Another week, another record high close. Driven by the incredible level of M&A and private-equity buying, the stock market advanced yet again this week. Not only did the Dow reach a new all-time peak, but the S&P 500 is now within 5 points of its own all-time high.
With earnings season all but completed, the market has been fueled by surprisingly positive economic data and strength in overseas markets.
What amazes me most about this market is the mix of companies that are leading it higher. Oil stocks have been outstanding lately, but with the exception of retail and a large chunk of tech, a broad mix of equities has moved higher.
The turnover in the portfolio has been almost as busy as the M&A market lately. This week I added two new names and closed out a chronic underperformer. Tuesday, I picked up a position in Citigroup (C) and was immediately rewarded by the announcement that Eddie Lampert had built a large position in the first quarter.
Friday saw the addition of XTO Energy (XTO) , a best-of- breed exploration and production (E&P) company that I believe has tons of upside as energy prices march higher.
New folks, welcome aboard! You will see many of the same disciplines at work, in real time, that are in my latest book, "Jim Cramer's Mad Money: Watch TV, Get Rich," and in "Jim Cramer's Real Money: Sane Investing in an Insane World."
I also want to be sure you're not confused about the terminology I use on my "Mad Money" television show: When you hear me refer to my "charitable trust" on "Mad Money," I'm talking about the trust that holds my Action Alerts PLUS portfolio. My winnings from Action Alerts PLUS go to charity after the close of each trading year.
Here's the quick guide to my rating system, too: Ones are stocks I would buy right now, Twos are stocks that I would buy on a pullback, Threes are stocks I would sell on strength and Fours are stocks I want to unload as soon as my restrictions allow.
ONES
Caterpillar (CAT:NYSE, $74.77, 1,400 shares, 2.49% of the portfolio): Pulled back slightly after being downgraded by a sell-side analyst. As long as investors remain focused on the company's exposure to the U.S. construction and trucking industry, this stock will remain undervalued and underappreciated. Ultimately, though, I believe Caterpillar will get revalued higher as investors realize machinery stocks are the new growth stocks for the next few years.
Citigroup (C:NYSE, $55.00, 800 shares, 1.05%): Started a position this week by picking up 800 shares of the world's largest financial services firm on Tuesday. The stock spiked the next day after it was revealed that Eddie Lampert had built an $800 million position. I don't expect him to become an activist in this situation, but his interest sure does raise the stakes for Citi management. Once my trading restrictions on this name are lifted, I'll continue building the position.
Clorox (CLX:NYSE, $67.07, 3,000 shares, 4.79%): Ran a bit on rumors of a possible leveraged buyout. Anything's possible these days, but I don't put much faith in the chatter. However, I do believe the company will discuss plans to shed noncore brands at its May 24 analyst meeting.
Fannie Mae (FNM:NYSE, $63.18, 2,700 shares, 4.06%): Still sits at the center of political debate about how to deal with the collapse of the subprime mortgage market. Several prominent trade groups, including the National Association of Home Builders (NAHB), said this week that they believe recent legislation aimed at increasing regulation of Fannie Mae and limiting its investments would be harmful to the housing market. The prospect of new legislation is certainly worrisome, but the market seems to give it little credibility, and Fannie Mae goes up nearly every day.
Freeport-McMoRan (FCX:NYSE, $71.15, 2,600 shares, 4.40%): Slipped somewhat as copper prices took a beating on concerns about slowing growth in China. Yes, the company's hugely levered to the price of copper, but it also generates a huge chunk of earnings from gold and molybdenum, so the stock shouldn't react too strongly to the day-to-day fluctuations of copper prices. And China has so far been unsuccessful in slowing down its runaway growth, so I don't expect the action its central bank took Friday, one rate hike, to have an overwhelming impact on its growth.
Nike (NKE:NYSE, $53.25, 2,800, 3.55%): Added 400 shares because the stock so far hasn't participated in the market's recent rally. Concerns about U.S. consumer spending -- highlighted by the poor results from Foot Locker (FL) -- seem to be keeping a lid on the stock. But Nike derives half of its revenue from overseas, so I still believe that numbers are too low. I'm also confident that Nike's new retail initiatives will reinvigorate growth and lead to a much higher stock price.
NYSE Euronext (NYX:NYSE, $82.44, 2,500 shares, 4.91%): Reporting as a standalone unit for the last time, Euronext announced solid preliminary results that confirmed that the European business is still growing by leaps and bounds. Speculation increased this week, spurred by two sell-side analysts, that the company could be shopping for a futures/derivatives exchange. The two names bandied about are the InterContinental Exchange (ICE) and Nymex (NMX) . While ultimately I believe there will be only a few huge, global exchanges, I do not believe another deal is imminent.
Toyota Motor (TM:NYSE ADR, $121.83, 1,900 shares, 5.51%): Announced the release of its most expensive hybrid this week, a Lexus that costs upward of $120,000. While Toyota stock has been stuck in the mud lately, I believe the recent increase in gasoline prices could lead to a pickup in sales of the company's hybrids, despite the phasing out of the tax breaks. It shares a problem that a lot of the stocks in the portfolio face: Investors are overly focused on its U.S. business and fail to appreciate the tremendous growth overseas.
XTO Energy (XTO:NYSE, $57.91, 800 shares, 1.10%): Started a position this week in the best-run oil and gas company I follow. With both natural gas and oil prices on the rise, I believe this space is due for a huge move, and XTO is best of breed. It's a low-cost producer with solid production growth and a very disciplined capital approach that is very shareholder-friendly. I expect big rewards from this position.
