A company’s stock chart can tell a different story than the fundamentals. Case in point: spice maker McCormick . While the underlying business looks downright horrible, some technical analysts say this stock is a buy. Cramer, a “fundamentalist” by trade, wasn’t convinced when he analyzed the stock during Tuesday’s Mad Money.
Why are the technicians so bullish? They point to McCormick recently breaking through its 200-day moving average, a long-term measure of a stock’s trajectory, on high trading volume and see this as the start of a new uptrend. In the world of chartology, volume tells you how legitimate a certain move was. More volume means more legit.
Also, MKC has been just about flat for eight months, so most shareholders have been waiting for the stock to break out. That means they’re less likely to sell now that they’re finally seeing some returns.
Another point the chartists like: When McCormick reported a disappointing quarter on June 25, the stock initially sold off but later rebounded to close higher than the 200-day moving average. This thinking here is that the sellers are now out, the buyers are in and they want more. Plus, that 200-day moving average has changed from top-level resistance to bottom-level support. So again, we have a new uptrend, and the stock is headed higher.
What does Cramer think? He can’t ignore all the problems with this business. Sales are down worldwide. The currency translation is hurting, too. Major retailers like Walgreen , Wal-Mart and Kroger are cutting back on their spice stocking. And Wal-Mart is pushing into the space with private-label products of its own. All of this is bad news for McCormick.
Maybe you’re wondering why the technicians want this stock given its long list of cons and relatively few pros. Cramer said it’s a bet on the economy worsening again. These investors think we’re headed lower, and they’re buying defensive stocks in anticipation of that. While Cramer likes the logic, he thought there were better companies to own. Kraft Foods pays out a 4.4% dividend yield, Hershey pays 3.2%. General Mills is a great play as well, but wait for the stock to pull back before buying. The fundamentals here are strong, much stronger than McCormick.
Cramer's charitable trust owns General Mills.
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