Jim Cramer is one of the top stock pickers on the planet. Recently, as a measure of comparison and an assessment of my own effectiveness, I have started dissecting some of his picks to evaluate how close we are. In some cases, I entirely agree, but on others, I have had no choice but to go the opposite way. Above are the picks made by Cramer back in December compared to my own and how they have fared so far.
Name | Call | Date | My call | Gains/Loss Percentage |
Alcoa (AA) | Sell | 12/20/2011 | Buy | 21% |
Bank of America (BAC) | Sell | 12/16/2011 | Buy | 53% |
Chevron (CVX) | Sell | 12/22/2011 | Buy | Even |
Exxon Mobil (XOM) | Sell | 12/19/2011 | Buy | 8.5% |
Microsoft (MSFT) | Neutral | 12/15/2011 | Buy | 21% |
Alcoa - I Would Buy
Cramer recommends Alcoa as a sell. But this is after the stock has already lost 43.79% in 2011. There are two things at play here - either it will be a falling knife or a value play. Alcoa recently made it to my portfolio because it continues to show just how much it believes in itself. At the start of the year I recommended Alcoa for several reasons, and so far the company has done all it can to affirm my belief by having announced excellent Q4 2011 earnings. The stock and sector should continue to see upward movement with the recent study that suggests aluminum prices could spike up to $2,400-$2,500 per ton.
Since my initial recommendation, the stock is up 21% to $10.74. As with other companies, the stock has been beaten up of late, due to slowness in business spending. For me, the optimism rested on the company's own confidence - to the extent where it believed in its ability to execute, assured that its long term fundamentals were intact. I continue to believe that this is a stock that should be acquired as it is heading toward $15 at some point during the year.
Bank of America - I Would Hold
For three months, the primary question surrounding Bank of America, the nation's second largest bank by assets, was, can it execute its business effectively enough to make any money? It was puzzling to consider that the bank with the largest branch network could not figure out a way to successfully monetize such a great advantage over its competition. Last week, during its fourth quarter earnings announcement, not only did it adequately answer some of these questions, but it offered some insight into what might lie ahead.
By Wall Street's reaction, I can only say that the reported profit of $2 billion for the quarter was a huge surprise, because it came after having posted a loss of $1.2 billion during the same period last year. Its full year earnings arrived at $1.45 billion compared to a prior loss of $2.24 billion in 2010.
The question now for Bank of America is, can it build on this momentum or will it be back to business as usual? As mentioned previously, it has not yet been able to fully maximize its branch leverage. This is even though the company reported over $1 trillion in customer deposits - which equates to approximately one out of every two households.
If you couple this with the fact that it has approximately $2.2 trillion in assets, I continue to wonder just how undervalued its stock might still be if it only produces a "decent" return on these assets. By "decent," I'm thinking anywhere between .5% to 1%. On $2.2 trillion, this would equate to net income in the area to $22 billion. With its current market cap, this puts BofA's valuation at just over 6 times earnings. So there is an under-appreciated premium when compared to (for example) Wells Fargo (WFC) which currently trades today at just over 8.
Chevron - I Would Buy
With the news that oil prices have started to rise on concerns with shipments in the Persian Gulf, I have begun to adjust my portfolio to prepare for any potential impact on consumer spending. For this reason, I'm willing to place some early bets on the energy sector while at the same time figuring out ways to hedge my own gas prices for some early portfolio plays. One company that stands to benefit from higher oil prices is Chevron.
The oil giant recently approved a substantial liquefied natural gas (LNG) compound in Australia that will supply energy to the emerging economies in Asia. This is the second LNG project for the company, which is betting on Australia to help generate growth in production. The company also plans to build an offshore production platform approximately 225 kilometers off the coast of Australia along with associated sub-sea equipment and infrastructure that will tie back the wells to the platform.
With such plans in place and a potential increase in fuel prices, it is difficult to agree with Cramer and sell Chevron at this juncture. Now admittedly, it remains a challenge to recommend any stock as a buy that is already trading at 52-week highs, but this can easily be overlooked when the company is on such strong fundamental grounds as Chevron while still trading at a relatively inexpensive P/E of 8.49. I would be adding until fundamentals suggest otherwise.
Microsoft - I Would Buy
Microsoft continues to intrigue me right here. Not only does it pay a decent dividend, but I continue to feel that the stock is exceptionally cheap at current levels. In 2011, I was too concerned with growth - a strategy that did not bode particularly well in depressed bear markets. Although I already own a decent portion of the company, I failed to capitalize on what I felt were opportunities to add on several of its dips. For quite some time now, the stock has traded at a significant discount to a conservative cash flow model.
The mistake that I've made over the past couple of years is ignoring this important fact. Growth has always been my primary investment motivation and something that Microsoft has failed to produce over the past several years. But regardless of how one feels about the company and its prospect of competing with Apple (AAPL) and Google (GOOG), the fact remains that Microsoft still has a business with very good returns on capital and excellent cash flow.
Microsoft will most likely never grow again in a way that resembles the mid to late 90s but that does not mean it does not have life. It has been considered a sleeping giant and remains only one good idea away from being awakened, and when it does, $35 will be a realistic destination. But at least there is a decent dividend to pay investors to wait.
Exxon Mobil - I Would Buy
It is hard to do much better than Exxon Mobil when it comes to oil and gas. As with Halliburton (HAL) there is a lot to like with Exxon Mobil. Yet the company often gets overlooked for what appears to be routine success. It often gets taken for granted. It has a huge reserve and plenty of capital which is an appealing quality to conservative investors. Not to mention that it has a well earned reputation - something that many of its competitors are working hard to rebuild.
Investors should keep in mind that Exxon Mobil is still a dominant player even among the big oil companies. It has nearly three times the market cap of even the other oil giants, but it is hardly a lumbering, stumbling giant. The company is still in the mix of all phases of upstream and downstream operations, and its portfolio of exploration and production projects should make it able to continue to weather these lean times.
