The transports were absolutely clubbed on Wednesday, which is good news as a traveler because that means cheaper fares. But as an investor this means nothing but bad news, and Jim Cramer is worried.
When Cramer took a closer look at the transports group, he was able to pinpoint the source of the problem down to the airlines.
"Sometimes though, this kind of action is a sign not of weakening trade, but of potentially ruinous, cutthroat competition. And that's what is driving the group down at this very moment," Cramer said.
On Tuesday, the "Mad Money" host spoke with Doug Parker, the CEO of American Airlines. Parker confirmed that his competitors in the industry have decided to take advantage of the strong travel market right now by ramping up capacity.
Parker admitted that these competitors are being far too aggressive in adding routes and planes, which could lead to airlines engaging in a huge dogfight over customers.
"Some capacity is being added not by us but by some of our competitors, and we will obviously respond to that," Parker said. "That's going to have a negative impact," he added.
Cramer was taken aback when he heard this. When Parker said he would respond, that means they will lower fares which translates to a negative impact on revenues per flier—the key metric for airlines.
Thus, Cramer interpreted this as meaning that earnings estimates are probably too high and need to be cut, which means that American Airlines' stock is not a cheap as it looks at just a price-earnings multiple of five. If estimates come down, that will mean lower stock prices.
That is exactly what happened on Wednesday. Uh oh.
American Airlines will certainly be okay because it is in the best shape that it has ever been. It has boat loads of cash and can pay down debt and offer a big dividend.
However, Cramer's concern is about more than just American Airlines. He is worried about the entire airline industry. The reason why he has been bullish on the airlines is because the recent consolidations had brought an end to the vicious competition of the past.
"Apparently those days are now over. I'm not saying that you can't buy the airlines when they reach a certain level. I'm just saying, wow, flying may be safer than ever, but those earnings estimates sure aren't!"
Whenever Cramer hears the words "adding capacity" he knows that this means investors will get volatile: They'll either fly out of the group, or fly into it.
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This is why Cramer instead recommended looking for industries with little competition, or where capacity is being reduced. Those are the groups with safe growth.
A few stocks that Cramer suggested are biotechs such as Regeneron and United Therapeutics, Target, WhiteWave, Hain Celestial, Harman International and Cramer-fave Netflix.
"If you're engaged in a dogfight for customers, the customers will win, but your shareholders might lose. Much better to find companies that you don't have to compete, or are protected from competition, or have laid waste to their competitors on the way to industry dominance."
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