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Making Momentum Work for You

Friday, 24 Aug 2007 | 11:31 AM ET

Aside of looking for value stocks, investors can play momentum during the recovery from a sell-off, Cramer said.

New High List: EMC
Mad Money host Jim Cramer says EMC is too low but it still has momentum, and if it keeps following the Cypress Semi playbook, then there's no reason to worry and plenty of reasons to buy.

Instead of checking the new-low list for discounts, the new-high list is where momentum is found. That’s where Cramer discovered EMC, a stock he thinks could move as much as 27%.

EMC was a play on the VMware IPO, but it has hardly moved since. Cramer isn’t worried, though, because the same thing happened when Cypress Semiconductor spun off SunPower – a blowout IPO meant little in the short term, but Cypress is up 52% about two years later.

By Cramer’s math, take out EMC’s stake in VMware and you’re left with a $9 stock price. That means EMC is trading at 11 times next year’s earnings with growth of 15% for the next five years. Cramer’s rule of thumb is that if the multiple is lower than the growth rate and the company is good, “it’s way too cheap.”

So what’s the problem? A lot of hedge funds immediately went short VMware and long EMC. Now they’re unwinding that trade, which puts downward pressure on EMC’s stock.

If Wall Street doesn’t start salivating over this stock, Cramer said there’s a very good chance EMC could put its cash to work through a buyback.

Questions for Cramer? madmoney@cnbc.com

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

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