Cramer's Mad Money - A Play on Merger Mania (8/25/10)

by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Wednesday August 25.

A Play on Merger Mania: BHP Billiton (NYSE:BHP), Potash (NYSE:POT), Intel (NASDAQ:INTC), Dell (NASDAQ:DELL), Hewlett Packard (NYSE:HPQ), 3Par (NYSE:PAR), Lazard (NYSE:LAZ), McAfee (MFE)

It's merger mania in late August, with BHP Billiton's (BHP) bid for Potash (POT), Intel's (INTC) purchase of McAfee (MFE), and similar deals going on. Dell (DELL), whose CEO is on Cramer's Wall of Shame and Hewlett Packard (HPQ) which currently has no CEO are in a bidding war for 3Par (PAR) which Cramer thinks is a third-rate play.

M&A activity is up 14% since last year, and Cramer thinks this number will only increase, given that so many companies are flush with cash. Instead of recommending speculation on just another takeover target, Cramer recommended buying a stock that will actually benefit directly from M&A activity; Lazard (LAZ).

Lazard is the boutique financial advisory firm that specializes in mergers and acquisitions. "And it may do them better than anyone," added Cramer. The company is actually outperforming major banks in its advisory capacity; restructuring and corporate finance make up the remainder of the company's revenues.

Lazard recently beat earnings estimates and sales were up 10%. Even though there has been an increase in deals lately, the volume of M&A activity should be 79% higher, so there is plenty of room for Lazard to grow. Cramer thinks the stock price could increase by 50% to $49.

Polypore International (NYSE:PPO)

Cramer scanned the 52-week high lists for stocks that are headed higher and found Polypore International, a company he thought looked a lot like Millipore, a maker of fillers and purifiers for biotech labs. Millipore was just bought last month by a company Merck KGaA (i.e. the German Merck). On further investigation, Cramer discovered that Polypore has a pastiche of different businesses including filtration for batteries, water purification, semiconductors, controlling gas levels in power plants and dialysis for medical procedures. One advantage PPO has with all of these businesses is they are oligopolies with high barriers to entry; PPO has large market share and pricing power in each of its segments.

For instance, Polypore is the number 3 player in the lithium ion battery space and sales in the business are up 57% in the most recent quarter. The company has beaten earnings estimates for five straight quarters, trades at a multiple of 19 with a 20% growth rate.

5 Reasons Investors Are Worried: 3M (NYSE:MMM), United Technologies (NYSE:UTX), ConEdision (NYSE:ED) and Exxon Mobil (NYSE:XOM)

Bears are looking for reasons to be afraid of stocks. They cite sluggish housing numbers, even though housing doesn't comprise a large part of the economy. The disappointing durable goods number could be cited as another problem, but manufacturing only comprises 10% of the economy and is actually strong.

There isn't one dominant reason the market isn't done going down; the market is suffering a "death by a thousand cuts." However, Cramer still prefers high-yielding stocks like 3M (MMM), United Technologies (UTX), ConEdision (ED) and Exxon (XOM) to bonds or keeping cash in a mattress. He identified 5 uncertainties that are shaking investors' confidence.

1. How much healthcare reform will cost.

2. How much financial regulation will cost.

3. What will happen with taxes.

4. How much houses are worth.

5. What is going to happen with President Obama's "anti-capital, pro-labor" agenda.


Jim Cramer was up 31% in 2009. Click here now to sign up for Jim's Action Alerts PLUS and trade alongside him. Special discount for Seeking Alpha users.

Get Cramer's Picks by email - it's free and takes only a few seconds to sign up.