Hedge Fund Pain Is Your Gain

All the talk during this financial crisis has been about failing banks and struggling Americans, but hedge funds have seen their share of angst, too. Poor performance has clients demanding their money back, so these funds are struggling to stay afloat.

Not that we have any sympathy for hedge funds. But this trend in client redemptions is a key driver in the markets right now, Cramer said, and it’s one that investors should follow. He’s recommended two stocks – KBR and Quanta Services – recently that have buckled under the pressure of massive hedge-fund selling. Monday night he put the focus on Trinity and Broadwind , two wind-power companies.

Jeffrey Gendell and his hedge fund Tontine Partners are large holders of both companies, and right now the pressure’s on. At today’s start, the fund was down 50% for the year. Not the kind of performance clients are looking for. While Cramer thinks Gendell’s investors will stick with him, the damage has already been done to Trinity and Broadwind, he said.

Cramer’s expecting Gendell and company to lighten up on both TRN and Broadwind as a way to raise cash. Add to that some heavy short interest by other hedge funds that smell blood at Tontine and you’ve got just the right pressure to push down these stocks. So investors should get a good entry point if they’re patient.

But this isn’t just about trading an ailing hedge fund. Wind power now is an even better business than when Cramer recommended it over this past summer. Congress extended the wind tax credits for another year, and states as varied as Texas and New Jersey are investing billions of dollars into this alternative energy.

What about the companies specifically?

Trinity is actually a railcar company that also builds wind towers. But what was once a business that accounted for just 4% of operating profit now brings in 12%, so wind power is a growing priority at Trinity. The company expects between $800 million and $900 million in annual wind-tower revenues by 2013, and Cramer thinks that is conservative.

Broadwind is a pure play on wind power, and the company’s building new wind-tower plants in South Dakota and Texas. It also recently acquired Badger Transport, creating an integrated supply chain for its North American wind customers. Plus, Broadwind makes precision gear systems, and has a wind-energy operation and maintenance-service division.

Just to reiterate, if you plan on buying either Trinity or Broadwind, don’t do it after a near 1,000-point rally in the Dow. Cramer expects both stocks to pullback eventually, so wait for that.

Jim's charitable trust owns Quanta Services.

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