Countering Cramer's Picks From Last Week

Jim Cramer issued 88 buy and sell stock opinions before the Thanksgiving break on 11.28.2011 and 12.02.2011:

Ticker	Cramer's Call	Airdate	Market Cap ($Millions)	P/E	P/B	P/S	Div Yield	EPS Growth Past 5 Years	EPS Growth Next 5 Years	Insider Transactions
USB	Buy	11.28.2011	49503.9	11.38	1.49	3.96	1.9%	-6.4%	8.8%	-1.7%
HD	Buy	11.28.2011	62017.36	17.27	3.49	0.89	2.9%	-5.2%	13.4%	-8.0%
GLD	Buy	11.28.2011	71763.55	N/A	N/A	N/A	0.0%	0.0%	0.0%	0.0%
BGS	Buy	11.28.2011	1121.9	21.78	4.73	2.09	3.9%	18.2%	10.0%	-3.7%
DPZ	Buy	11.28.2011	1939.22	21.09	N/A	1.19	0.0%	-1.7%	9.8%	-13.6%
KMP	Buy	11.28.2011	26265.29	492.94	3.44	3.23	5.9%	-2.3%	7.9%	0.0%
MWE	Buy	11.28.2011	4659.81	59.63	3.15	3.17	5.3%	12.9%	24.2%	-2.4%
FUN	Buy	11.28.2011	1206.63	N/A	6.11	1.19	12.8%	5.4%	6.0%	-65.7%
OKE	Buy	11.28.2011	8639.83	N/A	3.95	0.6	2.7%	-3.6%	7.8%	-4.4%
PNRA	Buy	11.28.2011	4248.89	32.21	6.92	2.42	0.0%	17.0%	18.0%	4.5%
AUQ	Sell	11.28.2011	2553.48	11.93	1.43	6.97	0.0%	52.9%	5.0%	0.0%
NUAN	Sell	11.28.2011	7497.95	207.75	3.09	5.69	0.0%	24.9%	14.2%	42.7%
SIAL	Sell	11.28.2011	7885.21	18.24	3.66	3.18	1.1%	10.7%	8.9%	4.8%
WYNN	Sell	11.28.2011	14699.04	27.48	5.71	2.85	1.7%	3.4%	37.9%	-21.1%
WFR	Sell	11.28.2011	981.8	N/A	0.44	0.34	0.0%	-32.9%	0.0%	85.0%
PZZA	Sell	11.28.2011	902.06	17.37	4.42	0.75	0.0%	8.8%	10.0%	-1.2%
PRSP	Sell	11.28.2011	1892.01	13.72	1.23	5.05	1.9%	9.0%	8.0%	14.0%
LNG	Buy	11.29.2011	820.94	N/A	N/A	2.8	0.0%	0.0%	0.0%	-37.6%
HAL	Buy	11.29.2011	34064.69	12.51	2.76	1.49	1.0%	-0.6%	27.7%	-28.1%
TSCO	Buy	11.29.2011	5254.06	27.2	5.61	1.31	0.7%	16.6%	17.2%	12.8%
GL	Buy	11.29.2011	71763.55	N/A	N/A	N/A	0.0%	0.0%	0.0%	0.0%
DOW	Buy	11.29.2011	33078.86	11.52	1.37	0.55	3.6%	-18.0%	6.8%	14.2%
EOG	Buy	11.29.2011	27452.27	26.59	2.2	3	0.6%	-34.2%	33.5%	10.8%
COG	Buy	11.29.2011	8974.65	62.24	4.38	9.66	0.1%	-8.0%	40.3%	-2.7%
RRC	Buy	11.29.2011	11389.79	N/A	4.89	10.63	0.2%	-14.6%	40.0%	-4.1%
SLB	Buy	11.29.2011	103545.3	23.96	3.29	2.74	1.3%	13.3%	22.3%	-3.6%
ESV	Buy	11.29.2011	11953.04	18.31	1.12	5.31	2.7%	16.4%	16.0%	-2.1%
NOV	Buy	11.29.2011	30999.66	16.66	1.81	2.28	0.7%	34.4%	15.0%	-36.0%
COP	Buy	11.29.2011	96686.03	9.32	1.47	0.4	3.6%	-4.6%	2.9%	462.4%
OXY	Buy	11.29.2011	79734.01	12.84	2.19	3.51	1.9%	-1.1%	14.8%	2.4%
KMP	Buy	11.29.2011	26265.29	492.94	3.44	3.23	5.9%	-2.3%	7.9%	0.0%
CLB	Buy	11.29.2011	5533.58	131.86	41.06	6.35	0.8%	39.6%	19.7%	-0.9%
CVX	Buy	11.29.2011	204764	7.62	1.69	0.83	3.2%	7.7%	6.3%	-4.8%
RIG	Sell	11.29.2011	14396.9	N/A	0.69	1.62	7.0%	-0.3%	10.1%	-1.1%
GGC	Sell	11.29.2011	670.08	8.98	1.34	0.21	0.0%	-55.5%	6.5%	2.6%
AEM	Sell	11.29.2011	7286.33	63.72	1.94	4.04	1.5%	37.1%	7.4%	0.0%
GILD	Sell	11.29.2011	30158.27	N/A	N/A	N/A	0.0%	31.1%	15.4%	5.2%
AMR	Sell	11.29.2011	141.3	N/A	N/A	0.01	0.0%	-21.0%	7.5%	147.9%
DMND	Sell	11.29.2011	642.83	13.13	1.41	0.67	0.6%	36.5%	16.8%	2.1%
BAC	Sell	11.29.2011	58747.25	N/A	0.25	0.85	0.7%	-31.4%	9.6%	3.6%
CRM	Buy	11.30.2011	17001.36	6250.5	11.35	8.13	0.0%	14.5%	26.4%	-5.0%
DECK	Buy	11.30.2011	4133.2	25.73	5.78	3.43	0.0%	37.9%	19.9%	-6.6%