TWOS
Altria (MO:NYSE, $69.95, 3,100 shares, 5.16%): It's been a slow couple of weeks for the world's largest tobacco company, not what I had expected from Altria after the split-off of Kraft KFT. I'm confident that the reason Altria has yet to make any new moves is that it's still considering splitting the domestic and international tobacco businesses, a move that I believe would be extremely popular with shareholders. However, I was also hoping for a large buyback or possibly an increased dividend, and those have yet to materialize. The stock is still worth at least $75, even without any of those developments.
Diageo (DEO:NYSE, $84.98, 2,400 shares, 4.86%): With beer sales continuing to falter as spirits become more and more popular, this name just looks like more of a winner. Just last week the company launched Smirnoff Source, a spring water-based malt beverage drink. With an improved focus on its U.S. distribution network and tremendous opportunities overseas, Diageo is winning on all levels of the market -- and its price reflects that.
Goldman Sachs (GS:NYSE, $230.34, 1,200 shares, 6.58%): This stock is still incredibly cheap, even as it hits yet another all-time high. With the markets rocking and M&A maintaining its furious pace, my $25 earnings estimate for 2007 could prove conservative. Either way, the stock seems to be pricing in a huge slowdown in business, and I just don't see that coming. I still expect $300 before the end of the year, and it just kills me that I'll have to sell some shares soon to keep the portfolio in balance.
Halliburton (HAL:NYSE, $36.46, 5,000 shares, 4.34%): Has been on fire in the past few weeks because the turn in natural gas appears to be sustainable, and the North American rig count is back at prior all-time highs. At its annual shareholder meeting this week, the CEO highlighted the incredible growth opportunities it sees overseas. He also discussed the move to Dubai, which I view as a very positive move. Even though the stock is up sharply in the past two weeks, it has been a huge laggard for a while, so I see plenty of room to run here.
Hewlett-Packard (HPQ:NYSE, $44.58, 4,000 shares, 4.25%): Reported second-quarter earnings at the high end of its previously preannounced range on Wednesday, but the stock slipped slightly. Despite the muted reaction, I was very pleased by the company's report. It noted strength in personal systems, and claimed it was starting to see some positive effects from Vista. H-P is one of the cheapest tech stocks I follow. With CEO Mark Hurd doing a brilliant job running the company, I believe it's headed much higher.
Sears Holdings (SHLD:Nasdaq, $179.88, 1,500 shares, 6.42%): The only name in the portfolio that has yet to report earnings. This stock has been in limbo lately because many investors seem to expect a big announcement from Eddie Lampert. I actually share that belief because the company has been stockpiling its cash and not buying back stock. I can't help but think an acquisition could be in the works. In the meantime, I'm anxiously awaiting the earnings announcement to check in on the retail progress.
Transocean (RIG:NYSE, $95.52, 2,800 shares, 6.37%): Even though the stock is in full-on bull mode right now, I'm going to have to trim my position just slightly in order to rebalance the portfolio sometime soon. The stock is now 15 points above my cost basis and 20 points above my last buy, and with the addition of XTO, taking some profits on the world's largest land driller makes sense. I still believe it's headed well north of $100, though.
Union Pacific (UNP:NYSE, $119.85, 1,900 shares, 5.42%): As was widely speculated, Warren Buffett revealed in a filing this week that he has accumulated a $1 billion-plus position in Union Pacific. The increased attention that Buffett brings, along with several recent initiations of the sector, have made the rails a very hot group at the moment. This is usually a sign that a top could be near, but I believe the whole industry is still early in a multiyear rally, so I'm holding on.
UnitedHealth Group (UNH:NYSE, $53.47, 3,200 shares, 4.07%): Hit with a slight negative this week when the Department of Justice asked for more information about the company's proposed acquisition of Sierra Health SIE. I believe this deal would be a huge win for UnitedHealth, so the possibility, however small, that it might not go through is certainly a negative for the stock. I'm still looking for a big second-half move in this name as the buybacks kick in and the company brings its costs under control.
THREES
American International Group (AIG:NYSE, $72.22 2,000 shares, 3.44%): I moved this one to a Three rating this week because its recent run has left it close to my expected price of $75. This stock is still extraordinarily cheap even at that price, but I'm worried about the possibility of a violent and costly hurricane season. My cash position is already too large, so I am in no rush to close out this position, but I want to put you on notice that I'll look to sell my shares as the opportunity arises.
Yahoo! (YHOO:Nasdaq, $29.75, 4,000 shares, 2.83%): Finally bounced this week on the Microsoft (MSFT) buy of aQuantive AQNT after the stock retraced all of its recent rally. I'm still looking to trade out of my stake on any rally above $30, though with the possibility of a Microsoft buy now completely off the table, I'm not sure what would get the stock to that level.
Regards,
Jim Cramer
DISCLOSURE: At the time of publication, Cramer was long AIG, Altria, Caterpillar, Citigroup, Clorox, Diageo, Freeport McMoRan, Fannie Mae, Goldman Sachs, Halliburton, Hewlett-Packard, Nike, NYSE Euronext, Sears Holdings, Toyota Motor, Transocean, Union Pacific, UnitedHealth Group, XTO Energy and Yahoo!.
Send email to james.cramer@thestreet.com.