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Cramer: Real reason stocks haven't been beaten to a pulp with less competition

For shareholders, there is nothing worse than competition, and less of it breeds opportunity. Jim Cramer believes the reduction of competition defined the winners of the tape on Wednesday.

"There is just enough competition among companies to keep their stock in check, but when the competition lessens, companies are instantly rewarded with stocks that rally, making it worthwhile to stick around to see what group will be the next one to soar," the "Mad Money" host said.

The airlines soared for much of 2014 after various mergers left just a few of the big players. Once those mergers took place and route overlaps were eliminated, airlines could finally raise prices.

But in 2015, airlines not only added a lot of planes, but also they tried to take advantage of higher prices by competing with one another. Relentless price cutting and lower earnings per share followed.

"This group has been a house of pain ever since, because no airline would stop adding new capacity lest some other company take advantage of the opportunity," Cramer said.





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"One of the reasons why this market hasn't been beaten to a pulp is that almost daily we hear a story of supply taken out of lessened competition." -Jim Cramer

That pain stopped on Wednesday, when Southwest Airlines announced it would reduce the rate of capacity increases to 4 percent, from 5 to 6 percent. It doesn't mean the company is shrinking capacity. But Cramer interpreted it to mean that estimates for next year's earnings may be too negative. The news shifted the whole group, with shares of Southwest, American and Delta rallying.

Companies that make basic data storage devices that allow information to be kept in personal computers, specifically DRAM and flash semiconductors, may also have less competition. Western Digital announced it would have sharply better-than-expected earnings.

Cramer attributed that to better gross margins at Sandisk, the recently acquired maker of flash memory chips. Supply in the flash industry is thus constrained because many companies have given up making the chips because of competition, and prices could go higher.

On the flipside, Sprouts Farmers Market demonstrated what can happen with too much competition. Sprouts is a natural and organic supermarket that was at one time expected to take market share from Whole Foods. Yet, on Wednesday, the company confirmed it would have flat same-store sales.

"A tremendous growth story with flat same-store sales is actually a no-growth story, with shareholders fleeing as if Sprouts sells nothing but Spam and Velveeta," Cramer said.

Cramer also noted that the dollar stores and the stocks of General Mills and Dave & Busters also suffer from too much competition.

"One of the reasons why this market hasn't been beaten to a pulp is that almost daily we hear a story of supply taken out of lessened competition," Cramer said.

At the same time, there are also stories of price wars or reduced gross margins in order to defend market share. That is the main reason, Cramer said, why the market seems to do nothing when indices like the transports rally.

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