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Hey, I'm Cramer. Welcome to Mad Money. Welcome to Cramerica. Other people, my friends, I'm just trying to make a little bit of money here. My job is not just to entertain, but to educate, to try to teach. So call me at 1-800-743-CNBC. Tweet me at @JimCramer. Nothing throws off home gamers like you than a rotation. Those huge swings in stocks that seem to make no sense whatsoever, at least when it comes to the fundamentals of the stock.
When you don't understand why your stock is moving, sometimes violently, it creates too much mystery. It makes you want to leave, to run not just to index funds but to the sidelines entirely. I stand against that, and I want to demystify what a rotation means, and I also want to tell you how to profit from it. So, in a day when the Dow advanced 156 points, the S&P gained 0.72%, and the Nasdaq jumped 1.12%, let me walk you through what's behind so many of these big moves so you can profit from them.
First, you have to understand that there are huge funds that make their decisions based on key pieces of data. These money managers have what's known as a worldview, meaning a vision of what's going to happen in the near future. Often, these people run so much money that they can't just pick stocks. Individual stocks are too small for them. They tell them they don't own the whole thing up. They have to pick broader trends and use ETFs or self-created baskets.
The problem is the worldview can change on a dime. The biggest piece of data, at least for the stock market, is the monthly non-farm labor report. We often see rotations based solely on that employment data. The labor report we got just last Thursday showed a pronounced slowdown in hiring. It's true that the unemployment rate stayed the same. No panic here. But when taken granularly, the report suggests that consumer spending may indeed be weakening.
That can trigger a major change in how these money managers see the world. If you're running tens of billions of dollars, you might want to deemphasize stocks that depend on consumer spending and overweight another, maybe technology, where companies aren't that sensitive to the consumer because they're mostly business-to-business, not business-to-consumer, like we're about to talk about.
Now, sometimes we get these rotations that are impossible to notice because there's so much else moving a market you get lost in it. This is not one of those times. This market is distinguished by how thin it is. Thin meaning there aren't many buyers or sellers. So, if someone big decides to move money in a basket, just entrusting brokers to say, 'Get this thing done by the end of the day,' that's how it really works. You're going to see some massive moves in real time for no reason whatsoever.
Why do we care about this? Because these rotations create dislocations that seem to come out of nowhere. And sometimes those dislocations can give you incredible opportunities to buy high-quality companies at a discount that shouldn't even exist, and it wouldn't if it weren't for the rotation. Today we got a bunch of them.
I've been recommending Johnson & Johnson ever since they mostly got past the overhang from all those talc lawsuits. No, the litigation hasn't gone away. But J&J is now fighting each case individually. So there really are no major rulings that can impact the stock that much. Johnson & Johnson reports on the 15th of July. Often the stock trades erratically on the report day. I know that. But then it begins to run higher in stairstep fashion.
I think the company will have lots of good news about its myriad blockbuster drugs, especially the oncology franchise. I expect some good news about share gains in cardio. And I like that Johnson is separating itself from the scrum that is orthopedic surgery. Think knees, shoulders, hips that have become commoditized. Selling the orthopedic business simply gives the rest of the company a much higher price-to-earnings ratio. I mean, it goes higher just to get rid of something that's not so good.
Today the stock closed down $3.71 at $259.33. Do you know at one point the rotation took the stock all the way down to 256? This stock was 263 last week. Nothing's happened! What a great level to start a position in a high-quality drug company.
The crazy thing about J&J, it is now a pure-play pharma business with no consumer exposure to begin with. And so it can divest its over-the-counter business already. And it's parting with orthopedics, which has a huge, actually, believe it or not, component because of the voluntary nature of what can be very expensive surgery. Even after it's been taken down by mistake, people... that's why I think you have to pounce. Or how about PepsiCo? Okay.
Last quarter PepsiCo reported a fantastic set of numbers that sent the stock soaring. Now, in part because of this rotation, the stock's been knocked down all the way back right around where it was before it took off. Today, PepsiCo dropped nearly a buck, sinking to a level where it sports a dividend yield north of 4%.
I think the rotation has given you a perfect place to start a position ahead of Thursday's report. I am sure that CEO Ramon Laguarta simply cannot be satisfied with a stock that's flat for the year. That's not his style.
Next, we know that a cup of coffee at Starbucks might not be such a bargain, but oh, I like that new protein drink, by the way, more than some of the other guys. But this rotation has put the common stock on sale. It got dinged for more than two bucks today. 102 at one point, it traded 100. CEO Brian Niccol has been working hard on the turnaround, but you've rarely gotten a break in the stock.
