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Profiting From Pre-Paid Funerals

Friday, 30 Jul 2010 | 7:50 PM ET

“We’re taking a speculative trip to the graveyard,” Cramer said Friday, “where the ‘death care’ stocks are very much alive and kicking.”

Yep, death care. The phrase sounds god awful, but it was only Cramer’s term of endearment for companies that deal in post-mortem services. The largest player in the space, and his favorite, is Service Corp. , which operates 1,441 funeral homes and 387 cemeteries across 44 states and Canada.

The attraction here is in what essentially amounts to pre-paid funerals. Once people retire, they start to think seriously about planning for their deaths, and they use companies like SCI to do it. For investors, though, the benefits are twofold: One, this should amount to great business for the company, which translates into a growing share price for shareholders, as baby boomers retire en masse; and two, these “pre-need” contracts, as they are called, offer tremendous earnings visibility for the future.

And get this: In most US states and Canadian provinces, the money paid for pre-needs is held in a trust, where it is invested to compensate for inflation, until the person dies. Any extra after the funeral services are rendered by law goes to the company’s working capital. And though pre-needs dropped in number during and after the crash of 2008, Cramer is expecting them to rebound right along with the economy. The money spent on them should increase, too, as people regain their purchasing power. SCI’s backlog is already at $6.6 billion—and this is only a $2.15 billion company.

Cramer considers Service Corp. best of breed in its category because it controls 12% of the overall post-mortem-services market, four times more than the closest competitor. And this business isn’t prone to upstarts, not with families using the same funeral home and cemetery for generations or new cemeteries taking years to generate a profit. It’s just too hard for new companies to break in. Plus, 80% of the industry is owned by mom-and-pops, so this is a very fragmented market.

A strong second quarter reported Wednesday after the close sent SCI soaring, closing up 13%. Still, though, the stock’s gains this year amount to only 4%, which is why Cramer thinks Service Corp. has more room to run.

His only advice? Don’t chase it. Remember, this is a spec pick. So take your time, do the homework, buy in small increments and use limit orders when you do.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

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