Mad Money with Jim Cramer
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Sell Block: Right Time to Buy This Energy Name?
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It is Cramer's contention that there's never an "all-clear signal" or "green light" telling investors when it's safe to buy a stock.
"But there are moments when it is much better time to buy a stock than it was before, when a catalyst is about to occur that you need to be in," he said. "We are about to get one for one of the most hated names in the oil and gas business."
He's talking about Sandridge Energy [SD
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].
Cramer originally recommended this stock as a speculative play on March 19 when it was trading at $7.44 a share. The stock is now down 13% for two reasons: First, Sandridge reported an earnings miss on May 6 where the company also forecast lower production and higher costs. Second, Sandridge announced on April 4 that it would acquire Arena Resources [ARD
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], a domestic oil company, for $1.3 billion.
"This deal has been murder on shareholders as it's being paid for almost entirely in stock, something that will increase Sandridge's share-count by about 150%," Cramer said, adding that because of the deal, the "shorts have been able to run wild in a giant short-selling pile-on-the short interest in this stock is about 25%."
To lock-in a profit on the deal, arbitrageurs bought Arena and shorted Sandridge, making it one of the most heavily shorted names in the business, Cramer explained. By doing this, he continued, the arbitrageurs were guaranteed a return even though it hurt Sandridge's stock.
"That's what risk arbitrageurs do," he said. "They buy the takeover target and sell the acquirer to get a sure-fire gain unless the deal falls through."
While the transaction has hurt the stock, Cramer thinks it's a "transformational deal" for Sandridge. Historically, he said, the company has focused on producing natural gas in West Texas. With Arena, the company is getting into crude oil, too. Cramer praised the move into crude because there's a "glut of natural gas" and prices have fallen.
Now is a good time to buy, Cramer said, because the Arena deal is expected to close Friday. When that happens, he said, the merger arbitragers should stop selling Sandridge and buying Arena to lock-in profit.
"Sandridge Energy has been a free-fire zone for the shorts, but tomorrow that should all be over," Cramer said. "You are getting a terrific moment to buy when the artificial selling pressure end and the new oilier Sandridge takes over."
Call Cramer: 1-800-743-CNBC
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