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What To Do In a Market of Contradictions

From: James Cramer
Sent: Wednesday, September 21, 2011 11:17 AM
To: Nicole Urken
Subject: Divergence

Norfolk Southern says they see no slow-down in export coal volume demand, yet we see guide-downs from BOTH Walter and Alpha Natural Resources. Let’s try to reconcile these very different views on trends.

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Wednesday, September 21, 2011 11:20 AM
To: James Cramer
Subject: RE: Divergence

Got it. You were saying this morning that CEOs and individual company execution have meant very different outcomes for companies in the same sector… Will look into it.


The lock-step action of stocks that are giving us divergent reads are indicative of what’s happening in the market. The below expands on some of those examples that were highlighted in yesterday’s Mad Money episode along with names you should add to your shopping list:

Mixed messages. That’s been the name of the game of late, making the already-macro-driven market even more perplexing. Case in point: Coal, a hot pocket of mixed messages that Jim talked about last night at the top of the show. Yesterday’s key question: How, in the span of a couple of hours, could Walter Energy and Alpha Natural Resources, two international coal plays, issue downside guidance while Norfolk Southern, a major railroad outfit that transported 171mm tons of coal last year, said it sees no slowdown in export coal demand? Not to mention a more bullish outlook from coal peer Consol Energy this morning! How can there be two completely different reads of the same industry? Well, the quick answer is one of execution. Walter and Alpha pointed to challenges in US mining conditions versus a real reflection of reduced demand, but it didn’t matter for related names. Norfolk was taken down 8% yesterday despite its positive commentary. And rail peers Union Pacific and CSX Corp were dealt the same fate.

That linked action in the market is unfortunately the “take-away message” for now. It doesn’t matter that there is upside to plays on coal, with metallurgical coal (the sexy kind of coal that’s used to make steel) driven up by infrastructure build in China and thermal coal (used in power generation) seeing more demand after nuclear tragedy in Japan. It doesn’t matter that after the large transport sell-off yesterday, that Norfolk and best-of-breed rails CSX and Union Pacific are great opportunistic buys. As long as we remain with the overhang of “significant risks” cited by Fed Chairman Ben Bernanke yesterday, investors will dump any names merely touching a sector in question.

So: does that mean there is nothing to do? Does that mean there is no way to make money in this market? Answer: No. What it means is that you can start to build your “shopping list”, as we always do on Mad Money during more tumultuous markets. Given that we still don’t think we are in an “end of the world” scenario, you can start nibbling and scaling in to positions that have been taken down unfairly in sympathy with peers.

So, the coal winners? CSX and Union Pacific remain favorite plays on the rail side, given their positive operating leverage (i.e. strength as volumes continue to pick up with improved pricing). And, on the coal mining side, Peabody remains a longer-term opportunity, as it’s essentially the “Exxon Mobile” of coal from a scale perspective, hugely important. Or how about Joy Global, mining equipment maker helping to pull coal out the ground, whose CEO Mike Sutherlin reiterated strong demand dynamics internationally on Mad Money yesterday.

Now, the coal complex isn’t the only place where there has been collateral damage. This “shopping list” strategy should be used in other areas where we have seen a divergence in messages. Case in point: The divergent results between FedEx , which posted downside guidance this morning, and UPS which had a very positive analyst day last week raising its long-term goals. FedEx’s higher exposure to international markets puts it at more risk here. Not to mention that UPS is able to take market share as the US Post Office is downsizing due to major losses, and FedEx is in a period of reinvestment.

Other examples? Cooper’s negative pre-announcement last Thursday after the close brought down Eaton. Eaton’s substantial electrical business has benefited from important energy efficiency secular trends along with cyclical recovery under the leadership of Sandy Cutler, a CEO who has been a frequent guest on Mad Money and who has continued to make money for his shareholders. Eaton is a name to buy on the company-specific issues Cooper cited. Another example: Dupont, best of breed chemical company, reported stellar results in its latest quarter, something that has gotten lost in the shuffle since, particularly with the downside announcement from peer Solutia last Wednesday. Dupont is a name that has transformed under CEO Ellen Kullman and which has a strong five-year plan that should be bought on weakness. And lastly, we’ve seen a stark divergence in results between truck names Cummins (CMI) and Navistar , something that we talked about on Mad Money last week. While the former has performed better, particularly after their strong analyst day, it is still being held back by sector uncertainty.

Take-away: Build your shopping list—CSX, Union Pacific, Peabody, and Joy Global along with Eaton, Dupont, Cummins, and UPS—but remember you will have to scale in slowly, given the “punish all” modus operandi of the current market. Build your shopping list and let the stocks come to you—pay your price after the emotion that has taken over this market begins to subside a bit.

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"Inside the Madness" appears Tuesdays and Thursdays at madmoney.cnbc.com

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