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In 2008, my MBA classmates and I researched Jim Cramer’s stock picks and found the following:

  • Buying Cramer’s picks after he recommended them underperformed the broader stock market. There seems to be a “bump” relative to the market for his picks that has happened faster than you could conceivably trade.
  • Cramer’s mid cap and large cap picks did not outperform the market, and “shorting the bump” would be an interesting strategy for high-frequency traders.
  • Cramer’s small cap picks followed by fewer analysts do a little better than small cap indexes after he discusses them.
  • -Cramer might be trying to do the impossible by making daily stock picks. He provides entertainment and displays an impressive, encyclopedic knowledge of publicly traded companies; however, this did not translate into alpha for his mid and large cap picks.

In the October 26 Mad Money lightning round, Cramer “tepidly” recommended Abercrombie & Fitch Co. (NYSE:ANF). Unfortunately, its high valuation and recent history of negative earnings growth do not bode well.

In the October 27 edition of Mad Money, Cramer spoke favorably of TIBCO Software Inc. (NASDAQ:TIBX) and Salesforce.com (NYSE:CRM). Both are very richly valued, and their prices would suffer dramatically if their valuations descended to more typical stock valuations.

In the October 28 Mad Money lightning round, Cramer recommended Skyworks Solutions Inc. (NASDAQ:SWKS) as an alternative to TriQuint Semiconductor, Inc. (TQNT). Since SWKS seems eager to make acquisitions, I recommend against it. (Acquiring firms tend to underperform the market after they acquire new companies. In fact, most new acquisitions end up getting expunged from the acquiring firm.)

None of these picks are attractively valued by relative value metrics:

Ticker

P/E (ttm)

P/E (forward)

P/S (ttm)

P/B

Dividend Yield

ANF

34.87

16.34

1.72

3.46

0

TIBX

51.95

26.59

5.28

5.64

0

CRM

678.73

78.17

9.09

12.42

0

SWKS

18.45

9.71

2.99

2.6

0

What could an investor expect from buying these stocks and selling them in a few years? We can model total returns over a three-year holding period for each of these stocks Cramer has noted positively. (I use a three-year holding period since above-average growth estimates are not reliable further out.) Since these are favorable recommendations that I am challenging, we will give Cramer the benefit of the doubt and assume a price to earnings multiple of 17, which is a little higher than the historical market average.

I typically use the lesser of earnings growth over the last five years and earnings growth projected by analysts for the next five years, but to be generous I will use the higher of historical and analyst estimates for earnings growth. These growth rates are used to calculate terminal price to earnings ratios, that is, price paid today divided by earnings at the end of the holding period for each stock:

3-Year Growth

Ticker

g (past)

g (future)

Terminal P/E

Annualized Return

ANF

-19.29%

17.96%

21.24

-7%

TIBX

25.18%

14.50%

26.48

-14%

CRM

53.33%

23.25%

188.28

-55%

SWKS

44.04%

15.84%

6.17

40%

Even incorporating the best growth rate (of historical and projected growth) we see that this growth does not account for the high P/E ratio at which ANF, TIBX, and CRM currently trade. A fall to typical valuations would destroy investors. Investors should also exercise caution when considering SWKS, since acquisitions often fail to increase shareholder wealth.

Overall, investors should question investing in these four stocks rather than trust Cramer's positive take on them.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Countering Cramer's Latest Stock Picks