Jim Cramer laid out five themes investors should watch out for in the first quarter during his monthly conference call with Action Alerts PLUS members. The third theme Cramer identified concerns merger and acquisition activity in the financial sector.
The blockbuster acquisition of SunTrust Banks Inc. (STI - Get Report) by BB&T Corp. (BBT - Get Report) earlier this month is just the beginning of a consolidation streak in the banking industry, according to Cramer.
Cramer believes that the wider market will generally ignore this merger activity, but he also believes that that will be a mistake.
"The cost take-outs and an economy that has some momentum will bring about some bountiful investments. I see companies like US Bancorp (USB - Get Report) , First Horizon (FHN - Get Report) , Comerica (CMA - Get Report) and most important, Key (KEY - Get Report) , on the red hot Suntrust-BBT griddle, and we will have to adjust accordingly," Cramer said.
Cramer believes that banking stocks are currently undervalued, given their yields at a time when interest rates are at all-time lows. The cheapness of many bank stocks is what makes them attractive takeout targets.
But mid-sized banks aren't the only ones that stand to benefit from the current environment; the big boys also stand to gain.
"These moves, more than anything else, could actually impact Goldman Sachs (GS - Get Report) , which will be able to profit from the M&A and the diversion of resources to that high margin segment of the firm's business. The IPO market will make Goldman a winner, too," Cramer said.
Goldman Sachs, a key holding in the AAP portfolio, is Cramer's top pick for the financial sector.
"As long as it stays below tangible book value, right around here -- and remember we bought more just a few days ago -- it remains one of my favorite stocks," Cramer said. "And, yes, Key could be added to the bullpen now, after a terrific in and out investment last year."