TheStreet.com's Jim Cramer says stocks like CIT need to avoided, not growth stories like Google, Apple and RIM.At Google (NASDAQ: GOOG) (Cramer's Take) they are not ring-fencing. They aren't ring fencing at Intel (NASDAQ: INTC) (Cramer's Take) either. Or Microsoft (NASDAQ: MSFT) (Cramer's Take). Or Coke (NYSE: KO) (Cramer's Take), for that matter.
What's ring-fencing? It's the term being used by financial institutions to keep the mortgage portfolios away from the rest of a company's loan exposure. I first heard it on the CIT (NYSE: CIT) (Cramer's Take) conference call, a company that for lack of a better analogy, really whiffed at the home mortgage game when things got tough. Actually it's not the first time I ever heard the term. We had some long horns at a farm in New Jersey. We had to ring fence them so they didn't gore and kill our horses.
CIT's not a cattle ranch. It's a lender.
On its conference call, where it had to issue equity to cover dividends, you could tell there was a real sense of relief from management. As one of the hardest hit non-bank mortgage originators that is still solvent, CIT put together what amounts to a rescue package that allowed them to sell most of their mortgage portfolio to Freddie Mac (NYSE: FRE) (Cramer's Take) to save their balance sheet and allow them to continue to lend to commercial businesses, particularly transportation companies, their true forte. I am sure if you own CIT you are thrilled that everything worked out and all you did was experience a giant loss on your stock's value.
But if you are trying to choose between stocks, you want to ring fence CIT. You want to stay as far away from this kind of company as possible even if you believe they have cordoned off mortgages because, alas, who needs it? You buy a company like this because it throws off excess cash that is then used to offer a hefty dividend and buy back stock. Some growth -- not shrinkage - ain't bad either.
But CIT offered the exact opposite of all of those.
The shock of that kind of reversal makes you realize how precious a clean growth story is, one that is consistent and can't really "blow up" in a quarter. One that has much less risk to it.
When we look at what has happened in the credit markets, we are now pricing in risk better, by accepting that some borrowers are going to be deadbeats and making them pay up, not down, for financing.
In the stock market we are re-evaluating risk, too. And we don't want it. Especially when the reward seems downright minuscule!
When people ask me how come we can play so much for a RIM (NASDAQ: RIMM) (Cramer's Take) or an Apple (NASDAQ: AAPL) (Cramer's Take) or a Google think of ring-fencing. Then you will know that they just might be worth buying even up at these prices.
RELATED LINKS:
- Best-Performing Funds Over the Past 20 Years
- 20 Years of Market-Moving Events
- Jim Cramer's Portfolios of the Week
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer had no positions in stocks mentioned.
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Reader Comments (Page 1 of 1)
10-19-2007 @ 11:20AM
SKM said...
Bush should declare "Energy Independence" in 10 years and decrease our trade deficit by 300 to 400 billion dollars per year, every year.
That would be a statement heard around the world.
10-19-2007 @ 6:19PM
Phil LEwis said...
I think todays drop in the stock market is solely responsible for stupid anniversary comments and commentators selling out to the brokerage houses
10-20-2007 @ 9:55PM
jleeski said...
Don't trust a loud mouth know it all like Cramer......
10-22-2007 @ 10:09AM
Tom said...
Follow what Cramer says and you'll be 40% right and 60% wrong. Check his record.