Showing posts with label Cramer. Show all posts
Showing posts with label Cramer. Show all posts

Thursday 24 November 2011

Calculating a Stock’s Risk-Reward Ratio by Jim Cramer

Calculating a Stock’s Risk-Reward Ratio
Published: Tuesday, 30 Aug 2011
By: CNBC.com


Focusing on a stock’s upside without giving proper consideration to potential losses, Cramer said Tuesday, can be “a grave mistake.” Too often people think only of the reward, without assessing the risk. And investors must calculate both.

“Because the pain from a big loss,” Cramer said, “hurts a whole lot more than the pleasure from an equivalent-sized gain.”

But how do you figure out the risk-reward on a stock? As a general rule, Cramer looks at the lowest price that a value-oriented money manager would pay for that stock to calculate the downside. For the upside, he uses the most a growth-focused manager would pay.


To arrive at these numbers, Cramer refers to something called “growth at a reasonable price,” or GARP, a method of stock analyzing first popularized by Peter Lynch. If you want to know just how much growth investors will pay, you need to understand GARP. And it involves a comparison of a stock’s growth rate to its price-to-earnings multiple.

But you can use this rule of thumb to figure out the value side of the equation, too, and here’s how Cramer does it: If a stock has a price-to-earnings multiple (PE) that’s lower than its growth rate, it’s probably cheap. And any stock that’s selling at a multiple that is twice the size of its growth rate or greater is probably too expensive and should be sold.

Example: A stock trading at 20 times earnings with only a 10 percent growth rate would be considered expensive. But the reverse—10 times earnings on a 20 percent growth rate—would be incredibly cheap.

This gives rise to another piece of Wall Street jargon: the PE-to-growth ratio, or PEG, which is the multiple divided by the stock’s long-term growth rate. A PEG of one or less is “extremely cheap,” Cramer said, while a PEG of two or more is “prohibitively expensive.”


This means then that the risk floor created by value investors will probably be somewhere near a stock’s PEG of one, while its ceiling, created by growth investors, rarely exceeds a PEG of two. That’s why Google [GOOG  570.11    -9.89  (-1.71%)   ] back between 2004 and 2007 was considered cheap, because its 30 percent long-term growth rate matched its 30 multiple. But if that multiple reached 60, growth managers would probably cash out of their positions.


There is one caveat to keep in mind, that this is a general rule of thumb, an approximation. But there are times when the numbers can be wrong. Cramer said stocks can look cheap based on earnings when those earnings estimates need to be cut, much like the banks and brokers were ahead of the 2008 crash. Or a stock could look cheap because its growth is slowing, like Dell[DELL  14.30    -0.53  (-3.57%)   ] after the dot-com collapse between 2000 and 2003. In these cases, the stock could trade well below a PEG of one, but that obviously doesn’t mean it’s a buy.

One final anomaly of multiples regards industrial companies, or cyclical names in general. The time to buy these stocks is when their multiples look outrageously high, Cramer said, because the earnings estimates are too low and read to be raised to catch up with their strengthening businesses.

(Written by Tom Brennan; Edited by Drew Sandholm)

Tuesday 27 July 2010

Cramer's Star Outshines His Stock Picks

[cramer]

MONDAY, FEBRUARY 9, 2009

And why not? An earthquake has hit Wall Street, and the 53-year old broadcaster has spent more time there than most any TV journalist. The guy is a hardworking genius with a word of advice for everyone...many words of advice, actually. He dispenses thousands of Buy/Sell recommendations a year and has declared that those stock picks will help you get rich.

The only regrettable thing about any of this is that CNBC and Cramer won't meaningfully discuss how his advice pans out.

Cramer's recommendations underperform the market by most measures. From May to December of last year, for example, the market lost about 30%. Heeding Cramer's Buys and Sells would have added another five percentage points to that loss, according to our latest tally.

These facts don't mean that viewers should avoid his informative and entertaining show -- they should just be wary of his stock picks.


Our research reveals that the stocks Cramer picks as Buys have been rising versus the market for several days in advance of his show, while his Sells have been falling. This doesn't prove there is a leak in the tight security surrounding CNBC's show. It could merely mean that Cramer and his staff are heavy-footed in their research. Or it could mean that his stocks are primarily momentum plays. That is the network's explanation. "Jim likes to recommend 'what is working'," said CNBC communications vice president Brian Steel in a written response Friday. "So it is no surprise there would be movement in these stocks prior to Jim mentioning them."

In any event, these pre-show moves are the probable cause of Cramer's underperformance. As the stocks revert to the market's trend in the weeks after the show, Cramer's followers get hurt [See chart below]. Like any active-investing strategy, Cramer's advice must always be measured against the market return that his viewers could get in an index fund.

