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Cramer’s 10 Hottest Momentum Stocks

Friday, 12 Oct 2012 | 6:48 PM ET
Cramer's High-Momentum Stock Picks
Amazon is up 50 percent for the year, and Google is up 17 percent. Mad Money host Jim Cramer explains why he thinks every fund that owns both of these stocks will be doubling down by the end of the year.

Over the past 30 years, Jim Cramer noticed the same thing tends to happen at around this time of year — many hedge fund managers continually buy momentum stocks from the start of the fourth quarter through the year's end.

"The growth-oriented fund managers will keep buying their best-performing momentum stocks practically non-stop for the next three months, " Cramer said. "And these guys will pay pretty much any price because they can justify stratospheric valuations based on the earnings in the out-years, meaning how much money these fast growers can make down the road in 2015 or 2016."

In Cramer's experience, anticipating which stocks may be "anointed by Wall Street as winners in the fourth quarter" is typically a winning trade. When he ran a hedge fund, he often bought the stocks he thought might be bought en masse during the last quarter of the year. He put together a list of stocks he thinks are likely to be the biggest winners this fourth quarter.

Amazon.com (AMZN)

Amazon.com, the world's largest online retailer, was the first stock to make Cramer's list.

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"Amazon is a beloved company that has cultivated fabulous relationships with its customers and most important, it's still taking market share all over the world, " Cramer said. "Amazon's like a bulldozer, putting bricks and mortar retailers out of business on every continent on earth save Antarctica."

Amazon has expanded beyond retail, though, Cramer said. The Internet company is engaged in the fast growing cloud computing space. Cramer said its website has become "a true online marketplace, " where people can both buy and sell goods. Amazon currently controls nearly 20 percent of all e-commerce in the U.S. and roughly 13.5 percent of international e-commerce, but Cramer thinks it can still take share. After all, Amazon accounts for less than 1 percent of total retail sales in both the U.S. and internationally, as well as both online and off-line. Going forward, Cramer thinks Amazon's share of total retail sales will only continue to rise as more people realize how convenient online shopping is and that its prices are relatively competitive.

Hot Stocks: Sherwin-Williams & Diageo
Money managers will be pulling out all the stops to prove they were overweight the markets' top performers. Mad Money host Jim Cramer takes a look at Sherwin-Williams -- up nearly 67 percent this year, and Diageo -- which has rallied 30 percent year-to-date.

Amazon also sells its own hardware, Cramer said, noting its Kindle e-reader has allowed Amazon to dominate the online publishing business. Not only is the Kindle cheaper than Apple's iPad tablet, the Kindle reading application is a popular download for both the iPad and Google's Android devices.

Although Amazon currently trades at 110 times next year's earnings, Cramer said growth-oriented managers can justify paying for the stock through the end of the year because it's expected to earn $7.39 a share in 2015. In turn, Cramer said the stock is really trading at around 35 times 2015 earnings, which he considers inexpensive given its 36.8 percent long-term growth rate.

Google (GOOG)

Internet search giant Google also made Cramer's list of "anointed stocks."

To Cramer, Google is the "Sultan of search, " given it commands 66 percent of queries in the U.S. and 75 percent of search advertising budgets. Additionally, its paid search business is growing by more than a 20 percent annual clip.

Speaking of online advertising, consumers currently are migrating from desktop-orientated ads to mobile, which Google also has a major presence in. More than half of all smartphones in the U.S. are powered by Google's Android operating system.

"Unlike so many other Web-based companies that were caught flat-footed by the speed of the switch to mobile, Google saw it coming — they'd been giving away Androids for years, precisely so that they'd be ready for this moment, " Cramer said, noting that Google's AdMob business, for example, sells mobile display ads. "Last year they captured 51.7 percent of the market and they're still the number one player and, of course, Google bought Motorola Mobility, giving them tons of patents and a real presence on the hardware side."

In addition to search and mobile, Google has executed a strategy for social media by way of Google Plus and YouTube.

Advertising is a $480 billion business worldwide with online sales less than 10 percent. Cramer thinks the online advertising dollars will only continue to rise, though, giving a boost to Google.

Google also has a clean balance sheet and strong management team. The stock currently trades at around 15 times next year's earnings, but considering it's expected to earn $67.33 in 2015, it really sells for just 11 times 2015 numbers. To Cramer, that's incredibly cheap given its 15 percent growth rate.

