Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Monday, September 29.
Depression Part 2
The plummeting Dow means that there’s great value to be found under certain conditions. Only companies that don’t need to borrow money to do business, and who make a product that people will buy no matter how bad the economy, can be owned right now. If a company needs cash, avoid it. If the product’s even slightly consumer discretionary, stay away. Then wait for a decline of between 5% and 8%. The strongest stocks of the strongest companies tend to bottom here, he said. Tomorrow should bring another bad day in the market, and that could give investors a chance to put their money to work – the very cash Cramer’s recently been urging them to raise. But only buy if the stock meets the aforementioned qualifications. Otherwise, sit on your hands, Cramer said. He urged viewers not to pull their money from the market, even at these levels. “Today’s 777-point drop was just the beginning,” Cramer said. “Now is not the time to put your money at risk. It’s time to protect your nest egg.” Because the bailout plan didn’t pass, “the Great Depression II is back on the table,” he said.
Just two weeks ago, Wachovia CEO Bob Steel was on Mad Money and said that out of $500 billion in loans on the bank’s books, only $10 billion were bad. Today, Citigroup bought Wachovia “for a pittance,” Cramer said, because the actual total was $42 billion. The FDIC was about to seize Wachovia. Cramer’s not calling Steel a liar. He believes that Steel believed. After all, the CEO bought $16 million worth of Wachovia stock on the open market and never hedged with options. And Steel wasn’t at the helm when Wachovia made those bad loans. Cramer allowed for the fact that maybe Steel didn’t yet have systems in place to properly value the loans. The final nail in the coffin, though, was probably JPMorgan’s massive devaluation of Washington Mutual’s loans. The numbers were much lower than those at which Wachovia was valuing its own portfolio, and many of the loans were comparable to WaMu’s. Once that happened, Cramer said, “Wachovia was toast.” Cramer was mad at himself for letting his viewers down. He trusted Steel, whom he’s known as a solid financier for 25 years. Cramer said that he should have been more critical, more skeptical during a time like this but he wasn’t. “I let you down,” Cramer said.
What else went wrong? How could Steel have been in a position where he could come on the show and tout his, more or less, healthy bundle of loans? The SEC and multiple bank examiners all signed off on Wachovia’s books. Even Steel, a former number two at Treasury, couldn’t see how bad his own balance sheet was. If the truth about Wachovia’s bad loans had been on the books, then there would have been no way Steel could have been so positive about his bank’s situation. The only thing investors can trust is a company’s financials, like Lehman Brothers, Wachovia’s financials “just didn’t reflect reality.” Cramer thought that if Paulson’s plan passed, and there’s no guarantee that will happen now, then Wachovia could dump its troubled assets on the government and move forward with its deposits and good loans. Maybe Steel who was ever bullish as all CEOs are, took advantage of Cramer. But in the end, Cramer said he is the last line of defense for Homegamers, and he holds himself responsible. As for Bob Steel, he has to be held accountable in his own right. And for not knowing just how in trouble his bank was, and watching Citigroup snatch it up at a huge discount, the CEO has been added to the Mad Money Wall of Shame.
Even when the market drops 778 points, there are stocks worth considering. In fact, Lender Processing Services does well because Wall Street took such a hard hit on Monday. Remember, mortgages are at the center of this market mess, and Lender Processing Services makes part of its money through default-management services, which involves helping banks with foreclosures and property inspections. After Congress today voted down Paulson’s bailout plan, there’s a good chance we’ll be seeing even more foreclosures in the near future. These default services made up 16% of LPS’s 2005 revenues, but by 2007 the number had jumped to 28%. And while the company’s closest competitor, First American, saw its business grow 44% year-over-year in the second quarter, LPS grew by 100%. Even if Congress does finally agree on a bailout, LPS could still work. There’s a 12 month to 18 month lag between a borrower default and when the company stops making money. So revenues should carry the business through much of 2009. Cramer doesn’t agree with LPS’s assessment that defaults won’t slow until 2011, but in a worst-case scenario, that’s just more reason to consider the stock. Add to this that the third quarter is about to end and with it come rate resets on adjustable-rate mortgages. There’s a good chance more foreclosures will follow as homeowners struggle to keep up with increased mortgage payments, and that means more business for LPS. Keep in mind, too, that LPS also handles the other side of foreclosures – mortgage creation. So even if the plan passes, and housing finds a bottom and people feel safe enough to buy again, then LPS will, again, see more business. The same goes for the rate resets. Those could just as well lead to more refinancing as opposed to foreclosures, leading banks to call on LPS for its services. The one drawback, Cramer said, is that bank consolidation could lead to a loss of customers for LPS. But then again, that means opportunity, too. Bank of America had planned to use Countrywide’s internal mortgage-processing system, which would have cost LPS $50 million a year in sales. But LPS is trying to win back that business, along with Countrywide’s, which would add $60 million $70 million in sales to the books. Bank of America or not, defaults aren’t going away, Cramer said. And it’s actually cheaper for banks to use LPS than it is for them to process these mortgages and foreclosures themselves. Then there’s the agreement New York’s attorney general made with Fannie Mae and Freddie Mac that they could only buy loans from banks that use independent means for appraising homes, i.e., use companies like LPS. LPS trades at just 11 times earnings because of a pullback due to that fear of bank consolidation. But given the current market situation, Cramer thinks investors will get an even better entry point. He urged them to wait for it.
Seeking Alpha publishes a summary of Jim Cramer's stock picks every day including: Mad Money Recap, Lightning Round and Stop Trading!
Get Cramer's Picks by e-mail -- it's free and takes only a few seconds to sign up.
Seeking Alpha is not affiliated with Jim Cramer, CNBC or TheStreet.com