JJC:  

Okay... listen up!...  It was bad!... I know it was bad.  It was led by the financials.  Once again, they came after the Citigroup (C)...  they came after the Washington Mutual (WM)...  they came after my priceless Annaly Capital Management (NLY*)...  How badly did I feel about that one today... When I screw up like that, I've got to own it, and I've got to whip myself...  

But you know what?...  We're not going to stop looking for things that work...  and the things we've been talking about all week... the safe havens...  they've been working.  Have they been making you money?  In some cases, yes.   Have they been losing you less money?...  When I want you to stay in the game, maybe that's all I can do...  which is why, once again, I'm not quitting...  I'm looking for stuff...

I think I've got an idea here, and I'm going to go for it (as he dresses up in a sailor's uniform)... I'm going to join the S.S. Cramer...

You see, now that it looks like that the democratic party primary could keep going for who knows how long...  we've got Hillary and Barack shooting at each other, tearing each other to shreds in the process...  it's time to start thinking of how to make money...  yeah, how to make money...

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But, you know what?...  If John McCain has got that republican nomination, like we know he does now, and he takes advantage of the internecine strife within the democratic party... and he becomes president, we're going to make some money...

His ability to be above the fray... his strong pro-Iraq stance - one that's still embraced by many Americans - would vindicate an enlargement of the defense budget, despite it's already bountiful size...   And, of course, that would mean an enlargement of profits for the defense contractors...

Listen to me!...   We are not, on this show, about politics...  I'm trying to make you some money, so we are in favor, on Mad Money, of a way to make money off the budget...        

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We all know McCain likes defense...  And, since the defense stocks, as a group, have become so relatively cheap, versus their strong earnings and the market in general...  well, let's just say they could be great buys right here, especially if McCain wins in November...

In fact, I think I like this group more than I ever have.  It reminds me of how much I liked the defense stocks in '79 and '80...  when I felt that Reagan was going to come in...

Tonight, Cramer's strong on defense too...

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But strong on defense isn't as easy as it sounds.  Where is he going to be spending?  Hey, defense has got a lot of different quadrants there, right?  Where's the money going to go? 

That's the big question.  And we believe we've got the answer...

So tonight, we've got a two-parter on defense...

First (this segment)... why it's cheap, and why we want to buy it right here...  and then, after the break, I'll explain what parts of the defense complex - dare I say, the military industrial complex - I think McCain is going to favor...  which stocks fit the bill. 

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Here's the reasoning behind defense in general...

Recently, we talked about how Wall Street consistently underestimates defense spending.  Not on Mad Money...   We know that defense spending isn't going away.  It's going to increase.  It's most likely going higher, despite maybe a wind-down in Iraq, under a McCain administration...

It won't get cut badly, if at all, under a democrat who'll have to up spending, in order to prove his or her national security credibility...  but those will be different stocks that have to be bought...

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These companies - the defense companies - are flush with cash.  They're buying back stock hand over fist...  They do not need a loan from Citgroup to make the quarter.  They are extremely pro-shareholder... no Wall Street Hall of Shamers in this group...

And they don't need a tapped-out Wall Street...  They do not need to go to a bank.  They are banks... 

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But something's changed since I got behind this group in July of last year, when the market was down big... and defense was one of the sectors I wanted to circle the wagons around... That was the right call...  as the other stocks, other than Boeing Co. (BA) - which has been weighed down by that Dreamliner, not so much by its defense business - have all gone higher since then... 

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Here's what gets really interesting though, for someone that likes to do valuations of stocks, which I want to teach you...

At the same time that the stock prices have moved higher, the stocks are cheaper than ever...  I know that seems counterintuitive, but it's true.  A stock can get higher and still get cheaper, if it doesn't keep up with its earnings.   Lockheed Martin (LMT), Northrop Grumman (NOC), Raytheon Co. (RTN*), which I own for my charitable trust...  General Dynamics Corp. (GD), L-3 Communications Holdings Inc. (LLL)...  their stock prices are all up, since I got behind defense in July.

They're average is up 6.6%, even though the Dow is down almost 1200 points since then.

Can you imagine that incredible advance in the face of that miserable decline?...

But, even as they've gone higher, their price-to-earnings multiples have gotten smaller, meaning you're paying less for the earnings of each of these stocks.  That's how a stock can go up, and yet still be cheaper...

What do we call this on Wall Street?...  We call this multiple contraction.  It usually happens when the earnings behind the companies are on the way down...   But here's a great situation, where the multiples have gotten undeservably smaller, while their earnings are going up... 

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There had been a perception on the Street that no republican could beat a democrat... this was not that long ago remember...  given the upopularity of the Bush regime...  but McCain could be the guy who bucks that theory...  I think people are feeling that.  It's something you wouldn't know, if you only read the business pages, as so many Wall Streeters do...

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Excluding Boeing Co. (BA), the average defense contractor traded at 14.5x earnings, when I got behind the group last July.   Now, they're trading at 13.6x earnings.  That means that they've gotten cheaper...  and the S&P 500 trades at 19x earnings...   In other words, they have a very big discount to what you pay for the average stock in the market, and that's wrong...

These stocks have better growth and better balance sheets than the average stock, and the outlook for defense is as strong as ever...  and, if John McCain takes the White House - a possibility that's looking increasingly likely - I've got to tell you...  the earnings estimates are all going to have to go up...

And I seriously doubt the democrats will threaten defense spending... because they can't afford to look soft...  particularly - I hope that this does not happen - if there's a major terrorist attack.   They don't want to leave themselves open on charges of being too weak on security.

I think both parties are committed to defense. 

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So, that's the case for defense in general.

Which of these stocks is the best?...  Which will make the most money in a McCain administration?...

Well, the answer is...  Call me a tease... you've got to stay tuned for that...