Cramer's New Favorite Bank Stocks

The Treasury Department’s bank stress-test results have created a new pecking order in the sector, Cramer said Monday. So, too, has the recent wave of equity offerings and debt raisings we’ve seen. The Mad Money host picked his three favorites among the best financials, those still operating despite the credit crisis having shuttered so many other firms.

The stress tests were designed to find out which banks had sufficient capital to handle further losses, whether through loans defaults, asset devaluations or other trading-related exposures, should the recession continue. Just nine passed, with the Treasury saying that they had enough cash to survive a worst-case scenario.

But seven of these banks decided to raise money anyway, which is a great sign, Cramer said. If investors want to own banks, they should buy those that don’t need the money, but rather, want it. Not only did Washington bless these companies, but also they now have extra cash to use as they wish, say, to acquire their weaker peers.

So who are these winners? JPMorgan Chase , Goldman Sachs , State Street , BB&T , Bank of New York Mellon , Capital One and US Bancorp . Cramer added Northern Trust to the list because the bank is very similar to State Street and Bank of New York. While Northern Trust wasn’t big enough to warrant a stress test, Cramer likes that the company decided to raise money even though none was truly needed.

But still, even among these top-ranked institutions, Cramer was willing to recommend only three. Given President Obama’s seeming crusade against credit-card companies, Capital One did not make the cut. Nor did Goldman Sachs or JPMorgan Chase, even though they are arguably the strongest companies in the group. There are others that Cramer thought offered more upside – State Street, BB&T and US Bancorp – so he recommended those instead.

State Street: ‘Number One, No Question’

State Street announced a $1.5 billion equity offering Monday morning, something that enticed Cramer’s charitable trust to increase its holding in the stock. State Street is a bank’s bank, meaning it plays custodian to other financial firms, mutual funds and the super rich. The business is, as a rule, a strong one. But STT got greedy and started buying asset-backed securities in hopes of more profits. This paper wreaked havoc on the balance sheet. The Federal Reserve’s Term Asset-Backed Securities Loan Facility should help, though, as will the overall rebound in the asset-backed market. The money raised from the secondary offering will clean up the balance sheet and pay back money borrowed from the Troubled Assets Relief Program. State Street didn’t deserve the hit it took, but the decline has made the stock very cheap, offering a great entry point for investors. STT is “number one,” Cramer said, “no question.”

BB&T: The Next Fleet?

BB&T, based in Winston-Salem, N.C., raised $1.73 billion at $20 a share, in addition to $800 billion in debt. This premier Southern bank fell into the same trap as State Street, chasing what looked like easy money in the Florida real estate market. But Cramer thinks that the extra cash should put BB&T in favor with the FDIC, making it the go-to institution when other banks in the region need to be sold off. Some viewers might remember that New England’s Fleet followed the same track after swallowing up a number of victims of the savings-and-loan crisis, eventually selling itself to Bank of America. Something very similar could happen with BB&T, Cramer said.

US Bancorp: The Speculation Play

US Bancorp may be the cheapest of the group, Cramer said, but it’s also the most speculative. The company raised $2.5 billion at $18 a share as well as $1 billion in debt, though a housing bottom is still necessary to make this stock a winner. Too many potential foreclosures are weighing on the balance sheet. Still, Warren Buffett’s Berkshire Hathaway just upped its USB stake, and Cramer does believe the bottom is coming soon. His reluctance to fully endorse US Bancorp is, in part, because he’d rather speculate on housing with Bank of America , because he expects one of the next equity offerings to come from that company.

Cramer’s charitable trust owns Goldman Sachs, JPMorgan Chase and State Street.

Call Cramer: 1-800-743-CBNC

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