Mad Money

Cramer explains how Coach and Sinclair's takeovers help us value stocks

How Coach and Sinclair's takeovers help value stocks

With big acquisition announcements from Sinclair Broadcast Group and Coach making headlines, Jim Cramer said takeovers like these are often a good measure for the stock market.

More specifically, the "Mad Money" host suggested watching whether the acquirer's stock goes up after the announcement, as Sinclair and Coach's stocks both did on Monday.

"If it does, I think that's a classic sign that even though the market may value a company's stock at what seems like a high price, that stock may still be cheap to a company that wants the whole business," he said.

Sinclair's $3.9 billion purchase of Tribune Media and Coach's $2.4 billion purchase of Kate Spade were both rumored, which sent the stocks of Tribune and Kate climbing ahead of the announcements.

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Cramer explains how Coach and Sinclair's takeovers help US value stocks

"More important, from the point of view of the overall market valuation, Sinclair's stock initially jumped 3 percent on the news, even as it ultimately pulled back and ended up slightly in the red, while Coach's stock jumped 4.8 percent. That's really significant," Cramer said.

The "Mad Money" host attributed Sinclair's uptick to relaxed consolidation rules implemented by the Federal Communications Commission in April.

Cramer said the change allowed new possibilities for consolidation that were not possible during former President Barack Obama's administration.

"This is a classic example of how important agency deregulation, from the president on down, can be for valuations in the stock market," Cramer said. "President [Donald] Trump's people simply don't fear increases in fees for consumer[s] or the power of concentration to influence political views. Tribune Media gives Sinclair tremendous reach and much greater scale."

As for Coach, Cramer applauded the way the fashion house ran its deal with rival accessory maker Kate Spade, as Kate's stock had run up to $24 before sliding slightly and selling to Coach for $18.50 a share.

Under the direction of CEO Victor Luis, the giant has positioned itself as a collection of brands, having already purchased luxury shoe brand Stuart Weitzman in 2015 for $574 million.

"Coach has a gigantic worldwide network of stores. Running these additional brands through that network, especially in Asia, has created a terrific diversification away from the U.S. brick-and-mortar retailers, who we know are struggling. In addition, Luis will seek to re-rate Kate as more of an upscale brand, like it used to be, by reducing the wholesale and online flash sale channels," Cramer said.

Cramer believes both acquisitions could spur more takeover activity in their respective sectors. In media, Gray Television, Tegna, and E.W. Scripps are all considered to be targets of networks looking for more local exposure.

But the "Mad Money" hosts favorite potential buy is Nexstar, a local station consolidator whose stock could soar if it made a deal in this freshly deregulated environment.

"Why buy the potential acquirer? Well, that's interesting, because this is why: I think the potential targets right now could be overvalued because of all the chatter, but Nexstar's stock is cheap no matter what happens," Cramer said.

In the fashion space, Cramer considers Coach's deal a wake-up call for competitors PVH and VF Corporation.

"Both had previously been very acquisitive, but both have been holding off doing deals of late, PVH in order to pay down debt from the Warnaco acquisition that gave them many additional Calvin Klein licenses, and VF Corp for reasons, frankly, that aren't that clear," the "Mad Money" host said.

Now, it is becoming increasingly possible that the takeover floodgates will open, Cramer predicted.

"This market might seem expensive to you, but to Sinclair and Coach, it's just right for making acquisitions." he said. "So I have to ask: who's next to take the plunge?"

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