We’re making several updates to our Bullpen watch list: adding five names, including Caterpillar (CAT), and removing two. The Bullpen is a collection of stocks identified by the CNBC Investing Club team as having the potential to join Jim Cramer’s Charitable Trust, which we use as our portfolio. These are companies we view as high quality and will monitor outside the current portfolio. We’re looking for opportunities to buy these stocks, but there’s no guarantee when, or if, we’ll start a purchase. Also, adding a stock to the Bullpen does not necessarily mean we would buy it at the current price. Before initiating a position, we are typically waiting for certain events to unfold — both company-specific and macro-oriented — or for a more attractive entry point. The latter is the case with some of these industrial names we are looking to buy as many have had huge runs over the past month. But we do have plenty of cash at our disposal and could always look to start small. Lastly, the current makeup of the portfolio may also delay an initiation in order to keep it diversified. Here are the additions: Raytheon Technologies (RTX), Marvell Technology (MRVL), Deere (DE), Caterpillar and Nucor (NUE). They are joining Emerson Electric (EMR), PepsiCo (PEP), Palo Alto Networks (PANW), Airbnb (ABNB) and Sempra Energy (SRE). As part of this reshuffling, you’ll no longer see Barrick Gold (GOLD) and Whirlpool (WHR) in the list. They are being removed. So our Bullpen now consists of 10 stocks. Let’s go company by company to explain the reasons behind the additions and the removals. 5 stocks added to the Bullpen This aerospace and defense company was formed in 2020 through the combination of Raytheon Company and United Technologies Corporation’s aerospace business. In 2021, about 35% of its revenues were from the commercial aerospace business, while the other 65% were from its defense business. RTX’s four main business segments are (1) Pratt & Whitney, (2) Collins Aerospace, (3) Raytheon Intelligence & Space, and (4) Raytheon Missles & Defense. As you know with our position in Honeywell (HON), we believe aerospace is one of the most attractive industrial end markets to invest in due to the continued recovery in international air traffic and the boost it provides to aftermarket sales. Even if the economy weakens in 2023, international routes should increase as more countries (like China) move away from tight Covid restrictions. In defense, it’s no secret that Russia’s war in Ukraine has depleted the missile stocks of the United States and its allies. We think it’s likely that countries will increase defense spending over the next several years to not only replenish their inventory levels but also to protect against other possible threats from rising geopolitical tensions. Raytheon’s business is also highly cash-generative. Management expects free cash flow to be $4 billion this year, increasing to almost $6.5 billion in 2023 according to estimates. With higher levels of cash flow comes greater cash returns to shareholders and more improvements to the balance sheet. The company is on track to repurchase over $2.5 billion worth of stock this year, in addition to its regular annual dividend increases. We are adding chipmaker Marvell back to the Bullpen. When we exited this position in early November , part of our concern was that nearly every semiconductor company had guided to a big shortfall at some point this year due to inventory gluts, and it was only a matter of time before the same fate were to befall Marvell. When it reported earnings 8week, it had a rare miss on both the top and bottom lines, and revenue guidance for the following quarter was more than $150 million below the consensus estimate. The main driver of the shortfall for the January quarter was a sharp sequential decline in Data Center revenues, primarily because of too much inventory at storage customers. Although this inventory correction is expected to take a couple of quarters to work through, Marvell’s long-term secular drivers in cloud, 5G infrastructure, and auto remain firmly intact, so we think it is worthwhile to watch it should the stock come down further. We may have gotten the timing of our exit wrong, but the fundamental call was correct. This shows why it is so hard to try and trade in and out of stocks. We likely need to see continued weakness in the stock price before starting a new investment in the company. As explained a few weeks ago on “Mad Money,” Jim said that Deere is a “real company that makes real things and generates real earnings. … Russia’s invasion of Ukraine pushed up crop prices, creating a tremendous bull market in anything agriculture, including farm equipment. On top of that, Deere’s also got an earth-moving business that benefits from the big bipartisan infrastructure package that’s finally started to kick in.” Deere recently reported fantastic numbers. All three of the company’s segments reported better-than-expected sales, and two out of the three segments — Production & Precision Agriculture and Small Agriculture & Turf — beat operating income estimates, while the other segment — Construction & Forestry — only missed the consensus operating income estimates slightly. The most impressive part of the quarter came from the core Production & Precision division, which had a big increase in both volume and pricing, resulting in 60% sales growth and 124% operating profit growth; even better than the quarter was forecast. Deere’s guidance for fiscal year 2023 was strong across the board, with farm fundamentals and a surge in infrastructure