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A Bull Market in Auto Junk?

When a company holds a secondary offering and the share price still goes up, that’s probably stock investors want to own.

LKQ Corp. has been enjoying that kind of momentum lately. The company sold 12 million shares at $31 a piece, and the price has climbed $3.60 since then. It was up even more, but Cramer said he wanted to wait for a pullback before he recommended it.

LKQ is the number-one supplier of recycled auto parts, thanks to a buyout of Keystone that closed Monday. Cramer is guessing the deal will force analysts to raise estimates and send this stock even higher.

Believe it or not, there’s a quiet bull market in auto junk, Cramer said, and LKQ is one part of it. Damaged cars get replacement parts from two places: the automakers and then companies like LKQ, which deal in refurbished, aftermarket and recycled parts. The market-share split is 70%/30%, respectively.

At least for now it is. The insurance companies that pay for post-accident repairs are becoming more and more cost conscious, so that should give LKQ a chance to take market share. This is Cramer’s reason to own the stock long term.

There’s a catalyst too. State Farm, the largest auto insurer, had stopped allowing aftermarket parts because of a class-action lawsuit filed against the company. But that lawsuit was thrown out, so LKQ could stand to benefit enormously now.

Cramer said LKQ should become a dominant player in the market as it rolls up smaller outfits through acquisitions. His risk-reward for the stock is four points down, 15 up, “the kind of risk/reward I dream about,” he said.

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