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Jim Cramer warns that the stench of enterprise software is now inescapable as AI begins to pulverize and disrupt premium business models. Investors are urged to flee to pulverized healthcare stocks that are immune to AI displacement rather than getting burned by a sector that has been charmed for too long.
Represents safety always has some growth but is now considered poison. These are now unbelievably healthcare is a value stock right now and I like that especially when it's attached to a growth industry like healthcare. We need growth because it seems like well it's slowing in some very unlikely places at least historically.
It's causing me to rethink some kinds of growth and gravitate towards others. Why? All right, let me explain. Especially if you watch the show you know what I'm talking about. Last night we had Bill McDermott CEO of ServiceNow on the show. Reported a perfectly good quarter. One that passed the August rule of 50.
Revenue growth rate plus profit margin equals more than 50. Very good sign for a cloud software play. There were huge sign-ups, many clients embraced their AI controller model letting them automate their workflows and more. But here's the problem. In an era where artificial intelligence can mimic very good software businesses, it's hard for ServiceNow stock to get a decent valuation.
Too many on Wall Street are terrified that this kind of company has no future. Hence today's staggering 17% decline for this stock. ServiceNow this stock is now down a ghastly 44% for the year. 44% But see even though ServiceNow stock has already been pummeled that doesn't even necessarily mean it's gotten cheap.
As Ben Reitzes at Melius tells us lots of their employees get stock as compensation. If you were to treat that as real cash compensation as you and I might then even after today's dramatic fall 103 to 84 and change stock sells at 37 times earnings much more expensive than most of the S&P. Now I've gone over everything that McDermott told us about half dozen times.
Here's my conclusion. ServiceNow is doing exactly what it's done for years but it's no longer going to be given that same price earnings multiple because artificial intelligence is cheaper and even if it doesn't wipe them out it can put pressure on pricing and you don't get a premium model multiple if your company's pricing is under pressure.
The markets changed. The buyers turned into sellers. Doesn't mean ServiceNow isn't a great company it is but institutional money managers who determine the prices that you see won't pay up as much for that for that kind of greatness when it's an enterprise software vulnerable to the great disruptors we talk about all the time.
The stunning decline in the stock rocked the software index taking almost every one of these down as holders believe that their software stock could be the next victim of Anthropic or Open AI. Probably an exaggeration. Some groups like cybersecurity have a lot less AI displacement risk. Private equity groups got crushed crushed too as they own the debt of many cloud software companies that have gone private in the past.
That debt's now under suspicion for the same reason ServiceNow got rocked. It could be unfair but no one's going to let you get your money back from these things. These aren't vacuum cleaners people. There's no warranty and certainly certainly no returns. How about this for a stock? Caveat emptor. At the same time we got hit by big layoffs in at Meta today.
I came midday but I think Mark Zuckerberg is being efficient. When the market heard Meta is firing 10% of its workforce it read that as meaning that the business must be faltering. That's completely untrue that's his style but the pin action hurt a lot of stocks. They didn't go over cover. He's efficient.
There's a He's efficient. I just like that. All right. Microsoft also also offered buyouts. All right, that stock got hit too. We can't presume anything anymore but we do know the software stocks got walloped not just by ServiceNow but by Microsoft too. We're not used to seeing the sector get hurt like this.
This sector's been charmed since 1985 and if these stocks had didn't have any fluff in them then fluff then it wouldn't be so hard. Now some of this market is just plain negative. I mean Tesla reported. All right. I liked everything they said. I I'm not you know it's I'm saying like I hang out with Elon Musk but I will tell you that what he's going to do with robots is revolutionary.
You want to sell that stock you're selling robots you're selling full self-driving cars you're selling the future but go ahead and sell the future. I'm not a sell the future I'm a buyer of the future. Now apparently apparently it would that's no longer good enough. It maybe have to have like the super future.
Let's hope that Intel with magnificent surprise top and bottom line tonight can turn things around. What an amazing quarter from Bout Thuan's been there for 1 year and 1 month. It's almost a miracle. It is a miracle. It's a miracle. I'm looking at my staff as hell it's a miracle. They're talking about a miracle too over there.
All right. Now it can't cover the stench of enterprise software though. I don't think anything can cover the stench of enterprise software even like the absolute best kind of cologne or perfume or like Chanel. Uh-uh. I think Chanel's still good right? I mean what else people use these days? All right anyway.
So how did chance my wife likes chance. So how do you protect your portfolio from these kinds of brutal declines? I had an idea. Why don't I own some stocks that have already been pulverized already been gaffed already been filleted even as they represent very good companies. Why don't I own some more healthcare?
Let me give you some examples. Let's start with a solid company with a stock that sells at seven at 11 times earnings CVS. I've more buying for the charitable trust but we held off because we have too many positions. CVS owns Aetna which I think is a pretty good not well it's not as maybe as good as United Health but pretty darn good company.
Reported tremendous quarter earlier this week but United Health is certainly in the bullpen. I think Aetna is good. The CVS owns 8,932 drug stores. Not that long ago there were three big drug store chains Rite Aid, Walgreens and CVS. Rite Aid bye. Walgreens got taken private it's now pulling back from a huge number of stores.
They may not even be a factor at this pace a few years from now cuz they're private though we don't really know what it is but I know something. CVS CEO David Joyner gave you a terrific quarter last time. I think it's only going to get better as the competition disappears. I prefer CVS to ServiceNow.
Okay, I'm out there. Next I'm a huge believer in Cardinal Health with a stock that's just been annihilated here that ain't reason. I think a vicious rotation out of healthcare. Cardinal's down from 233 to 204. Speaking of quarterly estimates repeatedly shifts its model from being a pure middleman to being a drug and drug wholesaler being a manager of services it's to its clients to offer.
Given the complexity of large independent medical organizations Cardinal's filling a gap in management for some especially changed that really don't know how to run their own business. I think there'll be many more to come high growth that now trades at less than 20 times earnings. To me Cardinal's a steal although we've been buying for the charitable trust and admittedly I started early some would say wrong.
Okay. Or how about a stock they talked about earlier in the week that's doing nothing J&J Johnson & Johnson AAA balance sheet one of only two the other being Microsoft. J&J has the best pipeline of potential blockbusters of any pharmaceutical company yet it sells at a little less than 20 times earnings.
These are just These are discounts. Okay, finally we're going to get to the one that you're going to buy tomorrow right? United Health Group. Here's a company that just reported its first solid beat and raise quarter in a very long time. Returning CEO Steve Hemsley who turned UNH into a juggernaut before retiring in 2017 is back and he's doing the same thing he did for years the last time he was CEO.
Produced the best earnings and biggest upside surprises in the real not chimerical not made up none of that jack stuff. Yeah after all that after putting up the best managed care earnings I've seen in ages stock still sells for just 19 times earnings. Boy this group is hated. The man is just getting started.
This stock deserves to be much higher. Okay, here's a little clue. UNH look at we'll do a little cinema verite here you know I like the cinema verite. Um UNH is at 354. This stock was at $600 last April. April of 2025. You know why I like these stocks so much because if they come down further you can just keep buying them hand over fist cuz you know what when they go down they actually get cheaper.
Cannot say the same thing about the vast majority of the tech stocks particularly software. Bottom line I think these quality healthcare names help to balance out your portfolio right now giving you something that that can't be salvaged by AI displacement that I can tell. Good balance something tells me you're going to need it and the stench of software I have to ask my executive producer you got anything?
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