We’re updating our rating on recently spun FedEx Freight after run-up
Every weekday, CNBC Investment Club with Jim Cramer publishes Homestretch, an actionable afternoon update just in time for the final hour of trading on Wall Street. Stocks are pulling back again as investors take profits in tech and AI infrastructure stocks, which have slumped after the recent rally. The sell-off caught many investors off guard; S&P 500 stocks rose about 1% shortly after the open before suddenly falling. Our thesis is that the selling pressure is due to investors freeing up capital to absorb new supply for the upcoming SpaceX IPO. This concern is why we took evasive action on Monday by reducing our positions in Goldman Sachs and Qnity Electronics to realize big gains. But another reason for the selloff could be that many AI stocks have made unsustainable moves since the end of March. Sell-offs like last Friday and today are a good lesson in the dangers of chasing parabolic moves and failing to make a profit. Whatever the case, Tuesday’s action is also a reminder that you shouldn’t give up on quality companies that have fallen out of favor, like Johnson & Johnson and Cardinal Health. Both have delivered strong gains, but neither fits the market’s appetite for AI-related stocks. It’s good to see gains in these stocks as the AI portion of our portfolio declines sharply. FedEx announced late Monday that its board of directors approved a 5% increase in the annual dividend. Notice: This follows a one-time annual rate adjustment in connection with the FedEx Freight conversion completed on June 1. The new quarterly payout is $1.22 per share, compared to $1.45 from the quarterly dividend paid in April. It is common for companies to reduce their payments after separating a business. The dividend distribution needs to be adjusted to reflect the cash flow and earnings of the separated business. At the new dividend rate, FedEx shares are trading at a yield of about 1.5%. When we started the position at lower levels in May, the stock was trading at a yield of approximately 1.55%. The key takeaway is that while optics may seem like a lower payout, the return is about the same. FedEx is committed to increasing its dividend while using opportunistic share buybacks to at least offset dilution. The FedEx Freight spinoff is perfectly timed as truck stocks are currently on fire, with shares rising well above our initial $175 price target. We are not selling our position as it remains relatively small and we still want to build on weakness. But at the same time, we’re not chasing stocks at these higher levels. As a result, we lower our rating on FedEx Freight to 2. We still plan to purchase more from both FedEx and FedEx Freight once prices approach our average cost base. Casey’s Markets and Cracker Barrel are reporting after the closing bell, while Chewy is reporting before the opening bell on Wednesday. The most important economic data of this week was the May consumer price index report, which was also announced on Wednesday morning. According to FactSet, economists expect a monthly increase of 0.5% and an annual increase of 4.2% in the index. The core index, which excludes food and energy, is expected to increase by 2.9% on an annual basis. Last Friday’s strong jobs report raised concerns that the Fed’s next move would be a hike, not a cut, and that’s a big change from what we and many in the market thought before the war in Iran began. A sober read can help ease these fears and provide welcome relief to the market. (See here for a complete list of stocks in Jim Cramer’s Charitable Trust.) When you subscribe 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 trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT GUARANTEE IS MADE.