Hey, speaking of coffee, for those of you who are junior growth enthusiasts, how about this one? Dutch Bros dropped 5.6% today. Now, for those who want to take a risk, you might want to start a position. And I'm being... I'm out there on this one.
Constellation Brands, STZ. Now, I know there was a negative Heard on the Street piece about spirits, but the quarter Constellation just reported last week was one of the first that even remotely smacked of a bottom, especially in beer. I think there was enough here to say that we got a bottom in earnings.
But this historically thin trader fell nearly $7 today, $130 and change. I think it's a steal down here. I remember when it was double that, especially given the fact that the stock now has a 3% yield. And no, I am not worried about World Cup sales being down because Mexico lost in the World Cup. Hey, by the way, that defeat is now in the stock today.
Finally, a whole bunch of retailers got shelled by the rotation. I don't want earnings risk when I extrapolate someone else's worldview on my own stock picking. But if you think the consumer is weaker, that means the consumer could be in trade-down mode. Trade-down means TJX. The stock got whacked right at the opening. Fell below $150 before rebounding. Finished the session off nearly three bucks, 151.
I can't think of a more advantageous place to buy this high-quality stock. Down 20 points from its high. Very rare that you get that. Remember, there are two components to TJX earnings: the trade-down and the amount of excess inventory they can pick up from struggling retailers for pennies on the dollar. When the last call said there's a ton of spare inventory slashing around, that's exactly what we want.
It's a key stock in the Charitable Trust. All you got to do is join my club, the CNBC Investing Club, to find out more. I wish you would. Here's the bottom line: if you can spy a rotation and figure out what the theme might be, you can identify some incredible bargain stocks. I'm talking about J&J, PepsiCo, Starbucks, even Constellation Brands, and yes, TJX. They all took it on the chin today.
I think this is a great place to do some buying because they're all collateral damage from this indiscriminate sector rotation selling. I want to go to Harrison in California. Harrison?
How's it going, Jim? Coming to you from San Diego. And the stock I'm calling about today just underwent a massive stock split and it boasts tremendous fundamentals, yet the share price has lagged in the last year. What are your thoughts on Booking Holdings, ticker BKNG?
Okay. Now remember, this stock's last quarter, Glenn Fogel, CEO. This stock's last quarter, it was not a blowout, and everyone's gotten so used to Booking Holdings doing a blowout that they decided to sell the stock. I agree with you, Harrison. I think it's a buy. How about we go to Pete in Texas, please? Pete?
Hi, Jim. Thanks for taking my call.
Of course, Pete. Booyah! Right back at you. What's going on?
Well, semiconductors have been doing well, but my interests are more down to earth. How's John Deere doing, symbol DE?
Oh my god. All right. So, I was talking to someone this weekend. The guy said, 'What do you like?' I said, 'Deere.' He said, 'Why?' Now, first it happened to be because there was a deer that had gone right in front of the road. So I said it was in my mind, you know. But you know, Deere is just on fire. The stock is incredible and it's not done going higher. All they have to do is talk on their conference call and they'll knock it down, though. They have an incredible history of being way too conservative. I'm a champion even more than they are.
Here's a good stock. Hey, why stop here? Why don't we go to Fritz in Washington? Fritz?
Yes, Jim. Thank you. It's a pleasure to talk to you.
My curiosity is Costco. I've had Costco for decades. I think I started in the early '90s, and I bought the stock for a reason. A friend told me once, he said, 'If they ever see that parking lot full of cars and that store full of people, buy their stock.' And you know, it's been that way since its beginning. Look, over the years, you know, I play with it, I watch it, but it stays at this point in time, it's $800 to $1,000, and it kind of stays there, up and down.
Well, Fritz, the way we have to look at Costco is very important. There are periods of what I regard as underperformance coupled with huge spurts up as it gets to where it should be. It's at 46 times earnings. If it drops to 45 times earnings, you're going to see a major move up. It got a little too expensive. I too have had this for my Charitable Trust. I don't know, maybe since the Charitable Trust started. You can follow it, yes, by joining the CNBC Investing Club. We write about it constantly, Fritz. It can be frustrating, but it will be rewarding.
All right. Now listen. If you can figure out the why behind a rotation, you can identify some incredible bargains that are definitely worth it. We saw this today. Time to do some buying in the stocks I mentioned.
Oh man, let me tell you. Honeywell spinoff Solstice announced it's buying Element Solutions today. We know them both. How is the company capitalizing on AI data center demand? I've got an exclusive for the Solstice is going to be the leader.
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In early May, we had two different specialty chemical companies on the show: Solstice Advanced Materials, which had recently spun off by Honeywell, and Element Solutions, which came public via a SPAC merger roughly a decade ago. Both of them have exposure to some really hot themes like semiconductors, data centers, and as we just learned, they're merging. Solstice is acquiring Element Solutions in a cash-and-stock deal valued at roughly $14.5 billion.