Visa (V)

To Cramer, Visa is a play on "one of the biggest secular growth stories on earth: the worldwide switch from paper to plastic." After all, roughly 52 percent of all payments in the U.S. are still made in cash, so he thinks there is a lot of room to grow. Internationally, about 85 percent of all payments are made in cash, so there is even more potential.

"That's one of the reasons why the secular growth of electronic payments is expected to increase at a 10 to 12 percent annual clip worldwide for the next several years, " Cramer said, adding that he thinks Visa could "grow even faster than that thanks to more partnerships with financial institutions, and more new products."

Visa currently controls 46 percent of global credit card volumes and 56 percent of global debit volumes.

In addition, Cramer said Visa has a clean balance sheet with $2.3 billion in cash and no debt. It also has a strong management team, he said.

To Cramer, Visa's stock is cheap on next year's numbers, too. It currently sells for 19 times 2013 earnings estimates with a growth rate in the double-digits. In turn, he thinks it's worth considering.

MasterCard (MA)

The shift from paper to plastic is one of the "biggest secular growth stories on earth, " Cramer said, referring to how a growing number of consumers are using credit cards. To play this trend, Cramer recommended investors consider Visa, but he also likes rival MasterCard .

MasterCard currently controls roughly 30 percent of global credit card volumes and 12 percent of global debit volumes.

Like Visa, Cramer noted MasterCard also has a strong balance sheet. It currently boasts around $5 billion in cash and a solid management team, too.

MasterCard currently sells for 18 times 2013 earnings, which Cramer thinks is inexpensive given it has long-term growth rates in the double-digits.

Ulta Salon, Cosmetics & Fragrance (ULTA)

Ulta Salon, Cosmetics & Fragrance made Cramer's list of hot momentum stocks.

"When you have a retailer that's expanding from being a regional player to a national one, you've got a stock that could generate tremendous multi-year gains, " Cramer said. "Right now we're in an environment where there aren't a lot of companies with genuinely rapid growth, but Ulta Salon … [has] the kind of long-term secular growth that makes money managers salivate."

Cramer noted Ulta currently has roughly 489 stores in 45 states, which seem to be doing well judging from its 9.3 percent increase in same-store sales in the latest quarter. In the year ahead, Cramer said Ulta plans to open about 100 new stores, increasing its total square footage by 22 percent.

Ulta is also taking share in the beauty business, Cramer said. It's already the U.S.'s leading specialty retailer, but even so, Cramer noted it only controls 2.8 percent of the beauty products market and 0.2 percent of the salon services market. So he thinks Ulta has a lot of room to take share.

Cramer said Ulta also has healthy inventory levels, which increased just 3.9 percent on a per store basis last quarter. The company also has a strong management team, he added.

Ulta currently sells for 29 times next year's earnings, which Cramer said seems high, but there is more than meets the eye.

"Ulta's far from the average stock, as it has a terrific 25 percent long-term growth rate, " Cramer said. "Remember, though, the money managers who will buy these stocks are valuing them based on the earnings in the out-years and when you look at the estimates for 2015, Ulta's only trading at 18 times those numbers, which seems pretty darned cheap."

Tractor Supply (TSCO)

Tractor Supply will likely be "anointed by the Wall Street fashion show as a fourth quarter winner" because the retailer is rapidly expanding from a regional to national store chain, Cramer said.

The tractor supply retailer currently has 1, 135 stores in 45 states, Cramer said. It plans to open up to 95 additional locations in the year ahead, giving it lots of room to grow. Tractor Supply thinks it can build 2, 100 stores in the U.S. before it risks saturating the market, which is an 85 percent increase from its current store count.

In its latest quarter, Tractor Supply produced a 3.2 percent increase in same-store sales, which Cramer called "decent." The retailer has very little competition, though. It also saw its inventory levels fall by 0.3 percent on a per store basis last quarter.

"Remember, excess inventory is the bane of all retail existence because it means you have to discount to move product, which kills the profit margins, " Cramer said.

Tractor Supply currently sells for 23 times next year's earnings and just 16 times 2015 earnings estimates, Cramer said. Considering its 18 percent long-term growth rate, he thinks it's a cheap stock.

Sherwin-Williams (SHW)

Sherwin-Williams is likely another anointed stock on Wall Street, Cramer said. After all, he considers it a "terrific proxy" for the U.S. housing recovery.

