Cramer's 'Mad Money' Recap: Defense Stocks Win Under McCain

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"Defense stocks are as strong as ever and as cheap as ever," Jim Cramer told viewers of his "Mad Money" TV show Thursday.

And those stocks are the place to be if John McCain makes it to the White House, he said.

Cramer first recommended the defense sector in July 2007 and touted such names as Lockheed Martin LMT, Northrup Grumman NOC, General Dynamics GD, L-3 Communications LLL and Raytheon RTN, a stock which he owns for his charitable trust Action Alerts PLUS.

Since that recommendation, these stocks have been up an average of 6.6% while the Dow Jones Industrial Average has dropped 12%.

"Defense spending isn't going to go away," said Cramer. He noted defense companies are flush with cash, are buying back stock and are some of the most shareholder-friendly companies out there.

"John McCain likes defense spending," noted Cramer, "and I like defense stocks."

Cramer said that despite the recent rise in defense stock prices, the sector as a whole remains cheap and trades at just 13.6 times their earnings compared to 14.5 times earnings last July.

"This multiple contraction won't last for long," said Cramer, adding he expects the sector's earnings and multiples to rise in the coming months.

McCain's Navy

Cramer donned a Navy flight suit and aviator sunglasses to crown General Dynamics as his favorite defense stock under a McCain administration.

General Dynamics is the third largest defense contractor behind Lockheed Martin and Raytheon, but Cramer says the company's exposure to both Navy destroyers and submarines makes it the most attractive.

According to Cramer, General Dynamics is cheap, trading at just 13.1 times its earnings, which is below the deflated industry average. The company also has $2.9 billion in cash and $2.4 billion in free cash flow.

But Cramer held his biggest praise for the company's sizeable backlog. General Dynamics currently has a backlog of more than $47 billion worth of contracts.

"When a company's backlog exceeds its marketcap, that's when you know it's cheap," said Cramer.

A Disastrous Run

In the "Sell Block" segment, Cramer added a new face to the Mad Money "Wall of Shame": Gary Pruitt, President and CEO of McClatchy MNI.

According to Cramer, Pruitt has all but destroyed a great newspaper franchise through its terrible acquisition of Knight-Ridder. Since the merger closed, McClatchy's stock is down 82%. In January, the company's advertising revenue fell by 16% following a 8.2% drop in December and a 9.2 percent decline in November.

Cramer said Pruitt's strategy of combining the two companies and cutting costs was fatally flawed since both companies had the same failing business model.

Cramer also noted another failed acquisition that Pruitt engineered when McClatchy bought the Minneapolis Star in 1998 for $1.2 billion and sold it December 2007 for $530 million.

"McClatchy," said Cramer, "is going to go much, much lower."

Cleanup Pays

Cramer welcomed Stephen Romano, President and CEO of American Ecology ECOL back to the show for an update on the company.

Romano said his hazardous waste management company's profitability is driven by growth, noting the company disposed a record 1.1 million tons of waste in 2007.

Romano said American Ecology is poised to do even more business in 2008. He said he plans to grow his company both organically and through acquisition and predicts earnings-per-share growth of between 10% to 16% for 2008. He also noted that the company has no debt and a dividend that yield 3.8%.

Cramer said he want to stick with those CEOs who make him money, noting Romano is definitely one of those CEOs.