Trading Cramer's Lightning Round Picks - March 25, 2011

Here are Cramer's Lightning Round picks for March 25th, 2011:

• Alcoa (AA)
• Spectrum Pharmaceutical (SPPI)
• Universal Displays (PANL)
• Pfizer (PFE)
• Celgene (CELG)
• Rubicon Minerals (RBY)
• Merck (MRK)
• American Capital Agency (AGNC)
• Health Care REIT (HCN)

Alcoa (AA) - Cramer Says Buy

Alcoa is an American company that specializes in manufacturing aluminum. They have 59,000 employees and their products are used in manufacturing products like airplanes and automobiles. So, if you are bullish on Boeing and Ford, you should also like Alcoa as a cyclical stock benefiting from increased demand.

The company's stock has a forward P/E ratio is only 11.87 and it is trading for just 1.29 time book value. Because this stock is in a cyclical industry you should probably ignore the trailing P/E ratio of over 70 because it is based on depressed sales levels. The company is set to report their first quarter in April and they are expected to report 27 cents per share earnings for the quarter.

There are two ways to buy this stock. If you are convinced that it is a buy, you could consider buying the January 2013 $7.50 LEAP for $10.00. The time value premium on this call is only $0.41 per share and it is deep in-the-money. If earnings disappoint, sell some April or May calls to reduce your cost.

If you are willing to hold the stock through earnings, but would like to lock in gains, consider buying the shares and selling in-the-money calls against your shares. The $17 May 2011 call is selling for $0.85. So, if the shares trade for over $17 at expiration, you lock in a profit of 4.44% for holding the shares for 56 days. This is a 28.98% annualized return.

Spectrum Pharmaceutical (SPPI) - Cramer Says Take Profits

Cramer says to take profits. Knowing nothing else about the company, the best way to lock in profits, if you are willing to hold the shares, is to sell calls against the shares and collect additional profits. Looking at the May 2011 calls, you can sell the $8 in-the-money call for $1.10 per share. If the shares trade above $8 at expiration, you will boost your return by 6.06% for holding 56 days. Annualized, that is a 39.5% boost to your total return.

Universal Displays (PANL) - Cramer Says Buy

This company does something with flat panel displays. Looking at the earnings multiples, you will see no trailing P/E and a high forward P/E of 47.91. This stock would be considered a growth play and definitely not a value stock.

Not knowing anything about the company, I know you can earn an annualized 25.7% return by buying the shares for $50.31 and selling May 2011 $45 calls for $7.30. The profit of $1.99 per share is almost 4% earned over the next 56 days. The stock would need to fall below $45 for this strategy to lose money.

The company is expected to report earnings on May 9. The mean estimate is -$0.045/share.

Pfizer (PFE) - Cramer Says Buy

Most people know Pfizer as the $162 billion biopharmaceutical company. The forward P/E on the stock is 8.93 and the shares trade for $20.35, which is very close to the 52-week high.

If you are going to buy this stock, you should consider the January 2013 $12.50 LEAP contract for $8.00. The time value premium on the LEAP is only about $0.15 per share. The company announces earnings in the beginning of May. If earnings disappoint, consider selling May calls against your LEAP contracts to generate income.

Celgene (CELG) - Cramer Says Buy

Celgene is a $25 billion biotechnology company. This company's forward P/E ratio is 13.57. Unlike Pfizer, this company's LEAP contracts have a large time value premium on the Calls. The only trade that looks good is the April $55 Covered Call trade. Buy the shares for $55.24 and sell the $55 April 2011 call for $1.34, collecting a $1.10 Time Value Premium. If the shares drop below $55, you've lowered your entry price by collecting the call premium. If the shares trade above $55 at expiration, you collect almost a 2% profit for holding the next 26 days.

Rubicon Minerals (RBY) - Cramer Abstains
Merck (MRK) - Cramer Says Don't Buy
American Capital Agency (AGNC) - Cramer Says Pass

Based upon my limited knowledge of mortgage REITS, I can tell you that most of these company's make money by borrowing at low rates through repurchase agreements and investing at higher rates in government guaranteed mortgage securities. This makes these companies earn money hand over fist when the rate curve is steep and since they have to pay out the majority of their earnings to maintain REIT status, they end up paying ridiculous dividend yields when rates drop. This explains the large dividend, but doesn't mean the stock is an outright buy. If rates start to go up, the margins could get squeezed and mortgage holdings could lose value.

Based on that summary, if you want to invest in one of these mortgage REITs, I'd recommend doing it in a tax-deferred account and selling out-of-the-money calls against your shares. The downside risks from interest rate changes are generally hedged by management through derivatives. The principal and income on the mortgage securities can be guaranteed by the government. Just don't expect the stock to shoot through the roof.

Health Care REIT (HCN) - Cramer Says Buy

Frankly, I'm perplexed by this buy recommendation. When I run the numbers, I can only eke out a 16.25% annualized return for an investor buying the stock and selling the May $50 2011 call for $1.90. The return is based on the time value premium of the call and the dividend which will be declared before the call expires.