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Cramer’s smokin’ new stock idea

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

Jim Cramer is a good stock picker but these picks are nothing short of smokin'.

They're the major tobacco companies, Altria, Reynolds American and Lorillard. "I'm a buyer," Cramer said.

Although the "Mad Money" host agrees the health risks posed by cigarettes are a serious social concern, as an investor he believes the forthcoming gains are too great to ignore. "I think the whole group is going higher," he said, "And no matter what you think about smoking, I believe somebody's portfolio will benefit from holding these stocks, why shouldn't it be yours?"

Pascal Le Segretain / Staff | Getty Images

Largely Cramer has gotten very bullish on tobacco because he believes that all three cigarette makers are facing a new and very powerful catalyst.

"Just this morning we learned that, after months of chatter, Reynolds American, the number two tobacco company in America is in the final stages of making a complex merger agreement with Lorillard, the number three tobacco company. This is a huge deal."

Although Cramer thinks there could be some synergies generated by the merger, he believes the far more powerful catalyst comes from the consolidation, itself.

"When you have fewer competitors in a given industry, it almost always results in stronger pricing which leads to greater profitability," Cramer said. In turn, investors bid shares higher.

"We've seen this over and over again: the domestic airline stocks have been soaring for the last eighteen months because they consolidated down to just three major players controlling most of the industry. Same happened in tech where Micron has been on fire, again for the last couple of years, precisely because that business went from having ten different players to just three."

Cramer believes in the wake of the merger, the tobacco stocks will follow suit; that is, they will all rally in expectation of greater profits generated by the consolidation.

Therefore Cramer said he's willing to bless all of the tobacco stocks, "because consolidation is good for everybody."

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Of course, for individual investors, Cramer always advocates diversification; and were you to buy all three stocks, chances are your portfolio would not be well diversified. So, for those investors who can only hold one tobacco stock, Cramer provided the following breakdown.

"Lorillard has already run up a lot and while we don't know what Reynolds will ultimately be willing to shell out for the company, I think it's unlikely that they'll pay more than $70 or at most $75 a share. That means your upside in Lorillard is somewhat limited here," Cramer said.

"At the same time, you can get a bigger dividend from owning Reynolds American, which yields 4.3 percent versus Lorillard's 3.8 percent, so Reynolds may be the smarter, safer way to play this deal."

"And if you simply want to enjoy the benefits of consolidation without the complications of an actual merger, there's nothing wrong with buying Altria here."




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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