spending as the key drivers. These trends will benefit many in the agriculture business, but Deere stands out to us because it expects to outgrow its end markets, due in part to its excellent pricing power. The stock may have had a huge run this year, gaining 28% compared to the S & P 500’s drop of around 17%, but it still trades at just 16x next year’s earnings estimate. That makes it slightly cheaper than the average stock in the S & P 500, which trades at around 17.1x next year’s earnings. The company is the world’s leading manufacturer of construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. Caterpillar runs its business through three primary segments – (1) Construction Industries, (2) Resource Industries, and (3) Energy & Transportation. Within Construction, nonresidential makes up about 75% of the segment, and we think this part of the business could strengthen next year in North America thanks to the significant amount of government-related infrastructure investment being made as part of The Infrastructure Investment and Jobs Act. In Resource Industries, commodity prices have come off their highs but remain at prices supportive of continued investment. In Energy & Transportation, the oil and gas part of the business is currently seeing a lot of strength in reciprocating engine orders and solar turbines. Although oil and gas production remains disciplined, Caterpillar points out that even maintaining production levels require a certain amount of continued investment. Another reason to like Caterpillar is that is a so-called dividend aristocrat. The company is one of 65 in the S & P 500 that can make that claim. To be a dividend aristocrat, a company has to increase its dividend payout for more than 25 consecutive years. In Caterpillar’s case, it has raised the dividend for 28 straight years and its current annual dividend yield is a solid 2.1%. Caterpillar has also been a steady repurchaser of its stock as management remains committed to returning substantially all of its Machinery, Energy, and Transportation (ME & T) free cash to shareholders over time. We’re taking another look at the country’s largest steel producer. We were in Nucor earlier this year but cashed out our remaining shares at $148 for a 54% gain in early April on concerns that this was the type of stock that would get crushed as the Federal Reserve got serious about thwarting inflation. The stock rallied for a few more weeks but then started to fall as quarterly earnings peaked and investors started to get concerned about an economic slowdown. A steel producer is not the type of stock you want to buy if the economy is entering a recession. But this slowdown could be different from prior cycles as it is hitting tech companies with bloated cost structures the hardest while the ones levered to the cyclical economy have been more resilient so far. Nucor currently sees three trends happening that are positive to demand. First is infrastructure spending, and Nucor believes it will have more spending on infrastructure as a company in the next 10 years than it had in the last 7 decades. Second, there is also a reshoring and onshoring movement happening in the United State right and that’s a tailwind to steel demand. The third is power grid moderation. Steel is essential to electricity grid modernization, and more onshore and offshore wind projects require a lot of steel. We also prefer Nucor over steel producers because it has the best balance sheet of the bunch and a strong track record of returning cash to shareholders. This is another dividend aristocrat with 49 consecutive years of increasing its quarterly payout. It is also serious about reducing its share count with $6.8 billion of buybacks since 2017 or about 20% of its total count. 2 stocks removed by the Bullpen We put Barrick Gold in the Bullpen back in March, thinking investors may seek out gold stocks as a safe haven during times of crisis. Russia had just launched its invasion of Ukraine, so it was an extremely uncertain moment and many investors were on edge. Our thinking was right initially, but GOLD shares began to slide in April and while gold, the commodity, still acts as an inflation hedge, we think what we will see over the next few months is that inflation has already peaked. We added this appliance maker to the Bullpen in May, thinking its low price-to-earnings multiple offered protection and its large annual dividend yield would pay us as we waited for visibility in the housing sector to improve. We also liked how Whirlpool management was in the process of strategically reviewing its Middle East and Africa (EMEA) business. Our thinking was that Whirlpool would become a better company if this lower-margin EMEA business were sold, and then management could use the cash windfall to buy back stock aggressively. As it turned out, the P/E multiple was low because earnings estimates were too high, and management struggled to close the EMEA sale under the original timeline. Some type of deal is possible in the future, but we believe this stock has become too much of a casualty of the housing market to buy in the near term. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust) 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.
We’re making several updates to our Bullpen watch list: adding five names, including CaterpillarBullpen is a collection of stocks identified by the CNBC Investing Club team as having the potential to join Jim Cramer’s Charitable Trust, which we use as our portfolio. These are companies we view as high quality and will monitor outside the current portfolio.