BMY	Buy	11.30.2011	55631.42	16.92	3.36	2.66	4.0%	4.4%	1.3%	109.5%
SNY	Buy	11.30.2011	91834.42	14.45	1.3	1.99	5.3%	20.0%	2.0%	0.0%
PGH	Buy	11.30.2011	3808.99	37.89	1.18	3.33	7.5%	-12.7%	0.0%	0.0%
DIS	Buy	11.30.2011	66363.08	14.66	1.74	1.62	1.6%	9.5%	14.0%	8.0%
TD	Buy	11.30.2011	65202.01	11.47	1.42	3.6	3.7%	2.7%	10.6%	0.0%
CMI	Buy	11.30.2011	18457.67	11.21	3.54	1.07	1.7%	13.9%	17.6%	-9.4%
HOT	Buy	11.30.2011	9707.9	17.5	3.38	1.79	1.0%	-2.8%	24.0%	-9.8%
WYNN	Buy	11.30.2011	14699.04	27.48	5.71	2.85	1.7%	3.4%	37.9%	-21.1%
C	Sell	11.30.2011	87214.27	8.11	0.49	1.18	0.1%	-37.9%	10.6%	-25.5%
RSH	Sell	11.30.2011	1134.18	11.47	1.42	0.26	4.4%	-1.5%	6.5%	11.1%
MSFT	Sell	11.30.2011	216193	9.35	3.64	3.04	3.1%	17.6%	10.7%	-7.0%
VRTX	Sell	11.30.2011	6173.67	N/A	10.65	6.76	0.0%	0.0%	0.0%	-1.5%
LULU	Buy	12.01.2011	6931.44	42.42	13.25	7.92	0.0%	141.4%	27.5%	-9.7%
DECK	Buy	12.01.2011	4133.2	25.73	5.78	3.43	0.0%	37.9%	19.9%	-6.6%
PVH	Buy	12.01.2011	5055.51	18.61	1.82	0.88	0.2%	-15.4%	14.7%	-24.1%
ETP	Buy	12.01.2011	9903.01	32.92	1.81	1.53	8.0%	-13.8%	16.7%	0.0%
GRPN	Sell	12.01.2011	12143.71	N/A	N/A	9.41	0.0%	0.0%	0.0%	0.0%
SFLY	Sell	12.01.2011	976.65	67.07	1.71	2.6	0.0%	-13.5%	34.3%	-17.6%
AINV	Sell	12.01.2011	1428.54	N/A	0.89	12.57	15.5%	-13.5%	6.7%	34.0%
PMT	Sell	12.01.2011	465.43	7.95	0.88	4.48	12.0%	0.0%	25.0%	6.1%
RIGL	Sell	12.01.2011	545.7	N/A	2.12	114.88	0.0%	0.0%	0.0%	-0.1%
RIMM	Sell	12.01.2011	8921.2	3.11	0.89	0.44	0.0%	58.3%	8.0%	0.0%
SDT	Buy	12.02.2011	784.56	N/A	N/A	N/A	11.7%	0.0%	11.0%	0.0%
PH	Buy	12.02.2011	12513.96	12.25	2.49	0.98	1.8%	12.6%	8.5%	9.0%
NAT	Buy	12.02.2011	597.98	N/A	0.66	7.38	9.4%	-26.4%	0.0%	0.0%
SI	Buy	12.02.2011	92791.3	9.78	2.1	0.94	4.0%	24.2%	19.7%	0.0%
T	Buy	12.02.2011	172742.9	14.8	1.52	1.38	5.9%	17.8%	3.5%	-0.4%
COST	Buy	12.02.2011	37789.86	26.42	3.16	0.43	1.1%	7.5%	13.0%	-1.3%
ETP	Buy	12.02.2011	9903.01	32.92	1.81	1.53	8.0%	-13.8%	16.7%	0.0%
EW	Buy	12.02.2011	7442.58	32.78	5.5	4.54	0.0%	23.5%	27.3%	-46.2%
CRM	Buy	12.02.2011	17001.36	6250.5	11.35	8.13	0.0%	14.5%	26.4%	-5.0%
LULU	Buy	12.02.2011	6931.44	42.42	13.25	7.92	0.0%	141.4%	27.5%	-9.7%
WM	Buy	12.02.2011	14514.21	15.38	2.45	1.1	4.3%	-1.1%	9.7%	3.5%
HD	Buy	12.02.2011	62017.36	17.27	3.49	0.89	2.9%	-5.2%	13.4%	-8.0%
YUM	Buy	12.02.2011	26289.95	22.39	13.22	2.18	2.0%	13.3%	12.8%	7.8%
DLTR	Buy	12.02.2011	9936.62	22.26	6.87	1.55	0.0%	23.8%	17.6%	-18.4%
AZO	Buy	12.02.2011	13521.51	17.31	0	1.67	0.0%	21.0%	15.4%	-60.3%
MCD	Buy	12.02.2011	97564.03	18.7	7.32	3.7	2.9%	17.8%	10.5%	-4.7%
CMVT	Buy	12.02.2011	1326.56	N/A	4.04	0.83	0.0%	-16.1%	22.5%	4.7%
S	Sell	12.02.2011	7938.92	N/A	0.61	0.24	0.0%	-57.8%	0.9%	2.1%
GMCR	Sell	12.02.2011	9104.03	45.29	4.76	3.43	0.0%	75.4%	37.2%	-3.7%
DG	Sell	12.02.2011	13861.72	21.47	3.17	1.01	0.0%	11.0%	16.2%	-99.5%
TOL	Sell	12.02.2011	3466.48	46.09	1.34	2.39	0.0%	-78.6%	8.5%	-3.1%
LOW	Sell	12.02.2011	30499.84	17.77	1.83	0.62	2.3%	-3.8%	13.0%	-10.6%
FGP	Sell	12.02.2011	1745.79	N/A	20.7	0.72	8.7%	18.0%	4.0%	49.1%
RFMD	Sell	12.02.2011	1776.16	21.3	2.57	1.87	0.0%	39.3%	13.9%	-1.9%

