Cramer's Mad Money - The Rally Is Not a Sign of Health (8/11/11)

 |  Includes: BHP, CSCO, EOG, GSK, LLY, MRO, SNY
by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Thursday August 11.

The Rally Is Not A Sign of Health: Cisco (NASDAQ:CSCO)

"One thing I didn't want to see," Cramer said, "was today's rally." He explained that the 400 point rise in the Dow might give investors a false sense of security and the dramatic rises in the averages this week were just as much a sign of an ailing economy as the devastating declines. Cramer would use strength to get out of sectors like banks and tech and raise cash or buy high dividend stocks. Cramer outlined 5 reasons for the rally and four reasons why the situation is not necessarily improving.

1. Cisco (CSCO) finally reported a strong quarter after a period of underperformance. The company is seeing acceleration in nearly all of its businesses and emerging markets are strong.

2. The ban on short selling for troubled banks caused a short covering. "This is a positive, but it is not a lasting positive," Cramer explained, unless banks raise capital.

3. Jobless claims were not so bad.

4. Gold broke its upward trend. However, if gold goes down, Cramer says he'd rather see it go down "of its own volition" and not because of increases in margin rates. He thinks gold will head back up.

5. Insider buying is at the highest level Cramer has ever seen it. Ironically, it comes at the same time as the largest exodus of "homegamers" from stocks since the market bottomed in 2009.

Four reasons the worst might not be over:

1. Lack of leadership, both in the U.S with the S&P 500 downgrade of the U.S. and the European leaders who don't seem to have a solution, and in any case, are on vacation.

2. Europe's problems are complex and will continue.

3. Machine trading will continue to create volatility in the stock market

4. The "up" days are not sustained, but are followed by "down" days.

Without fundamental changes in economic policy, Cramer said, there is going to be nothing but "sickening volatility" and the market will continue to seem like a casino rather than a safe place to invest.

Sanofi-Aventis (NYSE:SNY), Eli Lilly (NYSE:LLY), GlaxoSmithKline (NYSE:GSK)

When the market shakes up, it is time to "circle the wagons" around winning stocks of good companies whose yields are getting bigger because their stock prices are being knocked down. Pharma stocks Eli Lilly (LLY), Sanofi-Aventis (SNY) and GlaxoSmithKline (GSK) all yield around 5%, but which is the best investment?

Sanofi-Aventis has been sold off mainly because it is a French company, and all things French are getting hammered. The stock was down 7.4% on Thursday because the French stock market was down on news that the country's banks are in trouble. However, pharma has nothing to do with the financial sector. Cramer thinks SNY is ridiculously cheap, with a multiple of only 6.8 times next year's earnings; this multiple is lower than that of its peers. While its Plavix drug that treats blood clots is going off patent in 2012, the fact is so well-known that the news is baked into the stock. The company has two cancer treatments in the pipeline and its diabetes and vaccine businesses are doing well, particularly because it is difficult to develop a vaccine, and the company is inoculated against competition.

SNY's sales in emerging markets comprise 30% of its total revenues, and the company has higher emerging markets exposure than its peers. The Genzyme acquisition gives the company the advantage of high-cost orphan drugs and Genzyme's pricing power. The acquisition is going smoothly, and Genzyme's sales are up 16%. Cramer would buy Sanofi-Aventis now and perhaps more depending on the outcome of the analyst meeting on September 6, when management will discuss its growth strategy.

EOG Resources (NYSE:EOG). Other stocks mentioned: BHP Billiton (NYSE:BHP), Marathon Oil (NYSE:MRO)

Cramer would use the sell-off in oil to buy his favorite oil stock, EOG Resources (EOG). The decline in oil is not because of falling demand. In fact, demand is increasing. EOG is the most undervalued oil stock, and is the best way to play unconventional domestic shales like the Eagle Ford and the Bakken. EOG's stock has been knocked down 30 points from its 52 week high in spring. The company's stellar quarter got lost amid the volatility this week; EOG reported a 32 cent earnings beat, an 89% rise in revenues and a 50% increase in production. EOG's assets are undervalued, and the actual value is 66% higher than the price Marathon Oil (MRO) paid for similar assets. If the stock were valued at the price BHP Billiton (BHP) paid for Petrohawk, the stock would be 63% higher.

The company has reinvented itself on the realization that natural gas prices would stay low. In 2009, EOG was 29% levered to oil and 71% to natural gas. By 2012, this ratio will be reversed in favor of oil over natural gas. By next year, EOG will be able to transfer its oil by rail to Louisiana, where it can charge higher prices. The company has 100% success rate drilling in the Bakken shale; CEO Mark Papa said such a rate of success is "unheard of" outside of Saudi Arabia. Cramer would buy EOG shares now, but would buy more when they go lower. He thinks the company is an attractive takeover target.


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