A Case Against 7 Of Jim Cramer's Bearish Calls

by: Efsinvestment

Jim Cramer, the "Mad Money" host, is one of the most entertaining stock pickers in the street. His program is watched by thousands of viewers every day. One of the best parts of the show is the Lightning Round segment, where Cramer comments about stocks asked about by the audience. Within less than five minutes he makes several calls for the home gamers. In his program December 19, he made 10 calls, 8 of them bearish this time.

Cramer suggested switching Texas Instruments (TXN) for Intel (INTC), which I agree with. However, I do not agree with 7 of his negative calls, therefore I decided to provide a case against Cramer's bearish calls. I have examined Cramer's negatively mentioned picks from a fundamental perspective, adding my O-Metrix Grading System where applicable. Here is a fundamental analysis of these stocks that I do not agree with Cramer:

Stock Name

Cramer's Suggestion

O-Metrix Score

My Take

Chesapeake Energy












Cliffs Natural

Avoid for Now



Rio Tinto

Avoid for Now







Quad Graphics




Data obtained from Finviz/Morningstar, and is current as of December 20.

Chesapeake Energy (CHK)

Chesapeake Energy has been a long-time Cramer favorite, but apparently he changed his mind. A month ago, Cramer pointed out the rumors on funding issues, but stated:

… I do not think they have funding problems, and I think Chesapeake is a buy.

This time, he rated Chesapeake as a stock that is "stuck in the mud" due to depressed natural gas prices.

The stock lost more than a third of its market cap since early August. However, I do not think that Chesapeake is stuck in the mud. The company was able to boost its earnings by more than 100% in this year. It also generated an income of $1.32 billion from revenue of $14.54 billion. With a conservative growth estimate of 10%, I calculated the fair value of Chesapeake as $32 - $53. Its O-Metrix score of 5.73 is also well-above the market average. The chairman, the director, and the vice president are buying the stock like crazy, making several purchases over the last few months. I would rather follow the insiders instead of Cramer, when it comes to Chesapeake Energy. At $23, we can buy the stock for a much lower price than what most insiders have paid.

Sprint (S)

Sprint has also been in my avoid-for-now list for a while, but AT&T's (T) withdrawal on the T-Mobile deal has been a game changer for Sprint. AT&T is expected to contribute to the eurozone bail-out with a whopping $4 billion break-up charge. For that price, the telecom giant could have acquired a majority share in the Sprint, and everybody would have been happier with the transaction.

Sprint is the third largest wireless carrier in the U.S., serving over 50 million customers. Unfortunately, Sprint is a money loser with significant amount of debt. It is obviously a distressed company, with almost $8 billion of current liabilities to be paid soon. While the company is not generating profits, it is generating steady cash flows from operations. It will obviously be the most rational target for AT&T. At a P/FCF ratio of 6.33 and a market cap of only $6.5 billion, Sprint could be a prime target for AT&T. Besides, technical indicators suggest that the stock has bottomed, and poised for a rebound after losing 50% in 2011.

MEMC Electronic Materials (WFR)

MEMC is an integrated circuit maker, headquartered in St. Peters, Missouri. The company operates primarily in the solar sector, providing semiconductor devices to be used in solar materials.

Solar stocks have taken a deep beat in this year, and MEMC was not an exception. The stock lost almost 65% in this year. I think investors have over-reacted to solar stock news, driving them way below their historical valuations. This pessimistic atmosphere created a good opportunity to snap these stocks below fair valuations.

MEMC has $3.41 of cash per share at hand, which equates to $700 million of cash on the balance sheet. Considering the market cap of $860 million, one can observe that 80% of MEMC's market cap is cash. The stock is also trading at 0.38 times the book value. Even after subtracting for the goodwill and intangible assets, MEMC's valuation is well - below its net equity. It is another company insiders are bullish on. Insiders increased their holdings by 85% in the last 6 months. Current price offers a deep discount to what insiders paid.

Cliffs Natural (CLF)

Cliffs Natural is a natural resource company that specializes in iron ore and coal mining. The company operates several mining zones in the U.S., Canada, Australia, as well as Brazil. Founded in 1847, Cleveland, Ohio-based company is one of the oldest companies in the U.S.

Cliff was able to boost its profits by 90% in the most recent quarter, but the stock lost nearly 22% in this year. It is trading at very attractive ratios. Trailing P/E ratio of 4.54 and forward P/E ratio of 4.85 are one of the lowest among the basic material companies. With an EPS growth estimate of 12%, Cliff has an A+ O-Metrix score of 15. Therefore, I think the stock is a bargain at these prices.

Rio Tinto (RIO)

Cramer is bearish on Rio Tinto, as much as he is bearish on Cliffs Natural:

These don't have the dividend...we are at sea with these. I don't want you to buy either. I think you wait until the year is over.

Rio Tinto has been another loser so far in this year. The stock lost a third of its market cap since January. I think investors over-reacted to the situation in Europe, causing a massive damage to Rio Tinto's market cap. However, one should note that RIO was able to boost its earnings by 140% in this year, and more recently by 28% in this quarter. It is trading at a dirt-cheap P/E ratio of 5.67 and generates great cash flow. With an EPS growth estimate of 8%, RIO has an A-Grade O-Metrix score of 9.66. The stock is poised for a rebound in 2012.

Telefonica (TEF)

Cramer thinks that Telefonica's dividend is not safe:

No… That dividend is not safe

However, Telefonica's balance sheet and fundamental indicators do not agree with Cramer. Telefonica is trading a very low P/E ratio of 4.72. This is the lowest in Telefonica's near-term history. It is also priced at 6.85 times the cash flow. Thus, even if we assume no growth, the company generates enough cash to support its current yield of 12.80%. Surely, it has a lot of debt, but the debt/equity ratio is more or less stabilized. I think Telefonica is a bargain at the current prices. My FED+ Fair value range is $29 - $34 for the company. (Full analysis, here)

Quad Graphics (QUAD)

Cramer is not a favorite of Quad's business area and he is also suspicious about Quad's dividend yield:

I don't trust that yield. I hate that business.

I do not know why Cramer hates Quad, but his timing of this negative call came after the stock lost two thirds of its market cap. It might look like a high-flier company with a trailing P/E ratio of 71, but it is actually trading only 4.5 times the free cash flow. Therefore, there is a good margin of safety when it comes to Quad's 5.9% yield. The forward P/E ratio of 6.22 suggests a good deal for those interested. Besides, insiders are pretty bullish about the company. As Leonid suggests, the CEO and Chairman just bought 61900 shares at $16.02, worth near a million dollars. The current price of $14 suggests a better deal than the price CEO recently paid.

Disclosure: I am long INTC.