Cramer's Mad Money - The Most Dangerous Homebuilder (11/19/09)

by: Miriam Metzinger

Stocks discussed on the in depth session of Jim Cramer's Mad Money TV Program, Thursday November 19.

Sell Block: Pulte Homes (NYSE:PHM)

While housing has bottomed, it will be a while before prices for homes rebound, so Cramer would stay away from the sector in general, and from Pulte (PHM) "the most dangerous of the homebuilders" in particular. The company has a problematic balance sheet and paid an extra $1.4 billion for Centex intangibles; this is almost double what it should have paid.

The target demographic for Pulte, retirees, are seeing their retirement accounts decimated and falling property values for their existing homes make it impossible to purchase new houses. Pulte is being pursued by angry homeowners who claim they were sold homes at above-market prices. These charges are an "albatross" for Pulte. The company reported a bigger-than-expected loss last quarter and cancellations increased from 21.4% to 23%. "That doesn't inspire confidence," said Cramer.

McDonald's (NYSE:MCD), Nucor (NYSE:NUE), UPS (NYSE:UPS), Monsanto (NYSE:MON), Diana Shipping (NYSE:DSX), Nordic American Tanker (NYSE:NAT), Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL)

The market is in a dilemma concerning how to value stocks compared to a year ago. While the S&P 500 is up 30% year-over-year, there still seems to be uncertainty about where the market is headed, even though Cramer says he is bullish. The pullback on Thursday of the Dow and the S&P 500 demonstrates this ambivalence, and Cramer says it is difficult to come up with a general trading strategy in such a volatile environment, and would instead look at stocks individually.

Cramer recommended buying stocks that aren't higher than they were last year but should be: McDonald's (MCD), Nucor (NUE) and UPS (UPS). Agriculture stocks like Monsanto (MON) and Deere (NYSE:DE) and shipping stocks Diana (DSX) and Nordic American Tanker (NAT) should go higher. While stocks that have gone higher than the averages should be avoided, secular growth stocks Apple (AAPL) and Google (GOOG) are exceptions.

Cramer sees the pullback on Thursday as reason for optimism; “It lets you get the stocks you want at your prices,” Cramer said, “not the ones set by the desperate momentum chasers.”

Mad Mail: Fortinet (NASDAQ:FTNT), Intel (NASDAQ:INTC), Research in Motion (RIMM), Apple (AAPL), EQT (NYSE:EQT)

Cramer urged viewers who bought the Fortinet IPO to sell. In spite of Bank of America's downgrade of Intel (INTC), Cramer said, "I'm a buy, buy, buyer of Intel," However, he added, "It never hurt anyone to take profits." When one viewer talked about toxic byproducts from natural gas drilling in Marcellus shale, Cramer said he believed EQT (EQT) CEO Murray Gerber and Senator Ed Rendell of Pennsylvania that there are no environmental problems with natural gas drilling. While Cramer thinks Research in Motion (RIMM) is trading at a low multiple of 14 times earnings, he doesn't see a catalyst to bring the stock up. Cramer would buy Apple (AAPL) five points lower instead.

RehabCare Group (NYSE:RHB)

It looks like Obama's reforms will either die a "slow Republican-assisted painful death" or be watered down beyond recognition, so it is unlikely healthcare companies will be hurt by the reforms. This is good news for RehabCare, which derives 70% of its revenues from Medicare. The company is the largest independent operator of contract rehabilitation services in acute-care hospitals and nursing facilities. Acute care for serious medical problems requires expensive treatments, and it seems unlikely the government will ever make cutbacks in this area.

Since the government put a limit on building new acute-care hospitals, RehabCare has no threat of competition. Its $570 million acquisition of Triumph should grow the company's revenue base by 50% and increase earnings by 35% next year. Although the stock price has increased, Cramer thinks the Triumph acquisition and attention from money managers could bring the stock up from $26.80 to $33.25. "I think I'm being conservative," said Cramer.


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