Mad Money

Explaining NetApp’s Uncanny Rise

Tech Spotlight: NetApp

Investing may not have any hard and fast rules, Cramer told viewers on Monday, but some things just aren’t supposed to happen. Take, for instance, NetApp’s surging share price despite the company’s cash-and-stock buyout offer for Data Domain.

The market almost always reacts to such transactions the same, by sending the buyer’s stock lower. That’s just how it works. Wall Street plays a bit of arbitrage, shorting the company that issued shares to acquire its target, while buying the acquired firm. The resultant selling pressure inevitably pushes, in this case, NetApp down.

Think about it: The company most likely would have to sell at a discount the 47 million shares it was offering to fund the buyout. And a straightforward merging of NetApp and Data Domain would have subtracted 8 cents a share from the combined company’s earnings this fiscal year. Not to mention, NetApp’s $3.50 of cash per share made it look like a target, not a buyer.

Interestingly enough, though, NTAP is up 6.1% since it announced the takeover on May 20. Also, two analysts have upgraded the stock, and the short interest has dropped by over 30%. Cramer called this performance, in the face of Wall Street’s traditional moves against an acquiring company like NetApp, “the clearest signal that you’ve probably found a winner.”

Once the deal is done, NetApp is expected to increase earnings per share at a 20% compound annual growth rate between 2009 and 2012. And even after this recent run, the stock still trades at just 14 times earnings. Plenty of money managers would be willing to pay twice that for 20% EPS growth, Cramer said. Wait for a pullback before starting a position in NTAP if you can, but if not the stock is still cheap.

Of course, the one caveat is that EMC put in a higher bid on Data Domain after the bell, which could hurt NetApp. But it might also force the arbitragers to buy back the NTAP they sold. Either way, Cramer said he likes the stock, though admittedly more so with Data Domain as a new edition. Still, NetApp could get bought out itself, making this an investment worthy of consideration.

Cramer's charitable trust owns Hewlett-Packard.

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