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An Analysis On The Stock Picks Of Jim Cramer In Chapter 3 Of His Book Getting Rich Carefully

|Includes: AMZN, Amazon.com, Inc. (AMZN), APC, BGS, BIIB, CELG, CL, CLB, CMG, CRM, DPZ, DWDP, EOG, ETN, FB, FUN, GCI, GILD, GNC, GOOG, HAIN, IFF, KMI, NBL, PRGO, PXD, REGN, SKT, SLB, TJX, UAA, VOO

Summary

Cramer creates new sector categories.

Cramer picks stocks that are the best of the breed and worth a buy in these new categories.

Cramer's picks on average were outperformed by the S&P in the first year the book came out.

The bad thing about a financial analyst that decides to publish their predications is that the analyst can't go back and ask for a redo. He can't deny what he wrote and it's out there for the whole world to see. Criticism will come from everywhere if the predictions turn out wrong. Critics will jump at the opportunity to speak out saying how wrong the analyst was, why he was wrong, and what investors should have been done instead. Jim Cramer is a TV financial analyst who puts himself out there for the whole world to read. In chapter 3 of his last book, Getting Rich Carefully, Cramer creates new sector categories along with picking the best stocks in those categories. He touts these as the ones that will do the best. Did he make the right calls in the book's first year? That is what I will present.

We should first ask if investors actually wanted to buy this book. The second question to ask is, "Was Cramer's advice taken?" The book went on the NY Times Best selling list in February of 2014. So we know that thousands of people bought the book; now did people take his advice? I wanted see if there was a variation in trading volume in the month after the book came out which was December 23, 2013 compared to the same time period in 2012 and 2014.

Stock

1 year after

1 month after

1 year before

Costco Wholesale Corp (COST)

1,765,094.12

2,099,900.00

2,051,975.00

Under Armour ()

1,938,205.88

1,396,964.71

3,300,375.00

Regeneron Pharmaceuticals (NASDAQ:REGN)

944,094.12

780,441.18

657,593.75

Amazon (AMZN)

2,968,841.18

2,316,294.12

2,880,043.75

Whole Foods Market ()

3,823,494.12

3,950,047.06

2,936,187.50

DuPont ()

3,875,094.12

3,479,447.06

5,345,106.25

Chipotle Mexican Grill (NYSE:CMG)

401,064.71

332,994.12

569,993.75

EOG Resources EOG

4,737,576.47

2,801,800.00

2,650,287.50

Gannett Co (NYSE:GCI)

1,609,900.00

2,578,141.18

2,268,168.75

International Flavors & Fragrances Inc (NYSE:IFF),

391,835.29

323,105.88

307,700.00

The trading volume looks varied and the highest trading volume was spread out over all three years. It didn't look like the book induced any increase in trading. I will conclude there wasn't any significant trading difference in any of the stocks in the month the book came out. There are so many factors that can contribute to trading volume. There is company specific news, total market news, and January is earning season. If the trading volume for all ten stocks had the highest volume in the first month the book came out then maybe there was a chance Cramer's book helped play a part in it and would have to investigated further.

I will now move on to the specifics of chapter 3. Cramer presents over 40 stocks that are a buy in this chapter. The categories he presents are terms that he coined. He thinks some stocks can't be put under their typical sectors as he thinks these companies can offer more than what they are known for. The category sectors and a sample of the stocks in those categories include the following:

  • Technology: AMZN, Facebook (NASDAQ:FB), and Google (NASDAQ:GOOG)
  • Health: CMG, WFM, and GNC Holdings(NYSE:GNC)
  • Economical Retailers: TJX Companies (NYSE:TJX) and COST
  • Mergers: GCI and Eaton Corp (NYSE:ETN)
  • Stealth Tech: UA, DD, and IFF
  • Biotech: Gilead Sciences (NASDAQ:GILD) and REGN
  • Natural Gas: Anadarko Petroleum (APC) and EOG

If investors took Cramer's advice and bought these stocks should they criticize or praise him? The returns on most of the stocks he talks about are in the table below.

Category

One year return

Technology

 

GOOG

-2.90%

SALESFORCE.COM (NYSE:CRM)

9.67%

Linkedln (LNKD)

5.90%

FB

40.99%

AMZN

-23.92%

Average

5.95%

   

Health and Wellness

 

WFM

-14.41%

The Hain celestial Group (NASDAQ:HAIN)

31.46%

Panera Bread company (PNRA)

-4.36%

CMG

25.73%

GNC holdings GNC

-20.04%

Average

3.68%

   

Consumer Value

 

TJX TJX

8.48%

Priceline (PCLN)

3.19%

Perrigo Company (NASDAQ:PRGO)

11.48%

Cedair Fair FUN

3.51%

Tanger Factory Outlet Centers inc (NYSE:SKT)

18.93%

COST

22.04%

Average

11.27%

   

Merging companies

 

ETN

-5.88%

GCI

13.26%

B&G Foods (NYSE:BGS)

-5.22%

Average

0.72%

   

Stealth technology

 

DD

21.47%

UA

58.39%

Colgate-Palmolive Co(CL)

11.07%

Dominoes Pizza (DPZ)

39.35%

IFF

22.01%

Average

30.46%

   

Biotech

 

