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The Defense Sector’s Next Takeover Target?

Cramer was right to say that homeland security was a bankable sector. Since he first recommended this group last October, his top seven picks are up an average of 27%, and three of them have earned takeover bids. There’s still more money to be made here, though, he told viewers during Monday’s "Mad Money."

Safran and announced just today that they will buy biometrics companyL-1 Identity Solutions for $12 a share, giving investors who bought on Cramer’s recommendation a 70% return. Last week Hewlett-Packard bought cyber-security firmArcSight for $43.50 a share, an 89% return on investment. And back on Aug. 30, 3M picked upCogent, another biometrics play, for $10.50 a share, which is now up 10% since Cramer’s nod. Not bad when you consider that the S&P 500 has added just 7% in the past year or so.

Of course, this begs the question: Who’s the next target? Is it American Science & Engineering, NICE Systems, Applied Signal or FLIR Systems, the four remaining of Cramer’s original picks?

No, he’s actually putting his money on Fortinet , Verint or RadWare , but he wouldn’t recommend buying them yet. They’ve already run up as a result of takeover speculation. Better to wait for a pullback to create the right kind of buying opportunity.

Instead, investors might want to try NICE Systems, which makes data, video and voice analytics. The stock, having dropped 5% since Cramer’s Oct. 13 recommendation, hasn’t enjoyed the gains seen by its cohort, but the reasons for owning it still hold up.

NICE operates in physical and network security, making products that do things such as improving video surveillance, intercepting communications and even just logging video. And it’s a business that’s going strong, as NICE reported a better-than-expected quarter in August and raised its full-year forecast.

Given this, Cramer can’t understand why the stock is suffering relative to its peers. Not when this $29 stock is sitting on $9.37 a share in cash. Back out the cash and NICE is trading at just 10.6 times 2011 earnings—just too cheap for such a good company.

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