"When you decide to sell your house, the first thing you do is give it a new coat of paint to freshen it up and then the new family moves in and they want to pick their own colors, so they repaint it again, " Cramer said, adding that smart hedge fund managers will play a rebound in the housing market by way of Sherwin-Williams.

(Related: How Investors Could Play a Recovery in Housing .)

In its latest quarter, Cramer noted Sherwin-Williams' same-store sales increased by 13.9 percent while is overall sales grew by 9 percent. In turn, Sherwin-Williams increased its earnings-per-share by 31 percent.

"Not only is Sherwin-Williams selling more paint thanks to the housing rebound, it's also taking share, cutting costs, and going forward it could benefit from declines in the raw materials that go into paint, " Cramer said. "Some of this company's most important raw costs have either stabilized or already come down. The price of propylene, which is a key feedstock for Sherwin-Williams, has declined in a major way and so has titanium dioxide, another crucial ingredient for making paint."

Sherwin-Williams currently sells for 19.2 times next year's earnings with a 16 percent long-term growth rate. Cramer admitted the stock is not exactly cheap, but he still thinks hedge fund managers could be willing to pay up for this high growth stock.

Diageo (DEO)

If you're thirsty for growth, Cramer thinks Diageo is a good place to look. And it's not just because Diageo is a major liquor company — he thinks it ranks among the hottest momentum stocks.


"Diageo is a master of branding, " Cramer said, noting it owns many global liquor brands, including Johnnie Walker Scotch whisky, Crown Royal Canadian whisky, J&B Scotch whisky, Buchanan's Scotch whisky, Windsor Premier Scotch whisky, Bushmills Irish whiskey, Smirnoff vodka, Ketel One vodka, Cîroc vodka, Captain Morgan rum and rum based products, Bailey's Irish Cream liqueur, Jose Cuervo tequila, Tanqueray gin, and Guinness stout.

(Related: Beer for the South Pole: Dude, That's Cold)

Compared to other major liquor companies, Cramer said Diageo has the least exposure to Europe and the most exposure to emerging markets, accounting for 21 percent and 40 percent of its business respectively. It is the number one international spirits company in Africa, Asia and Latin America, Cramer said.

"In 2005 these markets accounted for just 20 percent of the company's sales, [but] by 2015 they should make up more like 50 percent, " Cramer said. "This is the alcohol stock to own. It's up 30 percent so far this year and I think it rallies even more before 2012 is over."

Diageo currently trades at 15.5 times next year's earnings with 10 percent long-term growth rate, which Cramer noted is much cheaper than other liquor companies.

Alexion Pharmaceuticals (ALXN)

Cramer also added Alexion Pharmaceuticals to his list of hottest momentum stocks.

The biotech firm makes Soliris, which treats paroxysmal nocturnal hemoglobinuria — a disorder that can lead to anemia, fatigue, pain and difficulty in breathing. In turn, Cramer said Soliris could bring in around $2 billion in sales around the world.

Soliris is also approved to treat atypical hemolytic uremic syndrome — a rare genetic disorder that damages vital organs. Cramer said it's also being studied as a treatment for three other diseases, which means it could potentially bring in more than a $5.4 billion in peak sales.

"If that's not a terrific long-term growth trajectory, I don't know what is, " Cramer said, adding that the company also has a healthy balance sheet and strong management team.

Alexion is expensive, though, Cramer said. It trades at 42 times next year's earnings and sells for 27 times 2015 earnings estimates, he noted. Considering its 38 percent long-term growth rate, though, he is betting hedge fund managers will be willing to pay up for this high growth stock.

Gilead Sciences (GILD)

Finally, Cramer added Gilead Sciences to his list of hot momentum stocks.

Cramer said Gilead is "the top player" in the HIV market. U.S. health regulators approved its four-drug combination pill, Stribild, on August 27.

Gilead is also developing a hepatitis C drug, which is a multi-billion market, Cramer said. If Gilead's drug is approved by regulators, Cramer thinks it will be a "game changer."

Like Alexion, Gilead boasts a strong management team and clean balance sheet, Cramer said.

Being as it trades at 15.5 times next year's earnings with a 15.6 percent growth rate, he thinks it's worth a look.


Read on for Cramer's Earnings Preview for Next Week

Reuters contributed to this report

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