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Cramer: Once Troubled, This Stock Has 40% Upside Potential

(Click for video linked to a searchable transcript of this Mad Money topic)

Even if you're not a big fan of the financials, there's a bank stock that Cramer thinks you might want to hold in your portfolio.

"Remember how AIG started to roar as the US Treasury sold off its stake in the company," Cramer said. "I expect the same kind of thing from Royal Bank of Scotland," as the British government begins to pull back.

Much like AIG, Royal Bank of Scotland was among the worst hit by the financial crisis. "RBS needed a gigantic 45.5 billion pound bailout—about $69 billion dollars at today's exchange rates—and ever since the U.K. has owned roughly 82% of shares," Cramer said.

And again like AIG, Cramer believes RBS has emerged as a stronger entity after the crisis. "It's gotten back on its feet. The turn seems solid to me, "Cramer said. Here's what Cramer likes:

- Retail banking in Britain is somewhat of an oligoloply with The Royal Bank of Scotland among the five largest players.
- RBS has a strong commercial banking arm "By itself RBS controls 36% of the market in Britain," Cramer said.
- RBS trades at a huge discount to rival Lloyds.
- RBS has pared down bad assets. "In 2009, RBS had 260 billion pounds worth of lousy assets, now that's down to 50 billion pounds and, by the end of the year, the company should be finished restructuring this ugly duckling division," Cramer said.
- RBS has several business units that could be spun off in order to unlock value. "For example, they own Citizens Bank, with its nearly 1,400 branches in the US. There's no real reason for RBS to be in the U.S. and I think it would make a lot of sense for them to sell Citizens or spin it off as a separate publicly traded company."
- RBS has a strong presence in Ireland, a nation emerging from a period of harsh austerity. "This could be the most undervalued gem of all because Ireland's roaring back and I believe it will have the best year over year growth in all of Europe," Cramer said.

Adam Jeffery | CNBC

Cramer believes all the catalysts listed above should drive shares considerably higher, but have not done so yet, because RBS still presents government overhang.

However, that may end soon.

"The next big elections in Britain are in 2015 and I suspect the current government will want to be out of the banking business by then, even if they have to sell the stock at a loss," Cramer said.

"I like it when banks get out of hock to their governments in part because more shares trading on the open market means more liquidity, but mostly because it dramatically reduces the possibility of political interference, and the combination of these two things tends to cause big institutional investors to start buying."

And when that happens the buying could be substantial.

Therefore, at current levels, Cramer thinks the stock presents great opportunity.

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"I could see the stock ultimately going 40% higher from here as RBS continues to gets its house in order," Cramer said. "I want you to start thinking about a building a position in this one at current levels."

However, he added a caveat. "Don't go crazy. There's no urgent rush," Cramer said. "I suspect it will take considerable time for people to realize that this ugly duckling will end up being a royal swan."

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

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Price
 
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AIG
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RBS
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