Investor Essentials Daily

Soon you’ll be able to bet against a famous TV host’s stock picks

November 4, 2022

Former Goldman Sachs employee and hedge fund manager Jim Cramer has been getting lots of criticism since he started his show “Mad Money” on CNBC in 2005.

The infamous host has a big track record in stock picks that have gone to the opposite of his recommendation.

Recently, an asset management firm, Tuttle Capital Management has filed prospectuses for two ETFs that track Cramer’s recommendations. One of these is the “The Inverse Cramer ETF (SJIM)” and the other is “The Long Cramer ETF (LJIM)”.

They’re expected to launch in December, but before that happens, it’s important to understand why someone would want to create an inverse fund for Cramer’s picks. In this context, let’s have a look at some of Jim Cramer’s most infamous picks using Uniform Accounting.

In addition to examining his recommendations, we’re including a deeper look into one of the picks, providing you with the current Uniform Accounting Performance and Valuation Tearsheet for that company.

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Only about a week ago, Jim Cramer started his segment with an apology. He looked close to tears. His tone was so serious, someone could have thought he had done something unforgivable.

However, the chart next to his head was a big signal to what could have happened that made Cramer so upset, it showed Meta’s (META) stock price falling more than 20% after hours.

All year, Jim Cramer has been bullish on Meta, and this was him admitting defeat.

Cramer appears on the financial news almost every day, so of course, not everything he says will age well.

There’s a growing trend believing that Jim Cramer happens to be a bad stock picker. It’s gained so much steam that Tuttle Capital Management is launching two ETFs based on Cramer’s recommendations.

One of these ETFs will allow people to take the opposite positions of Cramer’s picks, “The Inverse Cramer ETF (SJIM)” and another one will allow people to follow Cramer’s advisory “The Long Cramer ETF (LJIM)”.

In mass media and social platforms, it looks like The Inverse Cramer ETF is getting a big attention.

There might be some truth to the claim as his show Mad Money started in 2005, and people have been studying this topic almost ever since.

There’s an iconic clip of Cramer saying that “Bear Stearns was fine” on March 11, 2008, and that you shouldn’t be a seller. That day, the stock was trading at $62 per share.

Just five days later, the bank collapsed, and it was bought by JPMorgan Chase (JPM) at $2 per share.

A few years later, in 2010, someone decided to track the performance of Cramer’s picks for the full year. An interesting pattern emerged. He’d often mention stocks that had recently performed well, with the average stock he mentioned in 2010 having returned about 5% in the five prior trading days.

Interestingly, the day after Cramer mentioned a stock, it tended to outperform slightly, but over longer periods, that didn’t hold up. After a year of holding each stock, Cramer’s “portfolio” would’ve underperformed the market.

In October 19, 2020, during the pandemic, Cramer created a little portfolio he called the “Magnificent Seven” which was Netflix (NFLX), Peloton (PTON), PayPal (PYPL), Roku (ROKU), Block (SQ), Tesla (TSLA), and Zoom (ZM).

Incredibly, those stocks are down an average of 52%, while the S&P 500 is up 13% since Cramer posted his recommendations.

We could have predicted some of these falls from grace by looking at Uniform Accounting.

For instance, Peloton has lost money almost every year, and this year its Uniform ROA was -37%.

Additionally, even though Zoom’s Uniform ROA reached almost 1,000%, it started falling as people started to return to their offices.

We also liked Meta enough to have it in our Valens Conviction Long List, only we removed it in March 2021, before the company started investing billions into the metaverse.

The Inverse Cramer ETF has been testing all year, and so far, it seems like it’s outperforming the market.

It’s only down about 2% versus a more than 20% loss by the S&P 500. We’ll be covering the portfolio once it formally launches, but from Cramer’s track record, it does seem like there’s something to it.

SUMMARY and Netflix, Inc. Tearsheet

As one of Jim Cramer’s largest individual stock holdings, we’re highlighting Netflix, Inc.’s (NFLX:USA) tearsheet today.

As the Uniform Accounting tearsheet for Netflix, Inc. highlights, its Uniform P/E trades at 24.4x, which is above the global corporate average of 17.8x, but below its historical average of 36.3x.

High P/Es require high EPS growth to sustain them. In the case of Netflix, Inc., the company has recently shown 71% Uniform EPS growth.

Wall Street analysts provide stock and valuation recommendations that, in general, provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Netflix, Inc.’s Wall Street analyst-driven forecast is for EPS to shrink by 10% in 2022 and grow by 1% in 2023, respectively.

Furthermore, the company’s return on assets was 73% in 2021, which is 12x the long-run corporate averages. Also, cash flows and cash on hand consistently exceed its total obligations—including debt maturities and CAPEX maintenance. Moreover, its intrinsic credit risk is 70bps above the risk-free rate. Together, these signal low credit risks.

Lastly, Netflix, Inc.’s Uniform earnings growth is above peer averages, and above peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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