Diversified Portfolios - Cramer's Mad Money (8/27/08)

by: Joan Wickham

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Wednesday, August 27.

Time for Crew - J. Crew (JCG), Urban Outfitters (NASDAQ:URBN), TJ Maxx (NYSE:TJX), Gap Stores (NYSE:GPS)

“It's time to buy J. Crew,” Jim Cramer told viewers. Cramer made his recommendation despite a botched quarter and an abysmal stock performance this year. It's down 46% since December. Cramer said that while J.Crew has been on a one-way ticket lower all year, he feels that now is the time to invest. His price target on the stock one year from today is $35. While the overall retail environment remains bad, with slowing store traffic, Cramer said only Urban Outfitters, TJ Maxx and J. Crew have the ability to buck the trend and head higher. Cramer said he believes J. Crew's recent earnings miss was due to large extent to problems with the company's website. With the overhaul of the website nearing completion, Cramer said the retailer should regain its footing. Cramer put his support behind CEO Mickey Drexler, a man who Cramer says turned around Gap Stores GPS, and founded Old Navy. While many CEOs in retail are “one-hit wonders,” Cramer said Drexler is a standout. He said the time to invest with Drexler is when he's out of favor, which he is right now with the stock of J. Crew cut almost in half since December. Cramer said J. Crew may still go lower from here, but feels the momentum will swing upward once the 12 analysts who currently rate the company as a hold begin to see the light and upgrade the stock.

CVS Caremark (NYSE:CVS) vs. Walgreen (WAG)

Cramer pitted CVS Caremark against Walgreen, which he also owns for his charitable trust, to determine which drugstore giant is the better buy.

  • When looking at the drugstore sector overall, Cramer gave both company's a 4 out of 5, as drugstores offer safety and consistency in uncertain markets. He reminded viewers that 50% of a stock's performance is usually linked to its sector.

  • Next, Cramer looked at growth. For drugstores, Cramer said the key metric is same-store sales. CVS last reported same-store sales up 3.1%, while Walgreen reported 4.1%. Give Walgreen another point. Score: 5-4, WAG.

  • Cramer also considered each company's growth strategy. Last year CVS acquired Caremark, a pharmacy benefits manager, and by all accounts that acquisition has not gone well. Then to make things worse, CVS went and bought Longs Drugs, a PBM out West, to expand its footprint. Now the company’s expecting the deal to hurt earnings for two years. Meanwhile, Walgreen has stuck to its core strategy of being just a great pharmacy and drugstore, he said. Cramer awarded one point to CVS for its strategy, but none for its execution, while awarding Walgreen a point for its simplicity. He’s rather you own the sleek, strategy-focused Walgreen. Give two points to Walgreen’s and one to CVS. Final score: 7-5, Walgreen’s.

In the end, Cramer said Walgreen comes out on top 7-5 on his scorecard. He said this is not a market that values complexity or poor execution and CVS unfortunately has both. The market seems to agree with Cramer’s evaluation. CVS trades at 12.7 times earnings and Walgreen's at 14.5, which makes sense because Walgreen is the better company. Walgreen’s a buy, but not until it pulls back to $34 from its present level of $35.28.

Am I Diversified?

The First Portfolio included:

  1. Altria (NYSE:MO) -- “Yield is 5.5%. Even though smoking is going down, they are going up.”
  2. Bristol-Myers Squibb (NYSE:BMY) -- “A little disappointment on the new drug front today. That’s OK the yield is safe.
  3. Nike (NYSE:NKE) -- “Nike is a shoe and apparel company I like.”
  4. General Electric (NYSE:GE) -- “I recommended the stock at $27. Great yield.”
  5. Cisco (NASDAQ:CSCO) -- “I like what Chambers is doing very, very much.”

Cramer called this portfolio “perfect” and said he loved it.

The Second Portfolio included:

  1. Great Lakes Dredge (NASDAQ:GLDD) -- “Infrastructure is a big play.”
  2. Darling International (NYSE:DAR) -- “Alternative energy play.”
  3. Frontline (NYSE:FRO) -- “Our favorite dividend play in the shipping industry.”
  4. Tupperware (NYSE:TUP) -- “This is a direct sale company. We love that CEO. That stock is great with natural gas lower. The stock is considered recession proof.”
  5. Temple Inland (NYSE:TIN) -- “Temple Inland was a really good recommendation. One of the absolute best paper plays.”

Cramer said this portfolio also was perfect for this market.

The Third Portfolio included:

  1. Coca-Cola (NYSE:KO) – “Coca Cola is the premiere beverage company in the world. It is a terrific company to own.”
  2. Terra Industries (TRA) – “This company is in the ag business.”
  3. Hewlett-Packard (NYSE:HPQ) – “I think they are going to blow away the numbers. The EDS deal has now closed. It will be a magnificent story at the analysts’ meeting. ”
  4. John Deere (NYSE:DE) – “This company is also in the ag business.”
  5. Amgen (NASDAQ:AMGN) – “Amgen has made a total comeback here. It is just on fire.”

Cramer identified two of a kind with Terra and Deere, and he recommended selling Terra for a defense stock or industrial company.

Sudden Death

Cramer was bullish on Dawson Geophysica (NASDAQ:DWSN), Bristol-Myers Squibb (BMY) and Energen (NYSE:EGN).

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