The market didn't seem to love the transaction, though, as Solstice saw its stock plunge 15% today. Look, some of that's just the arbitrage guys going to work. When there's a stock-based transaction, they short the buyer and they go long the target. I think this is a very smart deal, though, and this pullback may give me a terrific buying opportunity. I know we thought about it for our trust today, but don't take it from me.
Let's check in with David Su. He's the president and the CEO of Solstice Advanced Materials. Get a better read on the situation. Mr. Su, welcome back to Mad Money.
Jim, great to be back. Thanks for having me.
Well, thank you, David. Maybe you can just walk us through. I know there's some really good bullets about why you think it's the right time to do this deal.
Well, we're really excited about it. Obviously, we're at a generational growth opportunity in semiconductors and advanced electronics. And the combination of our two companies, we believe, gives us a comprehensive product portfolio and really a world-leading advanced materials business in semiconductors, data centers, AI, and we couldn't be more excited about it and the future and the position we have in this segment.
All right. So tell me about what you think happened to the stock today, because I felt that there was a chance. Candidly, I've got to tell you something, David. I thought there was a chance, as I said this morning, that both stocks would be up, because I look at this as a premium multiple enhancer.
Well, we agree with you. I think when you look at the value of what these two companies bring, you're talking about strong, high single-digit growth, low double-digit EBITDA growth, a really strong margin profile in the mid-25% EBITDA margins. So, we agree with you, but as you said, I think you hit the nail on the head. Whenever you announce a deal like this, we know there was a lot of hedge funds, a lot of arbitrage in there. We've been telling the story. Reporting has been very positive on the strategic rationale for the deal, and we know we'll be back in the future as we execute on the transaction.
Well, maybe you can explain the ratio. Who gets what? How much of the company ultimately belongs to Solstice? How much to you?
Sure. So, it was a cash-and-stock deal, as you mentioned. Element Solutions received a half a share of Solstice stock as well as $10 in cash, which really accounts to about a 44% Element Solutions ownership, 56% Solstice ownership, and just two great companies coming together in a leading advanced materials business in semiconductors.
Now, I think people may not realize, but you also have a fabulous nuclear business that you're staying. It's not becoming a pure-play electronics. I don't mind that because I think the nuke business is so powerful. How is that doing?
Nuke business is fantastic, and you're right, and it actually synergizes. So, our nuclear business is sold out through 2030. As you know, it's uranium hexafluoride. We do the nuclear conversion for nuclear fuel, and it all ties to the data center. So now we are in chip fabrication, advanced packaging, thermal management. We're in the data center with our refrigerants business doing all the cooling. We've got our nuclear business. So we're helping power the data centers to help solve the power shortage. So all of this ties together, and we just think we are a critical infrastructure for AI and data centers, and we're really, really well positioned for the future.
There's a real scarcity value to the companies that make the material that semiconductors are based on. We've been looking at this group, and we thought that Element Solutions, also, these are remarkable companies with great secular growth. A lot of them are covered by chemical people. If they were covered by tech analysts, which they will be maybe now with the merging, the stocks would be much higher.
Yeah. It's a great growth proposition, right? It's growing at unprecedented levels for the next decade. The demand is significant, and now we've got a complete solution in our product portfolio to help solve the biggest challenges our customers have. And we know that as we execute and deliver on what we promise, the share price will follow.
Now, you're staying, obviously, you're going to be the CEO. Now, we had Ben on, but he's a terrific guy, and I know he was on the call, but he will just be a board member, if I'm correct.
That's correct. Ben has been an unbelievable partner through this, and I'm sure you know Sir Martin Franklin, who started this company. He's been phenomenal through this process. We've really built this strategy together. We really believe in what these two companies can do, the innovation we have, the differentiation, and we just can't wait to get started and work together to drive growth in this really, really attractive industry.
Okay. There was one line that I thought was quizzical, where you talk about how you want to maintain, it's kind of maybe oxymoronic, some of my critics have been saying, a strong sub-investment-grade credit rating. How do you have a strong sub-investment-grade credit rating?
Well, basically what we're saying is we're going to maintain our credit rating. We have a strong non-investment-grade credit rating. We are only going to be three and a half times net leverage with this deal. We'll be down below three times levered within 18 months. This deal is accretive in year one. So we're fully financed on the deal, and we feel great about our cash position as well.
All right, one last question. I know that the tradition of Honeywell is, from Dave Cody's days, is to buy and then sell and buy, as I know he did more than 70 of them. Are you now happy with the Solstice map of what has to happen without making any more disposals or acquisitions?
