Cramer's Mad Money - Buy the Villains of the Credit Crisis (4/14/11)

by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Thursday April 14.

Moody's Corporation (NYSE:MCO), McGraw-Hill (MHP), Goldman Sachs (NYSE:GS), AIG (NYSE:AIG), JPMorgan (NYSE:JPM)

It is no secret that Goldman Sachs (GS) is being treated like a major villain of the credit crisis, even though the investment bank didn't deal with a single bad mortgage. Still, Congress is after Goldman and other big banks when these institutions should at least share the blame with ratings agencies which were the "key enablers of the financial meltdown." Ratings agencies are pointing the finger at the banks, saying they were pressured to give the ratings they gave, and that their ratings were only opinions. Over 20 lawsuits have been dropped against these agencies while Goldman Sachs and others continue to get grilled.

Cramer thinks ratings agencies, such as Moody's Corporation (MCO) and McGraw-Hill (MHP), are the biggest villains of the financial crisis, but now are the biggest winners, since the companies are making a comeback. "They were supposed to defend us, but ...the bad paper could not have been sold without their seal of approval." However, it is hard to hate winners; both MCO and MHP are flirting with their 52-week highs. The two agencies are basically running a duopoly, with investment grade debt rising 22%, high yield debt up 30% and European debt rising 40%. Moody's trades at 14 times earnings with a 12% growth rate and its stock is 30% below its average range in 2007. McGraw-Hill has a multiple of 12, an 11% growth rate and is up 40% from its 2007 average.

"I would hold my nose and buy either one," said Cramer, since it doesn't look like these villains will ever get punished, but will continue to laugh all the way to the bank.

Cramer took some calls:

JPMorgan (JPM) and other major banks are going to be the whipping boys for the rest of the year. They are too hard to own.

AIG (AIG) has fantastic management, which hasn't always been true in the past. The government currently owns a lot of AIG stock, and Cramer would wait for the government to divest and share prices to fall before buying. "I'm not in a hurry to buy."

Perrigo (NASDAQ:PRGO), Johnson & Johnson (NYSE:JNJ), Netflix (NASDAQ:NFLX), Chipotle Mexican Grill (NYSE:CMG)

How do you know when a high-flying stock has gotten too expensive? Don't listen to what the analysts say, because they often view fast-growers with trepidation as the stocks climb, and they shift their position to the positive territory only when it is late in the game. Just as it isn't a good idea to buy stocks just because the price is low, it isn't a solid strategy to automatically distrust growth stocks just because they have high multiples. However, that is what analysts tend to do.

A prime example is Perrigo (PRGO), the producer of private-label store brands with 70% market share. Perrigo is "king of the knock-offs," and has seen a 90% rise in its stock price since Cramer got behind it in February 2010 as a trade-down play for the value-conscious consumer. Perrigo has been benefiting from Johnson & Johnson's (JNJ) many recalls, but analysts have been fighting Perrigo's rise tooth and nail, in spite of its excellent fundamentals. Finally, Goldman Sachs has upgraded the stock from a "sell" to a "hold," and another analyst upgraded Perrigo from "neutral" to "buy." If investors had listened to the bearish analysts, they would have missed a 58% gain in the stock.

One reason analysts were so bearish on Perrigo was because of a warning letter from the FDA about its manufacturing practices, but unlike JNJ, which has had multiple recalls with little reform, Perrigo responded to the FDA's complaints and fixed the problem. Now that the analysts have come late to the game, Cramer would sell some of Perrigo, because it may have the same fate as Netflix (NFLX), which analysts also hated all the way up, and the stock dropped once they changed their minds. "When the critics throw in the towel, you have to sell," said Cramer.

Chipotle Mexican Grill (CMG) is another growth stock that is more popular with consumers than with TheStreet. The stock has risen 97% since June of 2010. The company received four downgrades a day after it reported earnings in February, but it has surged back since and is near its 52 week high.

The bottom line: never short a high quality growth stock just because it seems expensive at first glance, but when analysts cover their shorts or upgrade, it is time to take some off the table, because they are probably wrong again.

CEO Interview: Bruce Northcutt, Copano Energy (NASDAQ:CPNO)

How do you invest in natural gas without becoming a hostage to low prices on the fuel? Try one of the gas and oil pipeline plays which are high-yielding "money machines." Copano gives a 6.5% yield and has extensive pipelines in Texas. The company is making the transformation into a mainly fee-based model, and with steady cash flows, the distribution will likely go higher. The stock is up 50% since April of last year when Cramer recommended it. Many energy companies are MLP, but Copano is an LLC, which has the advantage of not having to share its profits with partners, and can return more money to shareholders. Copano has $400 million worth of projects and 200 rigs in the Texas Eagleford shale. CEO Bruce Northcutt said that despite the media's preoccupation with environmental concerns over natural gas drilling, he has seen no pollution issues.

Cramer thinks Copano is a "terrific growth story with a great yield."

Alcoa (NYSE:AA), Google (NASDAQ:GOOG), JPMorgan (JPM), VFCorp (NYSE:VFC), Deckers (NASDAQ:DECK), Amazon (NASDAQ:AMZN), Lululemon (NASDAQ:LULU), Delcath Systems (NASDAQ:DCTH), Arm Holdings (NASDAQ:ARMH)

Everyone is worried about a soft patch in the market, and no one is sure whether to stay the course or panic, said Cramer. The consensus is that April is going to be soft, and this self-fulfilling prophecy is being played out in reactions to earnings and news. Alcoa's (AA) quarter was immediately labeled as disappointing in spite of some bullish information the company gave, but the label stuck; Alcoa's shares fell. JPMorgan (JPM) reported a better-than-expected quarter, but TheStreet didn't seem to care. Google's (GOOG) stock plunged before the company had a chance to explain its results.

"Soft patches tend to be self-correcting," said Cramer, "and commodity prices don't rise forever." Japan's reconstruction has been halted, but it isn't going to be shelved. Oil prices seem to be stabilizing. China can't keep raising interest rates forever, and in fact, China can't slow down its economy too much without risking social revolt. As commodities are slowing a bit, VFCorp (VFC) and Deckers (DECK) are already seeing gains, Chipotle Mexican Grill is as strong as ever, and growth stocks Lululemon (LULU) and Amazon (AMZN) should continue to perform well. Gold is a buy on inflation worries and on worldwide demand. "Soft patches always end," said Cramer.

Cramer took some calls:

Decalth Systems (DCTH) is a company that has to prove itself and it still doesn't have revenues. Until Decalth does, "It is not worth talking about."

Arm Holdings (ARMH) is a stock Cramer liked at a lower level, but thinks it is a sell at $29. "If that means I'm flip-flopping, then I'm the king of flip-flop. I like it, but it depends on the price."


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