Cramer: Fashionably Healthy

While celebrating today's rally, Cramer still wants to help you navigate the current volatility with a few tips from the Cramerican Marine Field Guide to Recessions. First, he says, remember it's all just a fashion show -- the big money guys are the critics and buyers of the Wall Street runway. And what's the new black? Healthcare. The safety and consistency of that sector are always in vogue in times like these.

Unlike other industries, healthcare is immunized against maladies such as high energy and food prices, a "flat-lining" economy and a financial system in critical care. Cramer points to all the money managers switching from other, less robust sectors. Health stocks, he says, are worth owning -- even those he doesn't like. True, drugs have been sickly -- the DRG pharma index fell from 355 in Jan and bottomed around 283 in June, but is back in great shape, closing at a healthy 305 today. Healthcare's stealing the fashion show (ouch, sorry about the tangled metaphors) because, in uncertain times, it's more comfortable than flashy, exciting oil and minerals.

The supermodel of the show? Smith and Nephew , the med equipment firm that got smacked around a bit in the first quarter, sinking from $64.73 at the end of April to close at $57.40 at the start of May -- an 11% drop! It's been drifting in the $50s since and closed at about $52 today, a price far below its worth, according to Jim -- but a great look for you.

Smith and Nephew is involved in several related businesses, a large share of its sales resulting from orthopedic reconstruction (hip and knee implants) -- a definite growth market, considering the increasing age and expanding waistlines of our population. Smith and Nephew also has an orthopedic trauma unit that makes equipment for doctors -- who traditionally stick with familiar suppliers -- to help mend bone fractures and other trauma. Then there's an endoscopy unit that makes tools to look around your insides --as seen on "ER." Finally, Smith and Nephew has a business in Wound VAC equipment -- advanced technology that quickens healing of injuries with less risk of infection. It also happens to be a massive $1.6B market, in which the only competitor is Kinetic Concepts -- now there's a happy duopoly!

Yes, Smith and Nephew did miss the quarter, but there's a tale behind that. Last year, Smith and Nephew bought two companies: Swiss orthopedics firm PLUS and BlueSky (which gave access to the Wound VACs business). Unfortunately, PLUS had some minuses -- skeletons in its closet that ended up costing $100M in sales costs and $10M in investigational costs, all due to -- ahem -- "unacceptable selling practices." (Their language, by the way!)

Even with $3.37B rev in 2007, Smith and Nephew got battered. Adding to the PLUS scandal, the street's expectations for Smith and Nephew's other acquisition, BlueSky, were more in line with its celestial-sounding name than in reality. At the time of purchase, BlueSky was basically 20 employees and $11M in sales. Smith and Nephew spent needed funds to grow BlueSky's sales and manufacturing capabilities -- spending that hurt its other businesses. It was an obvious cost trade-off at the time, but the street still didn't like it.

So it's taken a beating, but Smith and Nephew did what was necessary to expand key businesses, so the second half of the year -- i.e., NOW -- should start showing it reaping the benefits.

Jim's advice: forget the first half of the year at Smith and Nephew -- the bad news is in the past. SNN is now a cheap play on the aging of the American population -- and that's a guaranteed trend.

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