Jim Cramer is followed by so many investors that he can move markets. A stock being mentioned on his Mad Money show often pops up in after-hours trading, and that is just for a one-time mention. When you see the effect Cramer can have on a stock he casually rates a buy, you can just imagine how much effect Cramer can have on a stock he regularly discusses as a strong buy.
The power of his almost daily television show and his loyal following can make a huge difference in the valuation of a stock over time. This power to move stocks can be positive for his followers when companies are performing and the stock is rising, but if a company disappoints and Cramer goes from "buy, buy, buy" to "sell, sell, sell" that can create an avalanche of selling pressure.
For example, when Motricity (MOTR) disappointed investors, the stock price collapsed rather suddenly. Motricity was trading at $12, then $10, then $7, and now trades in the $2 range. Just like any stock, even Cramer favorites might not go up forever. There is a good time to take profits, and that time is before most other Cramer followers do, or before these companies, which trade at high valuations and with high expectations, possibly release lower earnings or guidance.
I think too many investors are letting Cramer think for them at times. Everyone should think for themselves, and really know the valuations and risks of their investments. Here are some stocks that investors should consider taking some profits on:
Darden Restaurants, Inc. (NYSE:DRI) operates a number of well-known restaurant chains, such as Red Lobster and The Olive Garden. With the economy looking like it is entering a recession and consumer confidence down, revenues could come in lower. Darden shares have been falling lately due to the impact of lower sales from Hurricane Irene. This stock looks ready to test the 52-week low soon.
Here are some key points for DRI:
- Current share price: $44.68
- The 52 week range is $42.37 to $53.81
- Earnings estimates for 2011: $3.87 per share
- Earnings estimates for 2012: $4.36 per share
- Annual dividend: $1.72 per share which yields 3.7%
- Book value: $14.38
Baidu, Inc. (NASDAQ:BIDU) is based in China and is a leading search engine company. This stock has had an incredible run over the past few years. However, due to this run, the valuation is at nosebleed levels and now trades for about 50 times earnings. When you can buy Google (NASDAQ:GOOG) for a much lower price to earnings ratio and with top management, it's hard for me to get excited about Baidu at this price.
Here are some key points for BIDU:
- Current share price: $147.23
- The 52 week range is $82.89 to $165.96
- Earnings estimates for 2011: $2.91 per share
- Earnings estimates for 2012: $4.39 per share
- Annual dividend: none
- Book value: $5.01 per share
Public Storage (NYSE:PSA) is a real estate investment trust (REIT) that invests in storage facilities. This stock recently plunged to about $103 per share and rebounded to current levels around $124. With so many REIT stocks yielding more than twice what Public Storage is paying, it makes more sense to be in those stocks. The drop to about $103 shows there is downside risk in this stock.
Here are some key points for PSA :
- Current share price: $124
- The 52 week range is $94.60 to $124.81
- Earnings estimates for 2011: $5.85 per share
- Earnings estimates for 2012: $6.14 per share
- Annual dividend: $3.80 per share which yields 3.2%
- Book value: $31.26 per share
BJ's Restaurants (NASDAQ:BJRI) operates a number of casual dining restaurants across the United States. This stock fell from around the $55 level when the market corrected but it still could fall further due to stretched valuations. With barely over $1 per year in earnings, this stock has a high price to earnings ratio of about 40. With the market full of companies trading for much lower price to earnings ratios and growing just as fast, it is hard to justify the valuation of this stock.
Here are some key points for BJRI :
- Current share price: $43.75
- The 52 week range is $26.27 to $56.64
- Earnings estimates for 2011: $1.09 per share
- Earnings estimates for 2012: $1.33 per share
- Annual dividend: none
- Book value: $11.23 per share
Whole Foods Market (NASDAQ:WFM) is a leading food retailer specializing in organic and natural products for health-conscious consumers. This stock had a very significant decline and dropped below $10 per share at the peak of the financial crisis a couple of years ago. Now with Europe having a potential financial crisis that could become a contagion event for all stock markets, Whole Foods stock could fall sharply again due to high valuations. I don't know of any grocery stock that sells for about 30 times earnings. In fact, many sell for less than 10 times earnings, so I would sell this stock while the price remains elevated.
Here are some key points for WFM:
- Current share price: $66.29
- The 52 week range is $34.04 to $68
- Earnings estimates for 2011: $1.91 per share
- Earnings estimates for 2012: $2.20 per share
- Annual dividend: 40 cents per share which yields .7%
Chipotle Mexican Grill (NYSE:CMG) operates a number of restaurants that offer high-quality and affordable Mexican food. This stock has been a market leader, but the price-to-earnings ratio of about 42 is so much higher than almost any other stock in this market that I can't even get close to considering a buy. This stock dropped to about $46 around January 2009. I have no doubt that the constant positive talk by Cramer for this stock has helped to boost it to valuation levels no one could have imagined even a couple of years ago. I believe it is just a matter of time before this stock falls under the weight of extremely high expectations and valuations. Insiders at Chipotle have been repeatedly selling in large amounts, and I would follow the insiders and sell while everything is going really well for this stock.
Here are some key points for CMG:
- Current share price: $312.63
- The 52 week range is $162.09 to $337.32
- Earnings estimates for 2011: $6.82 per share
- Earnings estimates for 2012: $8.64 per share
- Annual dividend: none
Amazon.com (NASDAQ:AMZN) is a leading online retailer that has grown into much more than books. Amazon is involved in video streaming, cloud computing, online deals similar to Groupon, and more. This stock traded for about $42 per share during the 2008-2009 lows. This company has incredible management, but the stock has already priced that -- and maybe more -- in. Even a mild miss or weaker than expected guidance could lead to a big drop in this stock. This stock trades for about 100 times 2011 earnings, that means it would theoretically take 100 years to get your money back in earnings, if they remain at these levels. Of course investors are expecting earnings growth, but if you pay too much for a stock, you can lose money, even in a strong growth company.
Here are some key points for AMZN:
- Current share price: $218.93
- The 52 week range is $122.25 to $220.64
- Earnings estimates for 2011: $1.97 per share
- Earnings estimates for 2012: $3.22 per share
- Annual dividend: none
Data sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.