Cramer's Black List: 5 Stocks To Avoid

 |  Includes: AA, AMZN, BIDU, DMND, GRPN
by: Efsinvestment

Jim Cramer, the Mad Money host, is one of the most popular stock-pickers on air. Throughout the program, Cramer and the Mad Money crew make several stock calls. Thousands of viewers follow Cramer's investment suggestions. It is quite hard, if not impossible, to catch up with the Mad Money host. One of the entertaining parts of the Mad Money program is the Lightning Round Segment. Within less than 5 minutes, the curious "Booya" crowd asks for Cramer's view on several stocks.

While Cramer usually tends be in a good mood, making "buy, buy, buy" type of recommendations, there was an extreme pessimism on Wednesday's Lightning Round. His calls were more like a black list for investors. Cramer, even suggested avoiding Baidu (NASDAQ:BIDU), his favorite Chinese stock, as the stocks in the "Land of Mao" are doing terribly these days. I have examined his stock mentions from a fundamental perspective, adding my O-Metrix Grading System where applicable. Here is a fundamental analysis of the 5 stocks in Cramer's Black List:

Stock Name


Cramer's Suggestion

O-Metrix Score

My Take



Avoid for Now







Long-Term Buy











Diamond Foods




Long-Term Buy

Click to enlarge

(Data obtained from Finviz/Morningstar, and is current as of December 15. You can download the O-Metrix calculator here.)

Cramer suggests waiting until Amazon goes lower before getting in. I am surprised to see Cramer has changed his mind on, since the stock has been one of his favorite picks. Apparently, Jim Cramer is starting to abandon the high-fliers after the Netflix (NASDAQ:NFLX) disaster.

The stock shows a sky-high trailing P/E ratio of 95.2, and a forward P/E ratio of 89.3. Estimated annual EPS growth for the next five years is 24.9%. It sports no dividend, and the profit margin is 2.0%, below the industry average of 3.8%.

Amazon is still suffering from the missed Q3 expectations, and the stock lost about 27% of its value since mid-October. A relative strength index of 33.17% signals that the stock is suffering from massive sell-offs. Revenue and cash flow are unstable. Price-to book (10.6) and price-to sales (1.9) ratios are two strong red flags. PEG value of 4.1 is another avoid sign. Profit margin is skydiving since March 2010.

downwards trend seems to be gaining momentum as November retail sales had another negative effect. The stock has a poor O-Metrix score of 1.34. Amazon was among my avoid-for-sure list for a while, and it will stay as such, unless the stock's price falls into my fair-value range of $74 -$91. (Full analysis of Amazon here.)

Alcoa is another stock Cramer changed his stance. Until recently, he was determined not to give on Alcoa, although the stock was not doing well. Apparently, Cramer gave up on the company, making the following remarks:

We both know that the quarter will be weak and that the stock is going nowhere. Should we sell down here? No, but it's at best dead money.

The aluminum producer is trading at a single-digit P/E ratio of 9.5, and a forward P/E ratio of 9.5. Analysts estimate a 10.0% annual EPS growth for the next five years. Shareholders enjoyed a 1.34% dividend last year, and the profit margin is 4.3%, next to the industry average of 4.4%.

While Alcoa was doing admirably good until November of this year, things have reversed since then. Things might look pretty bad for the moment, but the company has nice long-term agreements in the overseas. If the stock can keep its forward P/E under 9, this will lead to an over 40% discount to its 5-year average.

As soon as panic sell-offs come to an end, Alcoa will start climbing up. In the short-term, I can’t say I trust this stock, but you can buy this name for the long-term. Alcoa is a good investment to play the demand recovery for aluminum. Based on these numbers, Alcoa has an O-Metrix score of 5.96.

Baidu is still the only Chinese that Cramer gets behind. However, he can’t recommend buying, as China’s economy is going down. Baidu has a high P/E ratio of 53.5, and a forward P/E ratio of 26.0. Analysts expect the company to have a 49.7% annual EPS growth in the next five years. It offers no dividend, while the profit margin is 46.5%.

Baidu is the current symbol of a technology bubble. The stock might have been performing well for a while, but long-term EPS growth estimate sound exaggerated. Surely, Baidu has done remarkably well to capture the cream of the Chinese market, but that is it. I do not think Baidu can compete with Google on a global scale. Besides, with a trailing P/E ratio above 50, there is a huge downside potential.

The stock is highly volatile with a Beta of 1.9. One can still make a short-term profit, if he can spend several hours in front of the screen, watching the direction of both the stock markets, as well as the Yuan/USD exchange rates. But, If you want to play long, however, one should note that Baidu has no safety cushion. In case of a market downturn, the stock can go to much lower level. 50% EPS growth for the next 5 years also seem extremely optimistic for a company of Baidu's size.

When a viewer asked about Groupon, Cramer suggested that investing in social media companies are too risky –particularly when the markets are looking for safety.

Groupon launched its IPO at an updated offering price of $20 per share, which was $3 higher than the initial price. Even at the elevated price level, the market was crazy for Groupon, driving the stock almost 50% higher soon after IPO. The stock closed its first day in the market 30% higher, at $26. Since then, things had gone wild for Groupon shareholders; the stock collapsed to $14 before bouncing back to $24.

Groupon has a simple business model with the advantage of being the incumbent company in the market. The company employs over ten thousand employees most of whom primarily work with the suppliers. However, the company is a loss-maker, reporting near $700 million in operating losses. An efficient allocation of the employees might reduce these losses, but I do not see any future catalyst to justify a $10+ billion company. 6 out of 11 IPO writers initiated coverage with a neutral stance (which usually means sell). Therefore, I rate it as a sell. The stock might even be a good short candidate when the right time arrives.

Interestingly, while Diamond Foods is a safe company in a safe business, Jim Cramer was also bearish on the company, primarily due to the recent SEC investigation:

Account irregularities equal sell... I'm willing to miss any amount of upside. It's just too crazy for this guy.

Diamond has an attractive forward P/E ratio of 8.34, and analysts estimate 16.80% EPS growth for the next 5 years. Given the company's past EPS growth record of 36%, it is an easily attainable number. Insiders are pretty bullish on the stock, making several purchases in this year.

The stock has been one of the biggest losers in 2011. The company's market cap was slashed by near 50% in this year. Surely, the SEC investigation will keep the pressure on the stock for a while. Diamond will probably trade around depressed levels until it gets clearance from the investigation. However, the company has a good long-term record of returning profits to its shareholders. I believe the recent sell-off created a fair entry point for interested investors.

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