Wall Street needs to see more mergers and acquisitions come through before the “coming onslaught” of initial public offerings jams up investing capital, CNBC’s Jim Cramer said Tuesday.
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Major U.S. indexes traded strong out the gate Tuesday, but gave up most of their gains before the close. The Dow Jones Industrial Average added more than 140 points in Tuesday’s session. The S&P 500 and tech-heavy Nasdaq both gained about 0.70 percent.
“I think part of it is that we’ve got too many stocks,” the “Mad Money” host said. “So with a bunch of new IPOs on the horizon, the market won’t be able to handle all the supply. And when supply outstrips demand, prices go lower.”
Lyft will list on the Nasdaq Friday. AirBNB and Uber plan to go public this year, and Slack, Palantir, and WeWork could join the fray as well.
Cramer predicted FAANG stocks would fall under pressure if there is not enough money to go around. The FAANG group includes Facebook, Apple, Amazon, Netflix, and Alphabet‘s Google.
“I think the FAANG stocks will be used a source of funds,” he said.
But big tech is not the only sector that the host is worried about. He said the oil, cloud, health care and transports sectors, among others, are too crowded and need some consolidation.
“I wouldn’t be this concerned about the lack of mergers if I weren’t so worried about the coming onslaught of IPOs,” he said. “If money managers want to participate in these deals—and they will—they need to sell stocks that they already own to raise money … and that’s gonna put pressure on the whole market.”
Below are some potential deals that would get Cramer excited:
“I think the mid-sized independent producers need to band together in order to cut costs,” and a marriage of Apache and Anadarko would make sense, Cramer said.
A major oil company, the likes of BP, Exxon, or Chevron, could make a play for Occidental Petroleum, “which has the best acreage in the booming, low-cost Permian Basin,” he said.
There are too many cloud stocks, the “Mad Money” host said, adding that he has has had plenty of cloud company CEOs on the show. IBM is buying Red Hat and the host said it may inspire more consolidation once the $34 million deal closes. Furthermore, Red Hat’s latest quarterly report justifies the “huge premium” that the computer builder paid for the open-source software maker, he added.
“In retrospect, IBM may have actually gotten a bargain with Red Hat, even as the deal looked like a wild overpay at the time,” he said.
The CVS-Aetna merger left a bad taste in many investors’ mouths, but Cramer said CEO Larry Merlo told a compelling story on “Mad Money” last week.
“If Merlo can execute, I think the health insurers wind up wishing they’d made some deals right here,” he said. “I’m betting today’s sell-off will mark the lows here.”
Cramer also said he thinks drug distributors Cardinal Health and McKesson should consolidate.
Cramer said the crowded payments sector is in dire need of consolidation. He suggested Facebook could make a play for Square or PayPal.
“They need a revenue stream away from social media now that they’ve gotten religion about not selling you out as a business,” he said.
American Express has been strong, but the company should also go after Square so the financial services firm can own the register, he said.
Fidelity National bought payment processor Worldpay for $35 billion and Fiserv bought First Data for $22 billion, Cramer highlighted.
FedEx or UPS could pick up XPO Logistics, Cramer said.
“I’ve been a fan of XPO Logistics … but there are too many companies in the delivery business,” he said. “XPO’s stock has lost more than half of its value in the last six months.”
On the food delivery side, Postmates and Uber Eats will soon join Grubhub and Square’s Caviar on the public market. Doordash is also another top competitor in the industry.
“If I were GrubHub, I’d try to snap up Square’s non-core Caviar business,” he said. “I bet both stocks would rally.”
Disclosure: Cramer’s charitable trust owns shares of Apple, Amazon, and Facebook.
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