5 New Buy Ideas From Jim Cramer

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 |  Includes: AZO, CMVT, DLTR, MCD, ORCL, WM
by: Investment Underground

By Stephen Walker

CNBC’s Jim Cramer recommended the following 5 stocks on the Friday, December 2nd episode of Mad Money. The following is my analysis of his recommendations on a valuation basis. I conclude that Cramer was right on DLTR, CMVT, MCD and WM, but wrong on AZO, and offer my unique analysis showing why.

Dollar Tree (NASDAQ:DLTR) - Trading around $81.

Cramer’s favorite, dollar store, received yet another buy recommendation. Cramer said to buy the best-in-breed stock if Dollar General (NYSE:DG) reports a strong quarter. Dollar Tree is trading up 46% YTD and Jeffries reiterated its Buy rating on the dollar store’s shares. Analysts at the firm said, “Investors should continue to own Dollar Tree for its defensive profile, EBIT margin expansion and strong relative top-line growth.” Dollar Tree can only benefit from expected weakness in consumer spending. Dollar Tree generated $0.87 Q3 EPS, a $0.04 beat, and delivered in-line revenue of $1.6B. The company’s Q3 revenue was an 11.9% year-over-year increase. Dollar Tree initiated an accelerated share buyback of $300M worth of common shares. Dollar Tree’s 11.9% quarterly revenue growth rate is the highest of its competitors and the stock trades at 22 times earnings. Cramer was right about Dollar Tree. The company's defensive posture offers a bulwark of stability to investors in an economy with anemic growth. As consumers trade down to Dollar Tree products, the company should benefit from top line growth.

AutoZone (NYSE:AZO) - Trading around $330.

Cramer expects this auto parts retailer to deliver outstanding numbers when it reports quarterly results next week and thinks the stock will balst through its 52-week high of $342. Auto parts retailers like AutoZone, O’Reilly (NASDAQ:ORLY) and Advanced Auto Parts (NYSE:AAP) have benefited in this down market as many people have chosen to fix and maintain the cars they have in lieu of purchasing new ones. AutoZone is trading up 21% YTD and trades at 17 times earnings. According to SEC filings, the company withstood some insider selling, which many analysts see as meaning the stock isn’t as strong of a defensive play as people thought. In addition to its share repurchase plan, AutoZone’s Board of Directors approved an additional $750M stock buyback. AutoZone’s 8.1% quarterly growth rate is the highest of its competitors and the company has a 10.5% profit margin. With no dividend yield, this stock feels too risky as it has already had a large run. Cramer was wrong about AutoZone. The company's earnings multiple is rich, in my view, and could see compression as competition and slowed growth after a robust summer season weigh on AZO's revenues.

Comverse Technology (NASDAQ:CMVT) - Trading around $6.

Cramer picked this “single-digit midget” for a speculative play. Comverse primarily sells software and services to telecom companies and others in similar industries. Cramer feels the stock is trading so low because the company never recovered from the scandal in which some executives were brought up on fraud charges. Kobi Alexander, the former founder and CEO, has since fled to Namibia where he is still fighting extradition. After years in purgatory, the company re-listed on the NASDAQ in September. Comverse is breaking itself up because some units are more valuable than the company as a whole. Comverse Technology owns a controlling stake in Verint Systems (NASDAQ:VRNT), maker of video and voice analysis products for the business intelligence and security markets. Comverse’s core business is improving as the company is seeing stronger than expected bookings. Cramer thinks there could be a takeover opportunity, as Oracle (NYSE:ORCL) would love to get its hands on that controlling stake in Verint and it can use Comverse’s operating losses to its benefit when filing taxes. Cramer was right on Comverse. The company's shareholders should benefit as the break-up unlocks value. With strong bookings growth, the company should be able to incrementally raise prices over the intermediate-term, and therefore positively impact profits.

McDonald’s (NYSE:MCD) - Trading around $95.

This fast-food chain received a buy recommendation from Cramer. McDonald’s has experienced exponential growth in recent years, but to some investors’ surprise, is showing no signs of slowing down. McDonald’s is planning significant growth in China (as well as other Asian markets) and Africa. JPMorgan reiterated its Overweight rating on McDonald’s shares, citing strong October same-store-sales in the U.S. and “stunning” growth throughout Europe. McDonald’s recently announced a program with daily-deal provider LivingSocial in continued efforts to experiment with large-scale deals. The thought of buying a stock with solid same-store-sales, a 3% dividend yield and a strong growth outlook is enticing. Only trading at 18.5 times earnings is simply an added bonus. McDonald’s fundamentals are strong and hard to ignore. The restaurant chain has a 13.7% quarterly revenue growth rate, a 44% gross margin and a 20% profit margin. YUM! Brands (NYSE:YUM), operator of brands like KFC, Taco Bell and Pizza Hut, is also banking on China for growth in 2012. YUM! Brands has a 2% dividend and 14.4% quarterly revenue growth. Cramer was right about McDonald’s. The overseas growth story is still in the early innings, in my opinion. McDonald's has largely been overshadowed by YUM! Brands blitz in China, specifically, where McDonald's has continued with a steadier build-up. It's drive-through platform should continue to catch on with Chinese consumers who increasingly find themselves in vehicles rather than on foot.

Waste Management (NYSE:WM) - Trading around $31.

Cramer gave this provider of integrated waste services a buy recommendation. A long-time favorite of his, Waste Management reported a strong 3rd quarter in which it generated $0.63 EPS, a $0.02 beat, and delivered $3.5B in revenue, a 9% increase that beat estimates by ($0.1B). Waste Management has pioneered greener energy practices in its industry. Its recycling and trash-to-energy programs not only benefit the environment, but they benefit the bottom line as well. Waste Management has developed a way to use trash to fuel trucks, which significantly reduces fuel costs. The 4.35% dividend is another reason Cramer loves this stock. Now may be the right time to buy, as the stock is trading down 15% YTD. By far the largest of its competitors, Waste Management has an 8.9% quarterly revenue growth rate and trades at 15 times earnings. Republic Services (NYSE:RSG), despite have a lower growth rate of 2.6%, has higher gross (41%) and operating (19%) margins. However, Republic Services trades at a higher multiple of 18.6 times earnings. Waste Management only has growth in its future. Cramer was right about Waste Management. The company operates in an enviable industry, where barriers to entry are high due to capital costs and regulatory hurdles to obtain licenses, permits and waste disposal sites. With the largest footprint and processes in place to tackle these hurdles, WM should continue to increase its near-monopoly in rural and suburban areas where competition is less heated.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.