Cramer's Mad Money - When the Facts Change...(10/23/09)

Includes: AAPL, AMD, BAC, S
by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Friday October 23.

Note: Friday's Mad Money broadcast was a repeat program that last aired on June 25, 2009.

When the Facts Change...

When critics berate Cramer for changing his mind, his frequent response is from the wisdom of John Maynard Keynes, "When the facts change, I change my mind. What do you do, sir?" Cramer gave the example of his calling a bottom in March when the Dow hit 6,500, and he reasoned that unless most of the Dow stocks went to zero, the index couldn't go much lower. Although he was widely criticized by those who were holding onto their bearish theses, the Dow has since risen an additional 1,500 points. This demonstrates the rule that investors need to be flexible and get rid of a thesis that isn't working.

The Price is Right: Bank of America (NYSE:BAC), Sprint (NYSE:S), Advanced MicroDevices (NASDAQ:AMD)

At the right price, even an unattractive stock can be a buy, said Cramer, who cited the example of Bank of America (BAC) and Sprint (S), which were both priced for bankruptcy. Those who bought these stocks precisely because they were so low have made a big profit. Cramer also told viewers to be on the lookout for secondary offerings, many of which are at a 10% discount to the actual stock price. Cramer said he is glad he changed his mind about Advanced MicroDevices, not because of improving fundamentals, but because of its falling stock price. The stock has doubled since Cramer recommended buying it just because it was too cheap.

Be a Skeptic

Cramer urged viewers not to take what a particular company says at face value. He is skeptical about a company that tends to blame its problems on the general economic climate, even though things are tough. For every company that blames the economy for its poor performance, there is usually a competitor who is thriving in a challenging environment.

Upside Downsides and Apple (NASDAQ:AAPL)

Upside surprises usually move stocks, but not all upsides are created equal. Genuine upsides are created by companies like Apple (AAPL), which in spite of the recession, has constantly delivered new products and has increased sales. Upside surprises to beware of are those created by management through share buybacks, cost cuts, changing tax rates and other forms of number crunching. Upsides created by management are likely to fall right back down again if fundamentals don't support the move. Increased sales should be the main driving force for upside surprises.

Manipulation Works Both Ways

While many have criticized Cramer for his optimistic take on the markets, being negative does not necessarily equal credibility. While the pump and dump strategy is infamous (influential investors talking up a stock and then selling it into strength), hedge fund managers who are shorting stocks can do the same trick on the negative side, so there is no reason to have more faith in prophets of doom than in those who look on the bright side. Even if a hedge fund manager holds no shorts, he could still have a vested interest in talking down the markets if he feels he is underinvested and wants an entry point.


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