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Cramer Explains Why Management Matters

"Management matters," Cramer said Monday. "The best business model in the world isn't enough to overcome an incompetent CEO. The cheapest stock out there isn't worth buying if the person running the show has a proven track record of failure."

Take Avon Products , for example. Based in New York City, it is a direct seller of cosmetics and personal products. Cramer noted its stock is down 4 percent year-to-date and down 17 percent in the last 12 months. Meanwhile, the two other big direct sales companies — Herbalife and Tupperware — are doing well.

The direct sales business model is "on fire," Cramer said. While most companies can only expand by building new manufacturing facilities, direct sellers need only recruit new distributors. With high unemployment, direct sellers are finding that a lot of people are looking for additional income.

Using this model, Herbalife has posted a 105 percent gain since Cramer first recommended it on November 10, 2009. Tupperware boasts a 70 percent gain since Cramer recommended it on January 30, 2008. Yet Avon Products' stock has struggled.

So what's wrong with Avon? Cramer thinks its management is doing a bad job. During its latest conference call, many expressed anger and discontent over executive decisions. Cramer thinks the complaints are "dead on." The company recently spent $800 to $900 million on a restructuring program, but the program hasn't worked. Margins are actually flat since restructuring, Cramer noted. The execution has been awful, he said.

Avon also seems to have a cash flow problem, he continued. Since 2006, it has turned every dollar of operating earnings into just 48 cents of cash flow. It also has problems in sales growth in Brazil, where both Herbalife and Tupperware are doing well.

While Avon may look attractive with its 3.3 percent yield, its cheap valuation and strong business model, Cramer said it's not a buy until CEO Andrea Jung is removed from power.

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