Mad Money

Jim Cramer Pinpoints New Trend & Stock That Benefits

Defense: Growing Through Acquisition

"Now that we're almost a month into 2013, I think that one of the big trends for the new year will be a huge uptick in M&A activity," said Jim Cramer.

"Think about it. We've got a world where, for many industries, growth has gotten harder to come by. Meanwhile, our companies are sitting on huge piles of cash. If they want to grow, the easiest way to do it is by making acquisitions."

Of course Cramer isn't an advocate of buying a stock simply because it could be a takeout target – that's akin to a guessing game.

However, Cramer does see the trend as an incentive when you're making your shopping list. That is, identify companies that can go higher on fundamentals – but could also be a takeout target. That, according to Cramer, could give you two ways to win.

And a stock that Cramer said fits the criteria is Alliant Techsystems.

"The company is the largest maker of small-caliber ammunition in the United States, and they also make larger caliber ammo, as well as precision & strike weapons, missile warning solutions, and tactical rocket motors," Cramer explained.

As we said above, the theory isn't worth a penny unless fundamentals are also strong. Fortunately, "The fundamentals here are in excellent shape," said Cramer

"The company now has a $6.4 billion backlog. They had a book to bill ratio of 1.2, which means Alliant Tech had more business than they could actually handle. Also management raised its guidance for 2013," said Cramer.

"Even better, they boosted the dividend by 30%, something that brings the yield up to roughly 1.6% at current levels; I consider a dividend hike of that size an extremely bullish statement by management that they believe the business is going to get better.," Cramer said.

"Plus, ATK has a $200 million buyback at work over the next two years—that's equivalent to 9% of the market cap, a serious chunk of what's traded."

In other words, the stock could advance for these reasons alone.

However, Cramer thinks this stock could be turbo-charged as a potential target. Here's why.

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Although Cramer doesn't expect draconian cuts to defense now that the fiscal cliff has passed – he does think the Pentagon budget will get smaller – and therefore major defense players will find it hard to grow organically.

"Therefore the simple way for them to grow in this environment will be to make some acquisitions, probably smaller, easy to digest defense plays.," he said .

Gregor Schuster | Getty Images

And with a market cap of about $2 billion – Cramer thinks Alliant would be pretty attractive to some of the big players.

"This stock is real cheap and it's been a dramatic underperformer over the last few years," Cramer insisted. "On an enterprise value to earnings before interest, taxes, depreciation and amortization basis, Alliant Tech's now trading at a 37% discount to its 5-year average historical valuation. Although the stock has run over the last month, it's still at depressed levels and that means a larger defense contractor could likely snap ATK up for a pittance."

Cramer crunched some hypthetical numbers.

"If Alliant Tech got taken out at just 1.5 times sales, which is an eminently reasonable valuation, then the company would be valued at $6.3 billion, a 123% increase over ATK's current enterprise value of $2.8 billion. Now, I'm not saying the stock will double or that an acquirer would pay twice the current price, but at these levels, the economics of an acquisition or even a leveraged buyout look very, very attractive," Cramer speculated.

It's worth noting that Cramer is making a financial observation and not a political statement.

"If profiting from a company that sells bullets is something that bothers you, and in the current environment I could see how this stock might turn a lot of people off, here's a suggestion. Don't walk away from Alliant Tech as some kind of political statement. Nobody knows what's in your portfolio and the company won't even notice. Instead, if you want to make a difference, own the stock and then donate your profits to a charity of your choice," Cramer said.

Call Cramer: 1-800-743-CNBC

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