Banks Hit Bottom – Cramer’s Mad Money (7/21/08)

by: Joan Wickham

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Monday, July 21.

The banks have bottomed, so it’s time to start buying: JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), US Bancorp (NYSE:USB) and Bank of America (NYSE:BAC)

That was Cramer’s message during Monday’s Mad Money. Of course, this isn’t a blanket statement. There’s always a method to his madness. He identified four banks that he said will still be standing after the dust settles from the recent turmoil in the financial sector.

The “fortress banks” will survive to see 2009 and have the incredible opportunity to buy failing banks at bargain prices. How does Cramer know we’ve hit bottom in the banks? Some key stocks in this group stopped falling after the run on IndyMac and Washington’s moves to save Fannie Mae & Freddie Mac.

Then three things happened to take the Cramer’s “four financial fortresses” higher:

1) JP Morgan Chase (JPM), Wells Fargo (WFC), US Bancorp (USB) and Bank of America (BAC) reported good earnings.

2) Congress stepped in with meaningful legislation to combat the problems.

3) Those financial fortresses got in position to takeover all the other failing U.S. banks, most likely without any concern about anti-trust regulation.

3) The federal government is considering lifting antitrust rules, making it easier for larger banks to begin buying up the smaller, failing ones.

The move by Congress, coupled with a decrease in single-family housing starts, which is where most of the supply bulge is, should result in house price stabilization. And the buying up of struggling banks by surviving banks is very similar to what happened at the end of the savings-and-loan debacle in 1990, Lastly, the federal government is considering lifting antitrust rules, making it easier for larger banks to begin buying up the smaller, failing ones. This all comes courtesy of the SEC’s renewed focus on illegal short selling. As the shorts race to cover their positions, the big banks will be able to raise capital through equity deals, giving them the money they need to takeover their weaker peers.

Best Buy in Banks: Us Bancorp (USB), Washington Mutual (NYSE:WM), Wachovia (NASDAQ:WB), American Express (NYSE:AXP)

Cramer said he’s not recommending all four banks only US Bancorp. He said US Bancorp is the only one that's fallen far enough to make him comfortable. Plus, US Bancorp has a great 6% yield, and insiders have been buying up tons of their own company. It’s a good sign. Cramer said he would be a buyer of the other three only on weakness. There is the chance for weakness as Washington Mutual and Wachovia report earnings Tuesday. (American Express “reported a horrible number” Monday night and that was a good start.) “I think we’ve bottomed at last,” Cramer said. “I look forward to massive takeovers, consolidation and a dramatic advance in financials” – at least JPMorgan Chase, Bank of America, US Bancorp and Wells Fargo – “over the next year.”

Cramer Responds to Callers: PNC Financial Services (NYSE:PNC) – “This is a company to hold. I believe it will see $70 a share again. They had a good quarter.” They were just not quite good enough to call a Fortress Bank.

Biotech Takeover Targets: Genentech (Private:DNA), Forrest Labs (NYSE:FRX), ImClone (IMCL), Genzyme (GENZ), Watson (WPI)

Two week's ago, Genentech fell to just $75.93 a share after a negative article in the New York Times raised concerns that the company's cancer drug, Avastin, was too expensive. Cramer advised buying Genentech after the news, and the stock is now up 23% since that recommendation. Cramer said Roche's took advantage of the weak dollar to buy Genentech. With the U.S. dollar so weak, he said, it makes sense for European companies and others to acquire U.S. based companies. Cramer said Forrest Labs might appear be a tempting way to play the drug stocks, but advised against buying shares. He also advised against building a position in either ImClone or Genzyme. Cramer instead recommended shares of generic drug maker Watson (WPI) as the most attractive takeover target. Cramer said he likes the company for its pipeline of 60 new drug applications pending at the FDA, and recommended buying shares on any weakness in the sector. The pipeline is worth $2B.

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