Trading the Share Price
Investing isn’t always about finding a company with longer-term prospects, buying the stock and watching the fundamentals take it higher. You don’t always need such a solid thesis. In fact, sometimes cheap is just as good.
That’s another of Cramer’s investing rules: An inferior stock can still work if the price is right. Now, he would never recommend buying a company on the verge of bankruptcy or otherwise trending toward failure, but your low opinion of the firm alone shouldn’t preclude buying it.
It’s true that you’ll often find stocks worth consideration, but the price just isn’t low enough. In those cases, discipline is key. But if your choice is Bank of America under $4, as it was in early March 2009, or Sprint Nextel below $2, its price at the beginning of the year, you might want to snatch those up.
Why? Because Cramer doubted BofA was doomed to nationalization at the time – especially after Fed Chairman Ben Bernanke’s 60 Minutes declaration that no major bank would be allowed to fail. And Sprint, despite hemorrhaging customers, had delivered a bad but better-than-expected quarter and announced it had the money needed to cover its debts. So at those low prices, these stocks were too good to ignore. And the trade paid off: BAC tripled in two months, and S returned 69% in three months.
Higher-quality stocks are harder to find – they rarely drop enough to qualify as cheap – so Cramer recommended looking to secondary equity offerings for good deals. Both Ford Motor and BB&T , the ailing Southern regional bank fraught with bad loans, issued new shares on May 13, 2009, at significant discounts to their prior-day and prior-week trading prices. Cramer called these stocks mediocre at best, but the deals would have made you money because the price was right.
Advanced Micro Devices might be the best example of this kind of trade. After 22 years of hating AMD, Cramer told viewers to hold their noses and buy the stock at the end of 2008 when it traded for $2. By then the company had agreed to sell its problematic foundry division and its graphic-chip division was starting to take share from Intel and NVIDIA , making for a great buying opportunity. Sure enough, the stock doubled in just a few months.
Price forces you to make new judgments about bad merchandise, Cramer said. So remember: Cheap works just as well.
Cramer's charitable trust owns Bank of America and Intel.
Call Cramer: 1-800-743-CNBC
Questions for Cramer? firstname.lastname@example.org
Questions, comments, suggestions for the Mad Money website? email@example.com