The Rebound List - Cramer's Mad Money (8/26/08)

by: Joan Wickham

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Tuesday, August 26.

Housing Bottom - Toll Brothers (NYSE:TOL), Centex (CTX), D.R. Horton (NYSE:DHI), Pulte Homes (NYSE:PHM), Lennar (NYSE:LEN), MDC Holdings (NYSE:MDC), KB Homes (NYSE:KBH)

Jim Cramer believes the housing market will bottom in the third quarter of 2009. He based his conclusion on an analysis of the charts of the seven largest home builders, including Toll Brothers, Centex, D.R. Horton, Pulte Homes, Lennar, MDC Holdings, and KB Homes. He said the charts clearly show the top of the market in July, 2005, one year before the “beginning of the end” in July 2006. Given that 12-month lead, Cramer identified the bottom for the homebuilders on July 17 of this year. Normally, he said he would go with a 6-month to 12-month leading indicator for this bottom, but in this case, he's giving some more leeway and is predicting it will take 309 days before the housing market bottoms.

Cramer’s List of 10 reasons why he feels the market will rebound in the third quarter of 2009:  Freddie Mac (FRE), Fannie Mae (FNM)

  1. There are far fewer homes being built now than in 2005.

  2. The $300 billion Federal Housing Bill is helping homeowners avoid foreclosure.

  3. Home prices have come down to bargain levels (as much as 30-40% in some areas).

  4. The hottest housing markets are starting to cool off.

  5. Mortgage rates should decline once Freddie Mac and Fannie Mae are nationalized.

  6. The bulk of “teaser rate” home loans have reset and foreclosures will now decline.

  7. The rate of household formation will increase as thousands camped out in apartments can now afford homes.

  8. Immigration levels should rebound after the November election.

  9. The biggest problem areas are now contained in such problem states as California, Florida and Arizona.

  10. The areas with the highest foreclosure rates are starting to stabilize.

Lowe's (NYSE:LOW) vs Home Depot (NYSE:HD)

In a new segment called “In The Ring,” Cramer pitted home improvement superstore Lowe's against its biggest rival, Home Depot, to determine which company is the preferred stock to own.

  • Cramer outlined how professional money managers would evaluate the two stocks. First, he looked at the sector for both companies. With housing set to rebound next year, he assigned the home improvement sector a value of 2 or 3 on a five-point scale for both companies.

  • Then he focused on growth. He said Lowe's reported a 5.2% decrease in same-store sales and raised its guidance, while Home Depot reported a decrease of 7.9% in same-store sales. Cramer gave one point to Lowe's and only half a point to Home Depot.

  • Next, Cramer looked at market share. With Lowe's reporting a 1.2% increase in market share and Home Depot reported a loss, Cramer gave one more point to Lowe's.

  • After that Cramer looked at how much room each company has for growth. Home Depot expects to open 55 new stores, compared to Lowe's 120 expected new stores. Cramer awarded Lowe's an additional point for its expansion prospects.

  • Finally, Cramer considered each company's dividend. After comparing the companies' near identical PE ratios, he said Lowe's dividend clearly comes out on top.

His final conclusion: buy Lowe's and sell Home Depot.

Johnson & Johnson (NYSE:JNJ) vs. Pfizer (NYSE:PFE)

In a second installment of “In The Ring,” Cramer compared Pfizer to bellwether Johnson & Johnson to see who came out on top.

  • Cramer looked first at the drug sector overall and gave it only a 3 out of 5 due to the uncertainly of the current election cycle. “Drugs are not as safe as a utility in this environment,” he noted. Cramer said the key things to look for with drug stocks are growth, patent protection and invention.

  • When comparing the companies' growth prospects, Cramer noted that Pfizer sold much of its consumer products division to Johnson last year, leaving the company with almost no revenues from non-drug related sources. By contrast 24% of Johnson's revenues came from consumer goods. He awarded Johnson 2 points for keeping the “boring stuff” and diversifying its product mix.

  • Next, Cramer looked at patent expirations. Johnson expects to lose $3.8 billion in sales from patent expirations in the coming years, while Pfizer expects to lose $6.6 billion. Advantage Johnson, said Cramer.

  • Finally, Cramer looked at each company's product pipeline. Here he found Johnson with 7 to 10 new products expected between 2008 and 2010, while Pfizer expects 15-20 new products in their pipeline. He awarded one point to Pfizer on this front.

Tallying up the points, and accounting for some intangibles, like Johnson's great corporate culture and its famed shareholder Warren Buffet, the prize goes to Johnson & Johnson, he said. Pfizer, he said, may look cheap, but it isn't.

Maintenance Pays - Monro Muffler (NASDAQ:MNRO)

Robert Gross, chairman and CEO of Monro Muffler, came to discuss whether the tightening credit markets, means people are keeping their cars longer. Gross confirmed Cramer's theory, saying that Monro is seeing an uptick in business as people with older cars look for more expensive repairs. He said that while some customers are delaying some maintenance due to the slowing economy, many are investing in increased maintenance to help increase fuel economy. Gross also said the market still looks great for acquisitions, and with nine recent transactions already completed, he still looks for more in the coming months. Cramer told viewers that he thinks Monro is a buy.

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