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The 'Stealth' Bull Market in Propane

Some of the best bull markets, Cramer says, are the ones nobody talks about. These 'stealth' bulls are the ones that edge ever higher but tend to draw little attention, allowing you to get in before the upward momentum runs out of steam. Should the market be so lucky as to have a diamond in the rough in the form of a stealth bull sector? Yes, says Cramer, and that group is in propane and propane stocks.

Even when propane stocks aren't in bull mode, says Cramer, they are still money machines with huge dividends. Four names to look at are Suburban Propane , FerrellGas Partners, Inergy and Amerigas Partners , says Cramer, which have an astonishing average dividend yield of 8.4%. If you've caught up on your homework of reading Cramer's newest book, you'd know that his favorite way to generate cash long-term is through dividend compounding, and by virtue of having huge dividends, these stocks already have a good thing going for them. Using Cramer's "rule of 72" you can calculate that even if the price of these stocks remained stagnant, the dividend payments alone would double your money in 8 1/2 years.

But why, other than for the huge dividends, does Cramer like this area? First off, propane prices are 33% off their July bottom and these propane MLPs are up an average of 19% from the beginning of July. And things are going to get better for people in the propane business, says Cramer, noting that the Energy Information Administration is predicting that wholesale prices of propane will rise 7% in December of '09 and 9% through December '10. With retail prices expected to rise even more than that, these companies stand to see bigger margins, leading to higher cash flows and higher dividends, says Cramer.

But what's the best stock? Cramer says the strategy here is for cash generation through dividends, so you want to look at the size and safety of the yields, as well as the corporate debt and strongest regional exposure.

Here's how the companies currently stand on their yields:

FerrellGas: 9.2%
Inergy: 8.5%
Suburban Propane: 8.2%
AmeriGas: 7.8%

But how safe are they? To determine this, Cramer took the expected cash flow per share, divided by the expected dividend to come up with the company's cash coverage.
AmeriGas has the best cash coverage, at 1.5 times its dividend, followed by Inergy and Suburban Propane tied in the number two spot at 1.3, and FerrellGas in fourth at 1.2. For a more detailed explanation of this process, Cramer recommends looking into Getting Back to Even.

Next up: Corporate debt, which could also pose a risk to dividends. Taking a look at debt relative to the earnings before interest, taxes, depreciation and amortization over the last 12 months, Suburban Propane as the lowest leverage, followed by AmeriGas, Inergy, and FerrellGas with the most leverage.

Lastly, geographic exposure of these propane companies is important because some regions are better than others. According to the Energy Information Administration forecasts, retail propane prices are expected to go up the most in the Midwest through the end of the year, followed by the West, South then East. FerrellGas has the most exposure to the Midwest, followed by Inergy.

So, which propane name is really the best? Cramer's call is for Inergy, which comes in second in dividend yield, cash coverage and Midwest exposure, and third best on the balance sheet, making it the most well-rounded of these propane players, says Cramer. However, Natural Gas makes up around 40% of the company's business, so the best propane pure play is AmeriGas, the largest company of the four.

What's the bottom line? Don’t ignore the strength in propane and the high-yielding, money machine propane MLPs that would be a great fit in your IRA. Cramer's favorite on this front: Inergy.

For Cramer's full analysis, check back for the video!

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