Cramer's Mad Money - The Cheapest Apparel Play You've Never Heard Of (11/30/10)

 |  Includes: BEZ, JNY, M, NKE, PVH, RL, RTH
by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Tuesday November 30.

CEO Interview, Joseph Gromek, Warnaco (WRC), Phillips Van Heusen (NYSE:PVH)

With Phillips Van Heusen (PVH) flirting at its 52-week high, Cramer discussed a derivative play. Warnaco (WRC), which is "one of the cheapest apparel plays you've never heard of" and is the owner of major swimwear, underwear and sportswear brands like Calvin Klein and Speedo. Currently, the Calvin Klein brand generates 75% of the company's sales, over half of which are from overseas. The company recently beat earnings by 9 cents and saw a 15% rise in revenues year over year. Warnaco sells at 13 times earnings with a 16% long-term growth rate.

Gromek discussed the importance of the Calvin Klein trademark and the 1,800 specialty stores the company runs overseas. Calvin Klein has 30% market share in the U.S. for intimate apparel and is unique in that it is marketed to both genders. The company is launching CK One which will pull all three entities of the brand together; fragrance, underwear and jeans. Warnaco is not suffering from higher cotton prices, since it buys finished products, has purchased goods 6-9 months in advance and can raise prices on the strength of its brand recognition. "Your stock is cheap and it doesn't deserve to be cheap," said Cramer. "Warnaco is a great story."

Nike (NYSE:NKE), Ralph Lauren (NYSE:RL), Liz Claiborne (LIZ), Jones Group (NYSE:JNY)

"'Tis the season for broad generalizations about retail," said Cramer, but with the proposed extension of unemployment benefits and a continuation of tax breaks, the retail sector could flourish. Cramer discussed apparel makers or vendors, which are the best investments for those worried about economic trends, because they have more international exposure and are less tied to upfront costs and overhead. While department stores might make more money on merchandise, vendors do not have to hold fire sales to get rid of inventory and do not have the headache of real estate to deal with.

What makes an ideal vendor? A company with significant international exposure and brand recognition, which gives the company pricing power. Cramer thinks Nike (NKE) and Ralph Lauren (RL) with 50% and 30% international exposure respectively, are the "gold standard" among vendors.

Nike is a great way to play the "raging worldwide bull market in footwear" since it has 50% market share in sports shoes. Emerging market sales were up 24% for Nike, with sales in Brazil alone up 70%. The stock is up 17% since Cramer recommended it in March, and the company recently raised its dividend. Cramer thinks NIke, with a 17.5 multiple and a 10.5% growth rate, is worth paying up for, given its diverse customer base and strong brand.

Ralph Lauren (RL) is a best-of-breed vendor which reported a terrific quarter with an 11% rise in sales and a 30% increase in operating profit. While RL's stock has risen significantly, it is not too expensive and trades at a multiple of 18 with a 13% growth rate. Another retailer Cramer likes is Phillips Van Heusen which has had a big gain, but is "in the sweet spot."

Two vendors Cramer would not buy are Liz Claiborne (LIZ) which "represents everything that can go wrong with an apparel company": heavy debt, a suffering brand, and a 50% year over year increase in inventory going into the holiday season. Jones Group (JNY) reported a terrible quarter on rising raw costs and is in the penalty box for two quarters.

Off the Charts Retail HOLDRS (NYSEARCA:RTH)

America might be quickly losing manufacturing jobs to emering markets, but one area in which America still holds sway is shopping. While Cramer usually stresses fundamentals, he thought it was a good idea to consult technical analyst Tim Collins about the chart of Retail HOLDRS (RTH), which surprisingly is "buzzing" in spite of the bad press about retail.

According to the monthly chart, RTH is moving away from its previous overbought levels and the move is sustainable. Collins sees a "W" formation that means the price action is bottoming and could signal a 10-15% move in RTH for the coming year. When the stock breaks through resistance, it will likely rally hard. Collins notes a cup and handle formation for RTH, which also could signal a breakout to the upside. The daily chart also shows a W formation developing, which is also a bullish sign.

Cramer would not believe the negative hype about retail, but would pay more attention to the technicals and the fundamentals of the sector.

The USA Matters: Baldor Electric (BEZ), Macy's (NYSE:M)

It seems like the U.S. finally matters again, as the Dow jumped back after its huge initial decline on Tuesday to close only 46 points down. The markets were driven not by bad news from Europe or Asia, but from Obama saying the word "compromise" with the proposed extension of unemployment benefits and tax breaks, both moves which will stimulate spending.

Cramer commented on how stocks are hostages to the dollar, while the performances of individual companies are often ignored. Hedge funds are obsessed with driving down the euro instead of concentrating on good news like Baldor Electric's (BEZ) takeover bid which gave investors who bought it on Cramer's recommendation a 40% profit on good news about retail, particularly from Macy's (M). The obsession with the low dollar ignores the fact that some companies, like restaurants, actually benefit from a strong dollar. Still, Tuesday's news of compromise should stimulate spending and be good for stocks, at least in the near term.


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