Jim Cramer is committed to scouring the market, every day, looking for new investment ideas that he thinks could generate considerable upside.
And his latest efforts have led him to a new stock; FMC Corp. "I like this story, and I think the stock is a steal right here," said the "Mad Money" host.
"Pretty much the most aggressive thing a company can do in order to create wealth for shareholders is to break up," Cramer said. "The practice of breaking up has a stellar track record of generating gains."
And FMC Corp recently announced a break-up that Cramer thinks could unleash considerable value.
The company has three divisions: a big agricultural division where they make things like insecticides and herbicides; a health and nutrition segment where they make biopolymers for the food and pharma industries; and a commodity minerals business where they make lithium and soda ash.
Cramer says having all three divisions under the same roof has capped valuations.
"And the board knows it," Cramer said. ."
After the split, Cramer thinks the Street will value the ag-and-nutrition business as a so-called secular growth company, or a company that can grow regardless of the economy.
Conversely, he thinks the minerals division will be valued as a cyclical company, closely tied to global growth.
"Therefore, after the split I expect both new entities to command a higher valuation," Cramer said.
Of course, the market is a predictive mechanism. And the planned split has been announced for two weeks. You might think these developments have been baked into share price.
Cramer, however, says there's considerable upside ahead.
According to Cramer's research, there are four stages of a break-up that can generate returns for investors. Here's where he thinks the FMC break up stands.
1. In the first stage, the stock runs up on speculation, in anticipation of a possible break-up. That stage is past.
2. In the second stage, the stock pops on the announcement. "In FMC's case, the stock spiked from $77.83 all the way up to $83.10, for a 6.7% gain in a single session. But here's where I see opportunity that doesn't often come up. In the couple weeks since the news, FMC has declined to $77; that's below where it was before the breakup announcement. Not only have you not missed the move, but if you buy FMC at these levels, you're paying the pre-announcement price, which I think means there's still a lot of upside."
3. In the third stage. the stock runs into the actual break-up. That should happen, soon.
4. In the fourth stage, the new companies create value by operating independently. That should come early next year, after the split is complete.
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As you can see, at current levels, Cramer believes there's still time to leverage stage two, let alone stages three and four.
So how high can FMC go?
"I've seen sum-of-the-parts analysis that suggest this stock could be headed to the mid-$90s due to the break-up; that's about a 22% gain from Wednesday's close. I think that makes a lot of sense, especially since FMC's only selling for 14 times forward earnings right now with a 12% growth rate; substantially cheaper than the average stock in the S&P 500, which at the moment sells for 17 times earnings."
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