Jim Cramer on LyondellBasell Industries N.V. (LYB): ‘Anticipate, Anticipate, Anticipate’
We recently compiled a list of the Jim Cramer's Exclusive List of 9 YEV Stocks. In this article, we are going to take a look at where LyondellBasell Industries N.V. (NYSE:LYB) stands against the other YEV stocks in Jim Cramer's exclusive list.
Recently, Jim Cramer sifted through the S&P 500 to identify stocks that satisfy his criteria: yield, earnings growth, and value. He explained the need behind the criteria:
“In a market with huge year-to-date gains, you got to get a little more selective about what you buy. Which is why I created this three-part test, also known as tripartite test.”
To navigate this market, he developed a three-part evaluation framework, which he refers to as the YEV test. Cramer explained that the first criterion focuses on yield, specifically seeking stocks that offer better returns than the current yield on the 10-year Treasury, which sits slightly above 4%. The second criterion is outsized earnings growth, meaning he looks for companies expected to exceed the 14% growth forecast for the S&P 500 next year. Lastly, Cramer seeks value, targeting stocks priced lower than the S&P 500, which currently trades at around 21 times next year’s earnings estimates.
“We want stocks with higher yields than the 10-year Treasury, meaning 4% plus. We want faster earnings growth than the S&P 500. In the aggregate, that's faster than 14%. And we want a price-earnings multiple lower than that of the overall S&P 500, which trades at 21 times next year’s earnings, which everybody says is a little elevated.”
While Cramer acknowledged that his criteria was challenging to meet, he successfully identified nine stocks that fit the YEV model. He noted that although the Federal Reserve has created a favorable environment for investors, resulting in substantial market gains, it is crucial to exercise caution when selecting stocks.
Observing the historical trends, Cramer pointed out that October has generally been a strong month for the market, yet he reiterated the necessity of being discerning in purchases. He encouraged viewers to consider these nine stocks as the top tier within the market. He went on to emphasize:
“Now, I want you to think of them as the elite of the elite. Not many companies can give you high yields, cheap stocks, and explosive earnings growth all at the same time... Here's the bottom line: in a market like this one, you do need to be selective, which is why we've fallen back on yield, on earnings and on growth and on value. Okay, now these are all things that are very hard to find right now.”
Our Methodology
For this article, we compiled a list of 9 stocks that fit Jim Cramer’s YEV stocks criteria and were unveiled during his episodes of Mad Money from October 7 to October 10. We listed the stocks in ascending order of their hedge fund sentiment as of the second quarter, which was taken from Insider Monkey’s database of more than 900 hedge funds.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A factory worker monitoring a conveyor belt of specialty chemicals being produced.
LyondellBasell Industries N.V. (NYSE:LYB)
Number of Hedge Fund Holders: 41
Cramer recently introduced his YEV stocks list during an episode of Mad Money, focusing on companies that offer the highest yields. Among these, LyondellBasell Industries N.V. (NYSE:LYB) caught his attention and he mentioned its yield of 5.62%. The company, recognized as a significant player in the commodity chemicals sector, has faced a challenging year. Cramer pointed out that while its performance has been relatively stable, it has significantly underperformed compared to the S&P 500, trailing by nearly 20% during the same timeframe.
Cramer commented that the company’s stock, along with similar stocks, is experiencing the expected cyclical nature of the industry. According to him, these types of companies thrive when the global economy is strong but tend to struggle during economic downturns. This cyclical behavior explains why it has been lagging this year, as broader economic challenges have impacted its performance. He further explained:
“Until very recently, the two largest economies of the world, the United States and China were both deteriorating. But think about what's happened just in the past few weeks. First, the Fed officially kicked off a new easing cycle, starting with that double rate cut I just mentioned. And then there's a clear consensus that we are going to get several more rate cuts done before the Fed is finished.
Wall Street is expecting that the Fed funds rate will be down to 3.5 to 3.75% by next June's meeting. That's down 125 basis points from where it stands right now. What really matters, though, is that the general direction of interest rates is lower, which means the Fed is your friend. Don't fight the Fed. At moments like this, the textbook cycle stocks tend to become big winners.”
Cramer emphasized that the time to buy chemical commodity stocks like LyondellBasell is when the Fed is cutting rates. He further highlighted:
“Second, in the past two weeks, the Chinese government has announced the most aggressive stimulus efforts that [it] has put in place since the end of the pandemic. And for once, China is actually putting money in people's pockets. For a communist regime, they seem to really hate handouts, but they're finally taking action to bolster their ailing economy, which is good news both for their own companies and for cyclicals worldwide that are levered to the Chinese economy, including… LyondellBasel.”
Cramer has made note of the company releasing its third-quarter earnings report on October 1. He stated:
“A couple of weeks ago, analysts at JPMorgan published a note on the chemicals group. Basically said that they expect these companies to report weak third-quarter results… The analysts at JPMorgan went on to explain that these stocks have been what we call de-risked, meaning the near-term earnings headwinds are already baked into the share price. If you're willing to look past that and see further into the future, though… LyondellBasel should be on the road to recovery now that interest rates are coming down. You got to anticipate, anticipate, anticipate, that makes a lot of sense to me.”
Cramer emphasized that a shift in the Federal Reserve's policy, particularly when it starts lowering interest rates, signals a good time to invest in cyclical stocks. He noted that while many sectors respond quickly to such changes, the commodity chemical companies, like LyondellBasell, typically take longer to recover.
Cramer highlighted that companies like LyondellBasell (NYSE:LYB) are often significantly influenced by the decisions of the Federal Reserve. He cautioned that if investors do not expect a consistent series of rate cuts, these companies may struggle to meet their earnings targets. This could make their stocks appear more expensive than they actually are, leading to potential declines in value. He gave his opinion, saying:
“If, like me, you believe the Fed will continue cutting, then bond yields will come down, too, and economies around the world will reaccelerate, bolstering the commodity chemical business as a whole… LyondellBasel. Well, then you got to pull the trigger.
So here's the bottom line: In this quiet period before earnings season gets crazy, okay? We got to search for new ideas. These are ideas that represent the highest quality stocks for the current moment, the ones that fit the YEV paradigm: yield, earnings growth, and value.”
Cramer concluded by saying that the company is an ideal candidate for investment right now. He pointed out that this aligns perfectly with what hedge fund strategies typically recommend at this stage in the business cycle.
LyondellBasell (NYSE:LYB) is a global leader in the production of petrochemicals, polymers, and fuels, with a significant presence in various markets. The company has been actively working on improving its operational performance while pursuing strategic initiatives aimed at long-term growth.
During the second quarter, it generated $1.3 billion in cash from its operating activities. The substantial cash flow has been essential in supporting the company's disciplined approach to executing its business strategy. As highlighted in its fourth-quarter earnings call, the company is making strides toward its objective of achieving an additional $3 billion in normalized EBITDA by 2027, with nearly one-third of that goal already reached in 2023.
Overall LYB ranks 4th on Jim Cramer's exclusive list of YEV stocks. While we acknowledge the potential of LYB as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LYB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.