Cramer's Mad Money - 10 Reasons Not to Fear a Crash (8/17/10)

Includes: CVS, DE, ESRX, MHS, POT, UNH
by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Tuesday August 17.

10 Reasons Not to Be Crash-Cautious

Tuesday was an up day, with the Dow rising 104 points and the S&P 500 up 1.4%, but people who paid too much attention to The Wall Street Journal's article "Is a Crash Coming? Ten Reasons to Be Cautious" might have missed the move. The basic message of the article could be summed up as "no matter what happens, it's bad." Cramer refuted the article's 10 bearish claims about the market.

1.The article says the market's already really expensive, stocks trading at 20 times cyclically adjusted earnings. Cramer pointed out that when taking into account other factors, stocks are the cheapest they have been in 30 years.

2. The Fed is concerned about growth. Cramer wondered why this is a bad thing. Would it be any better if the Fed were not concerned?

3. Too much bullish sentiment. Actually, Cramer thinks there is an all-time record for bearish sentiment as huge sums of money are being transferred from stocks to bonds.

4. Deflation worries. Actually, there is more reason to be concerned about inflation. Fed Chairman Ben Bernanke is an expert on fighting deflation, Cramer said.

5. Household corporations still owe the government money. Actually, companies' balance sheets are healthy and delinquencies are decreasing.

6. Cramer conceded that unemployment is keeping a lid on economic growth, but added that it is one of the most "baked in" of the negatives. No surprises there.

7. Housing is terrible. While housing might be in the doldrums, the price of houses bottomed last year, it just has yet to go up again. The decline in housing starts is actually good news because it will mean higher prices for houses later on.

8. Labor Day is coming up. Cramer thinks this is a lame excuse to sell, since the fundamentals and not the calendar is a better guide to the movement of stocks.

9.Gridlock in Washington. "Is this a bad thing?" Cramer asked. When Congress can't act, it can't pass anti-business regulations.

10. All sorts of indicators are flashing amber. Cramer called this "Another piece of vulgosity." Fundamentals have never been stronger.

The Myth of the Hindenburg Omen

"They call it the dreaded Hindenburg Omen," Cramer explained, "just perfect for the panic-pushers in the media who are always looking for something to scare you out of this market."

The Hindenburg Omen occurs when 2.2% of stocks on the NYSE are at their 52 week highs and 2.2% are at their 52 week lows. While some say that this omen has occurred before every major crash since 1985, Cramer dismisses the omen as mere panic material. There are other factors that usually occur along with the omen to make it a legitimate predictor, and the omen itself is not always reliable. For instance, when the Hindenburg Omen occurred in July 2000, the market actually rallied 5.5%. September 2005's Hindenburg was followed by a swift decline in the S&P 500 followed by a rebound and a rally. The bottom line: "Forget about the Hindenburg Omen!"

MedcoHealth Solutions (NYSE:MHS), Express Scripts (NASDAQ:ESRX), CVS Caremark (NYSE:CVS), UnitedHealth Group (NYSE:UNH)

Cramer discussed a stock which has apparently found a bottom, "...a despised, totally misunderstood stock that's down an astounding 28% year to date," MedcoHealth Solutions (MHS). The company is a retail pharmacy claims processor and has a mail-order pharmacy. MHS has 15% market share, but has underperformed ExpressScripts (ESRX), which is up 8% for the year, and CVS Caremark (CVS) down 10%. Medco is a strong grower, at an 18-20% rate, but trades at a multiple of 11.7. The company has rarely traded below a multiple of 13 and is a great play on the secular trend of the increasing number of drugs going off patent.

While bears like to think that MedcoHealth's services can be replicated by its competition, loyal clients know the company uses the most thorough drug utilization review programs to get the best deals for each customer. While The Street worries about MHS losing contracts, the company in fact has a 99% retention rate with its clients; "They've got the best database in the world to figure out what works and what doesn't... better than the FDA."

It is unlikely that MHS will lose its contract with UnitedHealthcare (UNH). In fact, Cramer predicts the contract will be renewed in 2012, since the two companies share the same information technology systems.

Potash (NYSE:POT), Deere (NYSE:DE)

Potash rejected a $130 a share takeover bid from BHP Billiton (NYSE:BHP), and the stock rose $31 and 28% in one session. With grain shortages in Russia and raging demand for crops in emerging markets, Cramer thinks the agriculture sector is headed for a bull market. He has liked Deere (DE) in the past, but would hold off buying, since shares have run up ahead of what is expected to be a strong earnings report, and have similarly sold off. Cramer would wait for Deere to drop a bit more before buying.

Cramer thinks Potash will get a buyer, and the stock will see $160. No one can quite replicate Potash's business. The fertilizer cycle has turned and there is new demand for Potash's products while inventories are declining. The company is evolving from a simple fertilizer play to a "one-stop shop for everything connected to commodities" from fertilizer to iron ore. Cramer would hold out for Potash.


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