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Ringing the Register in Retail

Thursday, 26 Apr 2007 | 7:58 PM ET

According to Cramer, one of the biggest drivers of this rally we’re seeing is the surplus of private equity money floating around. Any company that’s a likely takeover target is going to see its stock price go up. Not every one of these is worth buying, but Cramer says there are plenty of good moneymaking opportunities for Home Gamers.

Private School: Ross Stores
All this private equity money needs to be spent somewhere

In keeping with the series Cramer has been running all week, tonight he offered up two more private equity picks that he thinks investors should consider, both of them from retail: Ross Stores and TJX Companies, which is TJ Maxx and Marshall’s. These two stores fit the criteria for PE buyouts, he says: strong cash flows with poor but fixable operations.

Ross Stores is a discount retailer, and it has the cash flow and great sales growth that are representative of a good business. Another thing ROST has that PE guys love – very little debt. The problem is that operating margins have fallen by 250 basis points over the last few years because of system troubles, distribution center problems and shrinkage issues. The improvement seen in margins last year means there’s a solution to the problem, Cramer says. A PE group would probably just fire staff, shut down less profitable stores and start generating higher margins and profits, which Cramer says is easy enough to do.

As for TJX, this company has been in a tough spot. It generates lots of cash with its core stores, TJ Maxx and Marshall’s, but it also owns Winners, Homegoods, AJ Wright and Bob’s Stores for their supposed growth potential – and it does so strictly to keep the Street interested in the stock. So TJX used to get 90% of its sales from its two core stores, but now that number only totals 66%. As Cramer says, “TJX is sacrificing its margins on the altar of higher growth so the Street will reward its stock price.”

That’s a perfect situation for private equity. A leveraged-buyout firm could sell off or shut down Winners and any other underperforming stores, like AJ Wright, to bring the margins back up. As a public company, TJX doesn’t have the luxury of ignoring growth even if consolidation makes more sense.

Bottom Line: All this private equity money needs to be spent somewhere, and Cramer thinks we could easily see Ross Stores and TJX taken private.

Questions? Comments? madmoney@cnbc.com

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ROST
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TJX
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