Stocks discussed on the in-depth session of Jim Cramer's Mad Money Program, Wednesday, April 6.
The Treasury might have accidentally gifted opportunities to the stock market. In the current scheme of things, companies are desperate to grow. The M&A space had dried up for some time, but the new tax inversion rules have opened the gates for everyone. How is that?
After the Allergan (NYSE:AGN) - Pfizer (NYSE:PFE) merger was blocked, Allergan CEO Brent Saunders reminded investors of the importance of M&A deals as some companies grow by acquiring. He said, "Anything that is a growth-oriented business with strong fundamental businesses and a good R&D pipeline to sustain that growth is of interest to us." Cramer thinks that Saunders will buy anything that gives them growth.
This opens to doors of M&A speculation activity. The lagging biotech stocks got life once again as lots of companies are potential takeover targets. Takeovers had dried up as of the two biggest acquirers in biotech, Allergan was being acquired and Valeant (NYSE:VRX) had self-destructed. After Treasury blocked the Allergan deal, the M&A space has found a new spark. That is why biotech saw its best day since 2009 and Regeneron (NASDAQ:REGN) was up 5.2%, Celgene (NASDAQ:CELG) up 5.9%, and Biogen Idec (NASDAQ:BIIB) up 5.2%.
Even in the oil space, the Halliburton (NYSE:HAL) - Baker Hughes (BHI) deal was blocked. Both these stocks were up 5.9% and 8.8%. Cramer had said for a long time that apart from biotech, the market needs oil stocks to rally too.
"I say the bulls owe a note of thanks to Treasury and Justice for getting the animal spirits going again and helping to create some wealth in the stock market, even if they clearly only did it by accident. A win is a win," said Cramer.
Is KB Home (NYSE:KBH) a takeover target?
In Cramer's opinion, KB Home is insanely cheap and he thinks that big homebuilders could benefit by acquiring it as the stock is still low. Even KB Home knows that its stock is cheap and hence the management has been buying back its stock aggressively. In the last quarter, they bought back 8% of their stock. The stock trades at $14 currently, but has a book value of $19. In Cramer's opinion, KB Home has assets in California that are worth much more than where the stock is trading currently.
The company has a small market cap, but a ton of land where it can build. "To me, that makes this company a prime candidate for a takeover," said Cramer. On the flip side the company has $2.6B in debt which makes it far from the best in the home building business.
Who could be a potential acquirer? Cramer thinks that PulteGroup (NYSE:PHM) would be the best suitor as it has struggled to grow in recent years, being such a huge home builder. The company's chairman and CEO Richard Dugas is retiring in one year, but its founder and biggest shareholder William Pulte believes that Dugas should step down sooner and he has missed the opportunities of buying land.
Cramer thinks by acquiring KB Home, Pulte can scale and compete with larger competitors such as Lennar (NYSE:LEN.B) (NYSE:LEN) and DR Horton (NYSE:DHI). Pulte specializes in the East Coast while KB Home is more concentrated on Northern California. "I'll even waive my matchmaking investment banking fee if the deal actually happens," said Cramer.
Broadcom (NASDAQ:AVGO) merger
The Broadcom and Avago merger was a game changer. It closed two months ago and the stock is up 14% since the deal was announced last May. The company expects cost synergies of $750M that will go straight to Broadcom's bottom-line.
There is more to like about the merger than the cost savings. Firstly, the company is less levered to wireless which has been declining. It is expected to be 22% of sales from 32% earlier. Secondly, the company gains exposure to the data center space which is growing at a rapid pace. "Avago's acquisition of Broadcom was a fabulous merger that has created a new star within the semiconductor industry," said Cramer.
The company now controls 4.5% of the total semiconductor market. They are a lead player in all the red hot growth markets like fiber optics, storage connectivity, set top boxes or chips for wireless devices in the Internet of Things.
The company trades at 12.3 times earnings which is the same as Intel (NASDAQ:INTC). This is way below the 18 times multiple of the average stock. In Cramer's opinion, Broadcom should trade at $226 per share which is 43% upside from current levels.
CEO interview - ConforMIS (NASDAQ:CFMS)
ConforMIS is a joint replacement company that uses 3D printing to create custom designed joint replacement implants and medical instruments. It went public last July at $15 and since then had a wild ride from $25 to as low as $7. The stock trades at $10 currently. It is the only customized joint replacement company in the market but is not yet profitable which makes it speculative. Cramer interviewed CEO Dr. Philipp Lang to hear what lies ahead for the company.
Lang mentioned the recall issue last August, which he said was due to an outside vendor. It was resolved within two months as the company had predicted. He said that the company is growing quickly and focusing on top line. They have been able to take market share quickly. "The key driver is really the clinical outcomes paired with economic outcomes," said Cramer.
Lang said that the new Medicare rules hold hospitals accountable for outcomes, including rehab and post-op care. Since ConforMIS patients walk faster after surgery and are more satisfied, they require less rehab which is beneficial for hospitals thereby making it a more logical choice for doctors.
Cramer thinks ConforMis is a good company but speculative given its size.
General Mills (NYSE:GIS)
Many analysts are saying that prices are too high to be sustainable or are high when compared to fundamentals. There are many reports downgrading consumer packaged stocks because they have run up too much.
One of those stocks is General Mills, which has run up from $56 to $64. "Do I think General Mills should be at $64? You can look at this stock like I would have if I owned it at my old hedge fund, in which case the answer is yes! But because it went up without me, no," said Cramer. The analysts say what they say since General Mills has very little organic growth, no fizz and is a steady company. Analysts want growth and consumer packaged stocks are clearly not the way to go.
These companies buy their stocks, raise dividends and offer enough earnings to keep the bears away. As soon as their prices go low, the buyers come in. "It is almost as if there is some invisible floor that governs them and you need a really ugly day to penetrate that floor, one that rarely comes," said Cramer.
When should investors buy stocks in this group? Cramer advised waiting for bad news on the economy and not their products. Then, the stock should be bought between 9:30 and 10:00 am ET as the companies cannot buy their own stock between that time.
"If you get all those circumstances you might just get a buying opportunity, although you can't take the first one because what will happen is that there are now enough momentum guys in these stocks that they will flee on day one and day two," he concluded.
Viewer calls taken by Cramer
Ulta Salon (NASDAQ:ULTA): Hold the stock. They have both high end and low end brands and a good omni-channel business.
Sherwin-Williams (NYSE:SHW): The acquisition was brilliant. Hold the stock.
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