In 2008, my MBA classmates and I investigated Jim Cramer’s recommendations 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 and micro cap picks 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, relays business news, interviews executives, and displays an impressive, encyclopedic knowledge of publicly-traded companies. He is like Stone Phillips, Oprah, and Bloomberg News combined. However, these talents did not translate into alpha for his mid and large cap picks.

Exploiting any persistence of these effects is fairly simple. Contrarians should review large and mid cap stocks recommended by Cramer and consider whether there is merit to taking the opposite positions. From this week’s large and mid cap picks, KMP, CLB, CRM, MSFT, and RIMM are challenged.

What could an investor expect from these three picks? We can model total returns over a three year holding period for each of these stocks. (I use a 3-year holding period since above-average growth estimates are not reliable further out.) Giving Cramer the benefit of the doubt for buy recommendations, the stock is assumed to be sold at a generous growth stock price to earnings multiple of 17 and the maximum of historical and analyst estimate values for earnings growth are assumed.

On the contrary, we will use more conservative values to give Cramer the benefit of the doubt for his sell recommendations. For his sell calls, a bargain value stock price to earnings multiple of 10 and the minimum of historical and analyst estimates values for earnings growth are assumed. These assumptions are used to project an annualized total return over the next three years and a terminal price to earnings ratios, that is, price paid today divided by earnings at the end of the holding period for each stock:

				3 Years Growth
Ticker	Cramer	g (past)	g (future)	Terminal P/E	Annualized Return
KMP	Buy	-2.3%	7.9%	392.8	-64.2%
CLB	Buy	39.6%	19.7%	48.4	-29.3%
CRM	Buy	14.5%	26.4%	3092.16	-82.4%
MSFT	Sell	17.6%	10.7%	6.90	14%
RIMM	Sell	58.3%	8.0%	2.47	59%

Even with assumptions that would favor Cramer’s sell recommendations for Microsoft (MSFT) and Research In Motion Limited (RIMM), these sell recommendations cannot be supported given current valuations. Even terrible scenarios look good for these stocks: holding these stocks through three years with the lesser of historical growth or analyst growth estimates and then selling at a bargain 10 price-to-earnings multiple would reap 14% and 59% annualized returns, respectively.

In addition, Cramer’s buy recommendations for Kinder Morgan Energy Partners LP (KMP), Core Laboratories NV (CLB), and Salesforce.com (CRM) are not supported even by a rosy scenario. Buyers of these stocks who enjoy the greater of historical growth and analyst growth estimates and are able to sell at a growth stock P/E ratio would still suffer negative total returns. Regardless of conceivable growth levels, the price is just too high for these stocks. Intrepid contrarians should research KMP, CLB and CRM as a sell picks, rather than trusting Cramer’s buy recommendation on each stock.

Bear in mind that challenging the consensus requires a strong will. In addition to countering Cramer, contrarians have to shut out the allure of stories and other distractions in order to focus on valuation.

Disclaimer: This article was written to provide investor information and education, and should not be construed as a guarantee or investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing. Moreover, this research does NOT constitute a guarantee.

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