Cramer thinks he’s found similar play in KKR Financial Holdings , an under $10 name that touts a sizable 5% dividend yield.
KFN is the debt-management platform for KKR, the giant private-equity firm. It’s structured like a real estate investment trust, though it doesn’t actually own real estate, Instead KFN manages a portfolio of loans and bonds backed by corporations and commercial real estate, one that’s “well known and, I believe, undervalued,” Cramer said, and “run by executives who really know what they’re doing.” That’s why he called the stock “incredibly attractive right here.”
But if KFN is so great, why did it close Friday at $7.56? Because people wrote it off once the credit crisis hit, Cramer said, when the stock dropped to 75 cents a share. The company’s five collateralized loan obligations – where KFN packages debt and sells pieces of it in securitized form to secure cheap, long-term financing – were out of compliance with their covenants and trapping cash instead of distributing it.
As of the most recent quarter, though, all five CLOs were back in compliance and kicking out that cash, which is one reason why Cramer thinks KFN is ripe for speculation. Also, in the asset-management business, the person at the top is all important, and CEO Bill Sonneborn, who worked at both Goldman Sachs and Trust Company of the West, is just who you want there, Cramer said. Plus, KFN has great backing in Leon Cooperman of Omega Advisors, a major stakeholder that just bought another 520,000 shares. Sonneborn himself just picked up 50,000 shares barely two weeks ago at $8.20 a piece.
And, of course, Cramer likes KFN because it’s cheap right here. The stock has pulled back 18% since its May 3 high of $9.19 because of Europe and the company’s withdrawn common-stock offering, an unfortunately necessity once the market started to decline as a result of the Continent’s debt troubles. Not to mention, KFN right now is trading at less than its book value (assets minus liabilities), so the stock is, as Cramer described it, “objectively inexpensive.”
As for the dividend, cash flows over the past six months have jumped 75%. Cramer thinks that will translate into increased payouts. And if they continue at the rate that analysts expect, KFN could be returning 75 cents a share annually in 2011 to investors, for a yield of 9.9% at the current price.
So consider KFN a great speculation play for an accidentally high yield, Cramer said, even though it “might just turn out to be a low-yielding stock … because of the price appreciation I am predicting that will happen to KFN over the next year.”
Cramer’s charitable trust owns Goldman Sachs.
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