GO
Loading...

Silicon Speculation

Friday, 4 Dec 2009 | 8:07 PM ET

Silicon prices look like they’re bottoming, Cramer said Friday, and Global Specialty Metals is a great way to play their rebound.

Pedal to the Metal?
Cramer explains how speculation stocks could help you profit.

The rising cost of silicon, which is used in chemicals, solar cells, aluminum alloys and electronics, benefits Global Specialty Metals in a couple of important ways. First, high barriers to entry have limited competition in this space. So instead of worrying about new companies rushing in to take advantage, the four firms that comprise 76% of production – GSM among them – can simply ramp up production. GSM has done just that, most recently at an idled Niagara Falls, N.Y., plant. There also are potential plans to fire up an idled factory in Selma, Alabama, as well.

Another reason that pricing is key for GSM is the effect on earnings. For every penny increase in silicon’s cost per pound, Global Specialty Metals sees a $2.4 million increase in profits before interest, taxes, depreciation and amortization. As long as silicon continues to push higher – and Metal Bulletin puts the bottom at about $1.08 a pound, with the price now at $1.24 – then GSM’s earnings should head in the same direction.

So where’s the risk? Despite having a solid balance sheet, GSM hasn’t been a public company for very long. Just since July 30, in fact. And private-equity firms D.E. Shaw, Luxor Capital and Plainfield Asset Management still own 27% of the outstanding shares. Their lock-up period expired at the end of November, so they could sell at any time. That, Cramer said, would kill the stock’s momentum.

There’s also no guarantee that silicon’s price will continue its upward trajectory. Investors must keep this in mind if they plan to buy GSM.

The stock trades at 20 times 2010 earnings. That may look expensive at first glance, but the 2011 growth rate is expected to reach 62%. That makes Global Specialty Metals worthy paying up for, Cramer said – as long as you can stomach the risk.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

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

  Price   Change %Change
GSM
---

Contact Mad Money

  • Showtimes

    Monday - Friday 6p ET
  • Jim Cramer is host of CNBC's "Mad Money" and co-anchor of the 9 a.m. ET hour of CNBC's "Squawk on the Street."

Mad Money Features

  • Grab the latest CNBC gear from the NBCUniversal Store!

  • Get a behind-the-scenes look at how Cramer formulates his investment advice. "Inside the Madness" is a column, which features e-mails and more with Cramer and his researcher Nicole Urken.

  • You’ve always wanted to hit the “Hallelujah!” button. Here’s your chance.