How Jim Cramer Loses Even When He Wins

Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As a contributor on the Motley Fool blog network, I get quite an assortment of "colorful" comments. One of my favorites went something like this:

"You're a complete fool! Everybody knows that if Jim Cramer says to buy a stock, you buy it!"

This comment reflects a common investing strategy: choose an analyst and follow their recommendations every time. In so doing, you will win in the stock market. However, I believe that -- by not having a buy-and-hold strategy -- many famous analysts can lead investors astray. To illustrate this, let's look at Jim Cramer's track record.

Cramer at his best

Jim Cramer's moves are tracked with Motley Fool CAPS. In an effort to be overly fair, I've picked his best performing buy recommendations. 

Company Start Date/Price End Date/Price Time/Return
Mastercard 5-31-06/$44.71 7-31-08/$244.15 26 mo/446%
Cypress Semiconductor 3-8-06/$3.92 1-22-11/$20.25 58 mo/416%
Salesforce.com 11-21-08/$5.58 12-06-11/$31.25 37 mo/460%
Apple 1-28-09/$92.22 6-13-13/$435.96 53 mo/373%

If you had invested $1,000 in each of these stocks when Cramer had suggested, that original $4,000 would now be worth about $21,000. No matter what ruler you use, that is called absolutely annihilating the market.

But here's the catch: Cramer lost. Big time.

Company End Price Today's Price Left On The Table
Mastercard $244.15 $596.12 $7,872
Cypress Semiconductor $20.25 $11.31 ($2,280)
Salesforce.com $31.25 $40.59 $1,674
Apple $435.96 $422.78 ($146)

If you disregarded Cramer's suggestion to sell, your original investment is now worth $28,000. In his attempt to time the market, Cramer left $7,000 on the table. And remember, these four are the best of the best.

So what?

I'm not trying to say Jim Cramer is a bad stock analyst. In reality, I tune in to him because often he has good insight into companies and the risks they face. But he falls short by having a short-term view of companies, the stock market, and the economy in general.

Take Mastercard (NYSE: MA) for example. Why did he sell? He said,

"Mastercard is not as good as Visa. Sell, sell, sell.

Whether or not Visa is the better company is irrelevant to whether or not Mastercard is a great company.

MA Revenue TTM data by YCharts

Mastercard is growing revenue, earnings, and free cash flow. On top of that, the company has a strong cash position and zero debt.

Valuation is the only lingering concern. Mastercard is currently priced at 20 times next year's earnings, as opposed to the industry average of 20 times this year's earnings. However, the company's above-average valuation is due to growth potential. Domestic growth opportunities exist, but more exciting are the international opportunities. Foolish blogger Rupert Hargreaves pointed out Mastercard's deal with the Nigerian government to eventually issue 100 million cards to Nigeria's citizens.

When you weigh Mastercard's risks and opportunities, the argument to sell seems very weak. A long-term view of this company would have kept you in when Cramer said to "sell, sell, sell."

Current recommendations

Currently, Cramer is reiterating his suggestion to sell Family Dollar Stores (NYSE: FDO). This comes after he recommended buying Family Dollar in 2008, selling in 2009, buying again a couple months later, and then selling again this year. 

FDO Total Return Price data by YCharts

If you had just bought and held when he first recommended it, you're up almost 300% in five years. In 2009, Cramer urged investors to sell because of Dollar General's IPO and an improving economy. But after the stock took a 20% dip he said it was time to "buy buy buy."

Selling a stock due to short term pressures, or buying into a stock just because it takes a dip isn't the way to invest. I would consider Family Dollar based on different factors. Over the past five years the company has grown revenue 81%, and net income 47%. In the fourth quarter, EPS is expected to grow 20% year-over-year. All this and the company's P/E is below the industry average.

On the other side of the sentiment coin, Cramer suggested buying Five Below (NASDAQ: FIVE), pointing out that the stock has more than doubled since its IPO. I agree that Five Below is a good buy, but not for that reason.

Five Below grew annual net income 25% in 2012. The company operated 244 locations by the end of fiscal 2012, but looks to add 60 new locations this year -- a 25% increase. All current locations are in the Eastern United States, meaning there is still plenty of growth opportunities in the west. While its forward P/E is 3 times times that of competitor Buckle, it seems justified considering the growth.

Cramer will likely suggest selling this stock within a year. Rather than looking at short term pressures, keep an eye on growth and earning trends before selling out too soon.

One Fool's conclusion

Buy-and-hold investing isn't dead. It's easy to trick ourselves into thinking that in these modern times we have the tools to "out-trade" the thousands of day-traders trying to time the market as well. But as we've seen, the best strategy is still to buy great companies and hold them for the long-haul.

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Jon Quast has no position in any stocks mentioned. The Motley Fool recommends MasterCard. The Motley Fool owns shares of MasterCard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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