Why this stock deserves its premium valuation — and should be owned
Every weekday, the CNBC Investing Club with Jim Cramer releases the Homestretch — an actionable afternoon update, just in time for the last hour of trading on Wall Street. Stocks are rallying Friday , but the S & P 500 is still on pace for a negative week. The market is rebounding from oversold levels, as indicated by the S & P Short Range Oscillator , which dipped into oversold territory Thursday for the first time since the end of March. Oil is down, but Treasury yields are higher after the August CPI report increased the odds of an interest rate increase. The market now sees an 86.5% chance of a 25-basis-point hike at next Wednesday’s meeting, up from 72% on Thursday and 59% one week ago, according to CME FedWatch. Linde was initiated with an overweight rating and a $542 price target over at KeyBanc. The analyst’s thesis is very much in line with what we have explained over the past few years, describing the industrial gas giant as a best-in-class company, especially since its 2018 merger with Praxair. KeyBanc pointed to the company’s strong track record of improving margins, lowering headcount, and winning new business even when its end markets are soft. While KeyBanc says the stock’s valuation is not cheap (it never is), the firm argues the premium is deserved given the company’s quality and tailwinds in end markets such as electronics/semiconductors and space, which we’ve detailed previously. Linde currently trades at about 25 times its next 12 months’ earnings, compared with 20.5 times at peer Air Products and Chemicals . Linde shares are up about 1% on Friday following the report, outperforming APD’s slight decline. One key point not mentioned in the KeyBanc report: Linde’s business tends to be resilient during energy-driven inflation because it can pass higher energy costs on to customers. We also appreciate management’s rigorous approach to evaluating the business. There’s one division, its in-home healthcare unit Lincare, that has not lived up to management’s standards, struggling with cost inflation and reimbursement-related pressure. The company explained that it is working to improve Lincare’s performance while evaluating the business’s strategic direction. This active approach to portfolio management is what good companies do and is one reason why Linde has been a long-held name in our portfolio. There are no major earnings reports next week, but several important corporate and macro events are scheduled . First off, the market will continue to closely monitor events in the Middle East because rising oil prices can fuel inflation and push bond yields higher. Interest rates will also be in focus ahead of Wednesday’s Fed meeting. On the corporate side, Salesforce will host its annual Dreamforce conference, and Jim will be in San Francisco to report on the event’s announcements. Salesforce aside, Jim has a strong guest lineup, including Broadcom CEO Hock Tan and Palo Alto Networks CEO Nikesh Arora. Several portfolio companies will also speak at analyst conferences, including Barclays’ Global Financial Services Conference and Morgan Stanley’s industrial-focused Laguna Conference. (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.