Catching falling knives: Jim Cramer’s picks, and my own
Jim Cramer is one of the most controversial stock-market pundits, and one of the most widely followed. He hosts the Mad Money segment on CNBC television, and founded The Street.com, a popular financial website.
On January 28, Cramer recommended a few stocks that have fallen sharply in this year’s stock-market unpleasantness. That caught my eye, because I’m a fan of “catching falling knives,” as a Wall Street cliché puts it.
Here are my thoughts on some of the stocks Cramer recommended, plus a few suggestions of my own.
Chevron
Cramer called Chevron Corp. (CVX), the “best of breed” in the energy industry. I also like Chevron, and own it for clients to whom dividends are particularly important.
Chevron yields 4% in dividends and has increased its dividend in each of the past 30 years
(as far back as my database goes). There is some danger of the dividend being cut, however, since last year the dividend slightly exceeded the company’s profit.
Chevron sells for 13 times the profits analysts expect this year, which is nice and cheap — so long as you believe the estimates. The stock fetches 25 times the company’s earnings for the four quarters through September.
Advanced Micro
Cramer said that Advanced Micro Devices Inc. (AMD) is “way too cheap.” I see lots of good things about the company but “cheap” is not an adjective I would use.
AMD stock sells for more than 32 times earnings, 17 times book value (corporate net worth per share)
and 8 times revenue. In my book, that’s expensive. I’m a notorious cheapskate, but I generally hunt for stocks that sell for no more than 15 times earnings, two times book value, or two times revenue.
On the plus side, AMD has a great reputation for innovating in the semiconductor field, is immensely profitable, and is coming off a blockbuster year. On the minus side it has been a feast-or-famine company, with eight losses in the past 15 years. Overall, I’m not tempted.
General Motors
Cramer also had a kind word for General Motors, which sells for less than seven times recent earnings. “It just can’t be that bad,” he said.
I agree that GM is cheap, but it carries considerable debt, is losing market share to Japanese manufacturers such as Toyota, and appears to be behind Tesla and Volkswagen in the development of electric vehicles.
While I’m not in love with Cramer’s choices, I like the idea behind his January 28 spot — looking for stocks whacked in January that may be good buys now, and even better buys if the downturn continues. Here are three that I like.
Moderna
Moderna Inc., the maker of a leading Covid19 vaccine, is down 37% in January (through January 28). Why such a big decline?
I think there were three reasons. Some investors figure that the Covid pandemic is ebbing or soon will. They regard Moderna as a one-trick pony. Others were put off by the fact that the stock was expensive. Still others may have sold Moderna because the Omicron variant of Covid seems fairly mild.
I think that Moderna’s technique of working with messenger RNA may be applicable to other vaccines, not just Covid. I also fear that we will be fighting Covid variants for a while. With the stock 67% below its high last August and selling for nine times earnings, I’m tempted.
Horton
Will rising interest rates (mortgage rates in particular) kill homebuilding stocks? Many people think so, which is why D.R. Horton Inc. (DHI) is down 21% this year.
The worries are logical but in my view premature. Interest rates can go up quite a bit and still be low by historical standards. Meanwhile, Horton had a return on invested capital of more
than 28% in the past four quarters (very high) and sells for eight times earnings (nicely low).
Western Digital
Western Digital Corp. (WDC) makes disk drives and storage products. The demise of the disk drive has been predicted for years, but they are still a workhorse product.
The disk drive market is an oligopoly with three players. Western Digital’s share was recently 36%, second to Seagate’s 43% but ahead of Toshiba’s 21%.
At 11 times recent earnings (and only six times predicted earnings), Western Digital seems attractively priced to me.
Will my selections beat Cramer’s? I’ll report the results in late January or early February 2023.
Disclosure: I own D.R. Horton and Volkswagen personally and for most clients. I own Chevron and Western Digital for some clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@ dorfmanvalue.com.