Some people say speculation is no different from gambling, but Cramer sees it as a whole new game entirely. To make the point, Cramer is looking into three speculative stocks, all doing business related to mobile phones: AMD , Sprint and Motorola . Cramer want to show you how to identify which speculative stocks are keepers and which ones can simply be discarded.
”It takes rigor to be a good speculator” says Cramer, who is looking at several major criteria to help make the call on these stocks: industry positioning, the strength of business and comparative performance.
Cramer identifies Motorola to be in the worst position of the three, directly competing with Research in Motion and Apple. Not to mention that Motorola’s market share has shrunk to its lowest level in a decade, with a mere 6% of the handset market.
Sprint isn’t in much better shape, says Cramer, as it’s being squeezed by Verizon and AT&T, while T-Mobile in gathering market share. But he points out that Sprint is doing well in one area: the prepaid market, with its Boost Mobile business, which is significantly contributing to Sprint’s subscriber base – a number that may increase for the first time in 2 years. Sprint also may have an ace in the hole, with an exclusive product, the Palm Pre, which stands to compete with the iPhone.
How about AMD? The landscape of the company’s business is that of duopolies, competing with Intel on computer processors and NVIDIA on graphics processors, but Cramer says the company is still gaining market share. Given that Intel has already gotten hit with a $1.45 billion fine for suspected anti-competitive practices by the EU, as well as increased anti-trust rumblings in the US, Cramer thinks AMD could be poised to benefit in a big way.
AMD comes in first for this category, followed by Sprint and then Motorola.
Strength of Business
All three companies have lately come been through periods of serious turmoil recently that brought their very survival into question, says Cramer, who thinks AMD looks solid. With improved demand and several big new product lines, AMD has also finished selling 55% of its difficult semiconductor manufacturing business—called “The Foundry Company” to Abu Dhabi’s sovereign wealth fund in March, offloading $1.2 billion of debt on the newly created company, improving its balance sheet. Now, AMD expects its core business to turn a profit by the end of the year.
For Cramer, Sprint comes in second, as the company has been aggressively cutting costs, and should start seeing savings from the layoffs it made in the first quarter relatively soon. The company is expected to generate about $3 billion in free cash flow in both 2009 and 2010, has paid off all its debt that matures this year, and has enough money to pay off most of its debt maturing in 2010 and 2011, says Cramer. Given the improved fundamentals, Cramer thinks that at these levels Sprint could be a “very likely” takeover target. “It’s too cheap not to attract some interest from possible suitors,” he says, “you could speculate on this one based on the takeover potential alone.”
Motorola is struggling more than the other two companies, with its mobile device business is losing money, with operating margins at down 21%, and while its been doing a good job of cutting costs, Cramer thinks it’s too soon to make a call either way on a turnaround.
In other words, how is all of this reflected in their stocks and how have they moved? Year-to-date, Motorola has increased by 41%, AMD has moved upwards 103%, and Sprint has skyrocketed up almost 200%. Motorola deserves to have moved the least of the three, says Cramer, and it could go higher even if it only marginally improves just on the strength of all the mutual fund money flowing into tech stocks. Sprint has moved so much that Cramer thinks the easy money has already been made. And while AMD has also had a major move, Cramer says its fundamentals have improved enormously.
How’s our speculative straight look when we tally everything up? First place: AMD. Second Place: Sprint. Third Place: Motorola.
Cramer’s bottom line: If you’re speculating, toss Motorola, buy Sprint on a pullback, and buy AMD here, although in a perfect world he’d like a little pullback before buying.
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