[pop]

[buy]

[ready]

[chart]

[Cramer]


http://online.barrons.com/article/SB123397107399659271.html#articleTabs_panel_article%3D1

Tuesday 1 September 2009

Cramer's 25 Investing Rules

1. Pigs Get Slaughtered
2. It's OK to Pay the Taxes
3. Don't Buy All at Once
4. Buy Damaged Stocks
5. Diversify to Control Risk
6. Do Your Homework
7. Don't Panic
8. Buy Best-of-Breed
9. Defend Some Stocks
10. Don't Bet on Bad Stocks
11. Own Fewer Names
12. Cash Is for Winners
13. No Regrets
14. Expect Corrections
15. Know Bonds
16. Don't Subsidize Losers
17. No Room for Hope
18. Be Flexible
19. Quit When Execs Do
20. Patience Is a Virtue
21. Be a TV Critic
22. When to Wait 30 Days
23. Beware the Hype
24. Explain Your Picks
25. Find the Bull Market

Saturday 21 February 2009

Jim Cramer is laying out his case against Warren Buffett's recent stock moves.


Wednesday, 18 Feb 2009
Jim Cramer "Struggles" With Warren Buffett's Stock Moves Because He's "Selling America"

Posted By: Alex Crippen

Topics:Investment Strategy Warren Buffett
Companies:US Bancorp Conocophillips Procter & Gamble Co Johnson and Johnson Berkshire Hathaway Inc.

CNBC's Mad Money host Jim Cramer is laying out his case against Warren Buffett's recent stock moves.
Last night (Tuesday), after Berkshire Hathaway's fourth quarter portfolio snapshot, Cramer warned on CNBC that investors should not follow Buffett's lead because they will not profit "within the time frame they care about." (Transcript and video clip are in the WBW post Jim Cramer Warns Investors: Don't Follow Warren Buffett This Time.)
This morning, on his TheStreet.com site, Cramer goes into greater detail, explaining why he's "struggling with some of the things that Warren Buffett is doing with his cash these days."
Cramer's prime complaint: Warren Buffett was "selling America" last fall when Berkshire reduced its stakes in Johnson & Johnson, Procter & Gamble, ConocoPhillips, and U.S. Bancorp. "What's more American than these stocks?" he asks. (The post notes that Cramer is currently long Johnson & Johnson and ConocoPhillips.)
Cramer draws a contrast with Buffett's "now-fated" October 16 New York Times op-ed piece that argued it was time to buy American stocks. Since then, the major market indexes have continued to plunge, so "those who bought America that day are feeling ... well, downright un-American. Or at least they're feeling poorer."
Cramer says that he is "sensitive" to that Times piece because at the same time he was advising an exit from stocks if investors needed to keep their money safe for a major purchase in the next year.
And he argues that while rich people can afford to buy for the long term as Buffett advises, everyone else can't.
"As long as Buffett was buying and not selling, or as long as he was at least holding, you couldn't knock him. But now it turns out he's putting a terminal value on something we thought we were to hold forever."
While Buffett is "obviously a tremendous investor" and "doesn't have to answer for anything," Cramer continues, "It is fair to say that many, many people relied on his judgment to buy stocks just like the quintessential American names of Procter & Gamble and Johnson & Johnson. To them, what can I say? 'Don't worry about it.'"
Cramer concludes that Buffett's "actions should be scrutinized just like anyone else's," so TheStreet.com is starting its own Buffett Watch. (He cites his friend Doug Kass, "who has been on this case for months now" and who has his own questions today about Berkshire's portfolio.)
"We need to know what's happening. Buffett's firm is too big, and he is too important to ignore. We need to know daily and some institution has to have the guts to do it. Glad it's us."

Current stock prices:

Berkshire Class A: [US;BRK.A 77000.0 -1600.00 (-2.04%) ]

Berkshire Class B: [US;BRK.B 2387.0 -129.50 (-5.15%) ]

Johnson & Johnson:[JNJ 54.65 -1.28 (-2.29%) ]

Procter & Gamble: [PG 50.25 -0.88 (-1.72%) ]

ConocoPhillips: [COP 39.44 -2.35 (-5.62%) ]

U.S. Bancorp: [USB 10.58 -0.30 (-2.76%) ]




For more Buffett Watch updates follow alexcrippen on Twitter.



http://www.cnbc.com/id/29258337/site/14081545


Comment:

Sounds familiar. Cramer vs Buffett, Moolah vs Teng Boo :)