We're high-grading in tech and finance, paying for it with a casino sale

Published Tue, May 24 20222:25 PM EDTUpdated Tue, May 24 20222:33 PM EDT

We're buying 50 shares of Facebook-parent Meta Platforms (FB) at roughly $180.24 each. We're also buying 100 shares of Morgan Stanley (MS) at roughly $81.44 each. Lastly, we're selling 300 shares of Wynn Resorts (WYNN) at roughly $58.10 each. Following Tuesday's trades, the portfolio will own 425 shares of FB — increasing its weighting to 2.67% from 2.37%; 1,550 shares of MS — increasing its weighting to 4.42% from 4.14%; and 750 shares of WYNN — decreasing its weighting to 1.54% from 2.15%. These three trades in Tuesday's down market further promote our strategy of high-grading our portfolio, an idea we've been emphasizing and executing on for several weeks. High-grading means selling and taking a little bit of pain in a position that's not right in the current investing environment. Not right could mean something with too high of a price-to-earnings multiple, too much economic sensitivity or inflation risk and zero capital returns. Then what you can do is take that cash to purchase shares of a higher quality company that's been put on sale by the market and fits our mantra of owning stocks of firms that make stuff and do things for profits, return cash to shareholders through dividends and buybacks, and trade at reasonable valuations. Some of our recent initiations that fit this profile are consumer staples like Procter & Gamble (PG) and beer, wine and spirits maker Constellation Brands (STZ), health insurance company Humana (HUM), and free cash flow generating machines and energy producers Coterra Energy (CTRA) and Pioneer Natural Resources (PXD), and most recently, the pharma giant and consumer health focused Johnson & Johnson (JNJ). Meta shares were getting hit hard Tuesday in reaction to the profit warning from fellow social media company Snap , which said Monday night that its second-quarter revenue and adjusted earnings are likely to come in below the low end of its guidance range due to what they cited as a faster than anticipated deterioration of the macro environment. The news sent shockwaves throughout all stocks tied to the digital advertising ecosystem, with the conventional view being that the softness Snap has seen will also be felt by other, larger players like Meta and Alphabet. It's likely true that advertisers may have pulled back their spending plans over the past month as many companies tightened their wallets amid the macro uncertainty. It's also true that all companies will likely feel the impact of this, but we think the ad businesses at Meta and Alphabet are very different from Snap. They make the magnitude of the sell-off look overdone. Figure this, FB has lost more than $40 billion of market cap Tuesday due to a shortfall of an inferior and more of a hit-or-miss type company with a total market cap now of about $21 billion. As we talked about earlier on the Club's "Morning Meeting," when advertisers pull back on spending they typically don't cut back from it all. They eliminate the weaker ones that don't have as large of a reach and generate lower returns on investment. In this case, we think advertisers are likely to circle the wagons around more proven platforms that offer higher ROIs like those of Google and Facebook. Lastly, we should point out that the stock characteristics of SNAP is much different from FB, so we're not letting the magnitude of SNAP's decline Tuesday shake us out of our positive long term (at least six months) view of FB. SNAP on a generally accepted accounting principles, or GAAP, basis is losing money and turned free cash flow positive last year. FB is currently expected to make $11.76 in GAAP earnings per share this year, implying a 15x multiple. Even if numbers need to come down further, FB is about as cheap on earnings as it has ever been, suggesting a lot of downside and bad news is priced in at these levels. Meta platforms is also expected to generate nearly $25 billion of free cash flow this year. Morgan Stanley fits our high-grading profile of what we like buying in this market volatility. It has a capital return program that we value. At the current price, the dividend yield is roughly 3.45%. Management consistently buys back nearly $3 billion worth of stock a quarter. The valuation is not demanding whatsoever at 11x forward earnings estimates for a quality franchise that last quarter showed resilience through an investment banking slowdown and choppy market. Funding our two purchases on a near dollar-for-dollar basis will be a trim of Wynn Resorts. While it is disappointing to make this trim with the stock down 31% year to date and realizing a loss of about 54%, our recent exits of Boeing and American Eagle Outfitters prove that it is never too late to act and high grade. Wynn Resorts has been a tough one to stick with because its profit recovery is mostly linked with the recovery in Macao, a Chinese special administrative region. Wynn has been unable to gain any meaningful traction due to continued Covid-related travel restrictions in China. Due to our low visibility into when China will move past its zero-Covid policy, we'd rather have this precious capital invested in more profitable, higher-quality companies with less international risk and more capital returns. (Jim Cramer's Charitable Trust is long FB, MS, WYNN, PG, STZ, HUM, CTRA, PXD and JNJ . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

People walk by the New York Stock Exchange (NYSE) on May 23, 2022 in New York City.

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