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Cramer's 'Mad Money' Recap: Gaming the Russell Rebalancing

TheStreet.com Staff

Click here for an archive of Cramer's "Mad Money" recaps.

The Russell 2000 index is the key to this year's trades, he told viewers of his "Mad Money" TV show Thursday.

When a company gets added to the index, the biggest advantage is that the stock gets a lot more attention and promotion, Cramer said.

Every year, the Russell indexes (not indices), he explained, need to be rebalanced because of certain stipulations the indexes have. The annual rebalancing of the Russell 2000 index, which is made up of 2000 small-cap stocks, will take place in June this year.

To be eligible for the Russell, which makes up its own rules, a stock must have a market capitalization of $233 million to $3 billion, trade on a major exchange and trade at more than $1, among other conditions, Cramer said.

On June 22, the Russell 2000 will be reconstituted, and all companies that don't meet the criteria will be "purged and replaced," Cramer said. "The additions and deletions are based on stock prices as of today's close."

Cramer said he's here to try to predict which stocks will join the index and thus rally. The Russell rebalance, he said, is a "great" trade. It is one of the few events in the year that causes certain stocks to go up.

A great example of the effects of this process, he said, is what happened with Jones Soda (JSDA Quote).

Last year at this time, Jones had one analyst covering it; the company got into the Russell index, and now there are five analysts.

Additionally last year, a total of 228 stocks were added to the Russell 2000, out of which 111 went higher and 98 went lower. Even though this might seem like 50-50 odds, the stocks that went up moved much more than those that went down, Cramer said.

In fact, the top five performers of the Russell index last year -- Sigma Designs (SIGM Quote), Matrix Service (MTRX Quote), Bradley Pharmaceuticals (BDY Quote), Jones Soda and Advanced Magnetics (AMAG Quote) -- are all up more than 100%, Cramer said, and all came from different sectors.

The rebalance has to happen, Cramer said. Don't read about this in the papers after the fact.

Three for All

Cramer said he has three favorite stocks that he believes are likely to get added to the Russell 2000.

Even if the stocks aren't added to the index, Cramer likes these plays. But remember, Cramer reminded viewers, to not trade after hours, to use limit orders and to buy these picks incrementally.

The first of Cramer's Russell 2000 stocks is Coleman Cable (CCIX Quote), a company that makes electrical wire and cable, he said.

Coleman is now big enough to be included in the index and only has one analyst covering it, Cramer said. However, this should change if it joins the Russell 2000. He said he could even see a company such as General Cable (BGC Quote) buying it.

Cramer's next "golden nugget," he said, is FCStone Group (FCSX Quote), which has two analysts covering it in addition to overseas exposure.

His third and final Russell rebalance stock is Great Lakes Dredge & Dock (GLDD Quote). The thing Cramer said he especially loves about this stock is that it is protected by the Jones Act, which prevents foreign competition in the U.S. market.

Plus, it has a lot of foreign business, he said.

Sell Block

In his "Sell Block" segment, Cramer said that Charter Communications (CHTR Quote) and Apple (AAPL Quote) are each up 41% since he recommended them.

Starting with Charter, Cramer said it's time to take most or all of this stock off the table. Though Charter was always more expensive than Comcast (CMCSA Quote), even though Comcast was the better company, Cramer said he liked it because it was refinancing its debt at better levels.

Now he wants people to declare victory on the stock

Apple, he said, "is more difficult." Cramer said he has to put his stock in the Sell Block, at least a little bit. "This is a stock that needs to be traded now."

In general when there is a stock that is up 41% in six months, market players should not be greedy -- otherwise they could get burned, he said. "Never be afraid to take something off the table if you're up 41%."

On Stockpickr.com, Cramer said, he advised people to sell Apple into the launch of its iPhone product because expectations have gotten too high for the product.

Second, it is a possibility that the iPhone is not the next great thing, he added. Also, people should keep in mind what happened when the product was first introduced. On the day it was unveiled and the day after, Apple plummeted, Cramer said.

Therefore, why not declare victory on at least some of your position? he asked. Cramer recommended schnitzeling some and buying it back after the launch and after Apple inevitably goes down.

Meanwhile, he suggested not selling Dell (DELL Quote) or Sears (SHLD Quote), which he owns for his charitable trust, Action Alerts PLUS.

Even though Sears had a horrible quarter and isn't executing or even buying stock back to create a cushion, Cramer said he's giving the benefit of the doubt to Eddie Lampert.

"I'm not happy with it, but I'm not worried about it either," he said about Sears.

In his "Mad Mail" segment, Cramer told a viewer that Halliburton (HAL Quote), which he owns for his charitable trust, is going down because it is levered to domestic drilling and natural gas, which people are "suspicious" of.

"To me it should be bought because it's so darn cheap," Cramer said, adding that he likes it on a valuation basis.

Lightning Round

Cramer was bullish on Global Sources (GSOL Quote), Duke Energy (DUK Quote), Exelon (EXC Quote), Consolidated Edison (ED Quote), Level 3 Communications (LVLT Quote), Briggs & Stratton (BGG Quote), AAR (AIR Quote), BE Aerospace (BEAV Quote), Dollar Tree Stores (DLTR Quote), Bankrate (RATE Quote), Nucor (NUE Quote) and ValueClick (VCLK Quote).

Cramer was bearish on Archer Daniels Midland (ADM Quote), IDT (IDT Quote), FactSet Research Systems (FDS Quote) and Applebee's (APPB Quote).

For more of Cramer's insights during the Lightning Round, click here.

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