Celgene Corp (CELG)

34.83%

Biogen (NASDAQ:BIIB)

25.10%

GIL

9.11%

REGN

48.55%

Average

29.40%

   

Energy

 

EOG

14.03%

Pioneer Natural Resources comp (PXD)

-19.02%

Schlumberger Limited (NYSE:SLB)

1.01%

APC

7.73%

Noble Energy (NYSE:NBL)

-23.85%

Kinder Morgan (KMI)

22.80%

Core laboratories (CLB)

-34.83%

Average

-4.59%

Total Average

10.66%

There is a large range of returns. The largest was UA at 58.39% and the worst was CLB at -34.83%. Cramer looks to have picked some winners. FB, HAIN, UA, REGN, and CELG were all up over 30%. He also picked some real losers too. NBL, CLB, GNC and AMZN were all down by more than 20%. What about the rest of the stocks that look to have just average returns? We need a reference index to compare them. Vanguard's S&P 500 ETF (VOO) would be a good reference point. VOO's annual return was 14.81% during this time frame. Most of Cramer's picks were losers. 22 of them returned less than VOO and 9 of them had a negative return. If you invested an equal amount of money into all of these stocks the average return would have been 10.16%. VOO beat that portfolio by more than 4%. This seems pretty significant and if a person invested $100,000 in VOO instead of a portfolio of these stocks that person would have been better off by $4,000.

Only two of the sectors that Cramer mentioned outperformed VOO. His stealth category did amazing. The stocks averaged a 30% return over the book's first year Most of these stocks are in the consumer discretionary section. I think lower gas prices helped achieved this. With lower gas prices consumers have more money in their pockets to spend. The companies in this sector are probably making more money too. Oil goes into making a lot of these products. Plastic uses a huge amount of oil to produce. The heath sector was the second best category at 29.4%. The heath care industry looks to have benefited from Obamacare. Healthcare companies are also taking advantage of an aging U.S. population. Advancements in the healthcare industry have seen huge progress in the fight against many different diseases. If consumer discretionary did well in the stealth technology it's interesting to see that his stocks in the consumer value category didn't do as well. It looks like they would have outperformed VOO if you took out the two travel stocks. Priceline and Cedar Fair were losers. People may not have traveled much due to Ebola or what has been happening around the world with countries being at unrest. Overall it doesn't seem like his categories as a whole did as well to the total market.

Let's look at these returns from a different angle using Cramer's own teaching methods. Cramer thinks individual investors should be able to beat the market by buying stocks in a diversified portfolio. He also thinks an investor shouldn't hold anymore than 10 stocks at a time. If a person took that advice into consideration and randomly picked one stock out of each category that would be a 7 stock portfolio. If an investor was lucky and picked the best stock out of each group that would have given that investor a 34% return. This is more than doubled the S&P and Cramer would have looked like an oracle. However, if that same person chose the 7 worst stocks that investor would have had a -5.7% return. Cramer looks like an idiot in this scenario. The probability of choosing all the best 7 stocks or all the worst 7 stocks is about 1%. It's more likely an investor would have picked some winners and some losers and would end up with an average return of 10%, which this is less than the S&P. Using Cramer's method would have not beat the market.

I have one last comment to make about this book. It's hard to imagine what Cramer was thinking when he wrote it. He talks about so many of them on his TV show. Why did he choose the stocks that he did? Why did he choose to leave out stocks that he loves and touts on his TV show? Apple (AAPL) is one of those stocks that he has loved forever. AAPL would have been one of his better picks if he had recommended it. It was up 41% for the year. He raves about it all the time and rates it a buy. Who knows why he didn't include it. I also want to comment about his merger sections. I don't think this should be a category. The category had the second worst return. He says quite often that he doesn't recommend buying a stock based solely on being a buyout target unless it has good fundamentals. I don't think a normal investor who watches Cramer should ever buy a stock because it may be taken over. This is way too much speculation and too hard to figure out which stocks may buy or get bought out. If a stock has good fundamentals, is profitable, has positive cash flows, and is in a growing sector that should be reason enough to buy that company. If it happened to be bought out then that's just icing on the cake.

Most of Cramer's predictions didn't do well in the first year the book came out. Less than half of them did better than the S&P. This gives anti Cramer fans more fuel for their fire. One thing that I find ironic is that before Cramer wrote his book he said he was against writing a book that was just about stock picking. His reasons for this were the same reasons I mentioned in the introduction. He never did this in any of his previous books. He now has to eat his own words. In the past year I have never heard him mention the bad track record that his book has had. I have no preference for him either way. I have read all his books and listen to his podcasts. I also listen to the Motley Fool podcasts. A point I would like to make from this article is that I think it's important for investors to gain as much knowledge as they can from all avenues. It's always a good thing to hear different perspectives. I believe investors would become better investors and better decision makers if they did. Investor can see what works and what doesn't. Investors only looking to one specific analyst for advice could get burned. This only gives them a 50/50 chance of doing better than the benchmark. If investors get consensus from multiple sources they may make higher than normal returns. Investors didn't get "burned" by just listening to Cramer and I really don't think his critics can speak out too much as I think 10% is a very good one year return. However, a passive investor who just bought an S&P index fund like VOO would still have done better.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.