Moreover, net income for the first half of 2024 decreased significantly to nearly $738 million, compared to $983 million during the same period last year.
Amidst these challenges, Dollar General (NYSE:DG) adjusted its sales projections for 2024. It lowered expectations for revenue growth from an initial forecast of 6% to 6.7% to a more modest range of 4.7% to 5.3%. Additionally, the outlook for same-store sales was revised downwards, with forecasted growth now estimated between 1% and 1.6%.
2. Moderna, Inc. (NASDAQ:MRNA)
Number of Hedge Fund Holders: 39
Moderna, Inc. (NASDAQ:MRNA) is a biotechnology company that specializes in the development of messenger RNA therapeutics and vaccines for a variety of diseases. Its portfolio includes vaccines for respiratory illnesses like COVID-19 and influenza, as well as those targeting latent infections such as HIV.
Additionally, the company is involved in creating cancer treatments, including personalized vaccines, and has therapeutic options for rare diseases and pulmonary conditions.
During his show, Cramer talked about the company and said that the stock was “down nearly 44% in the third quarter.” He went on to say:
“Moderna simply hasn’t been able to follow up with its game-changing COVID vaccine with anything big enough to move the needle.”
Recently, Moderna (NASDAQ:MRNA) announced plans to reduce its expenses by approximately $1.1 billion by 2027, a decision driven by the decline in demand for its COVID-19-related products.
To navigate this transition, the company will pause development on certain projects within its pipeline and discontinue others to better manage research and development costs. The target for R&D spending has been adjusted to a range of $3.6 billion to $3.8 billion in 2027, down from a previously forecasted $4.8 billion by the end of the current year.
Moderna (NASDAQ:MRNA) CEO Stephane Bancel highlighted that this strategic shift will involve scaling back on some studies and putting a hold on the latent product portfolio, which pertains to viruses that can remain dormant in the body for extended periods before potentially causing serious health issues later on.
1. Dollar Tree, Inc. (NASDAQ:DLTR)
Number of Hedge Fund Holders: 38
Dollar Tree, Inc. (NASDAQ:DLTR) runs retail discount stores. The Dollar Tree segment is characterized by its fixed pricing model, where items are sold at $1.25. The segment offers a broad selection of consumables, including food, health, and personal care products, household items, and seasonal merchandise targeted at various holidays.
The Family Dollar segment serves a different market niche, focusing on general merchandise. It provides a diverse range of consumables alongside household supplies, apparel, and seasonal items. It also offers consumer electronics and school supplies.
During his episode, Cramer said, “The fourth and fifth worst-performing in S&P: Dollar General and Dollar Tree.”
Despite its extensive offerings, Dollar Tree (NASDAQ:DLTR) is currently navigating a challenging retail industry. The company has observed a decline in discretionary spending as consumers prioritize essential items over higher-margin products. It has intensified competition from rival retailers, which has led to the company rethinking its approach.
The company launched a thorough review of its store portfolio during the fourth quarter of fiscal 2023. The evaluation sought to identify stores suitable for closure, relocation, or rebranding based on current market dynamics and individual store performance.
The review revealed approximately 970 underperforming Family Dollar locations, which led to the decision to close around 600 of these stores in the first half of fiscal 2024. Additionally, about 370 stores will close at the end of their current lease terms.
Further complicating matters, Dollar Tree (NASDAQ:DLTR) announced a formal review of strategic options for the Family Dollar segment. The process may explore potential sale opportunities, spin-offs, or other disposals of the business. While there is no fixed deadline for this review, the company is actively assessing its options.
As of August 3, the company had already closed around 655 stores identified in the optimization review and plans to close an additional 45 stores by the end of fiscal 2024.
Baird Mid Cap Growth Equity Strategy stated the following regarding Dollar Tree, Inc. (NASDAQ:DLTR) in its Q2 2024 investor letter:
“Consumer discretionary performance was the quarter’s largest detractor. Thematically, our holdings in retail and in particular value retail hurt due to greater-than-anticipated operating challenges amid the persistent inflationary environment. In addition, our expectation that value-based retailers would benefit from consumers trading down, spurring revenue and new customer growth, has not yet materialized in a meaningful way. Of note, Dollar Tree, Inc. (NASDAQ:DLTR) and Five Below delivered disappointing performance.”
While we acknowledge the potential of Dollar Tree, Inc. (NASDAQ:DLTR) 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 DLTR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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