Stock Picking by the Individual Investor Isn't Dead
Research Director, Mad Money
From: James Cramer
Sent: Monday, October 10, 2011 10:48 AM
To: Nicole Urken
Subject: 4 years after the Dow's high--Carl Q points out
Carl Quintanilla pointed out today on twitter that only 6 stocks have made you money since the Dow’s high: WMT/KO/CVX/HD/MCD/IBM. Please tell me where they were at that moment. Also we have to do calculation inclusive of reinvested dividends to get total return—
From: Nicole Urken
Sent: Monday, October 10, 2011 3:06 PM
To: James Cramer
Subject: RE: 4 years after the Dow's high--Carl Q points out
The Dow closed at high of 14,164.53 on 10/9/07 (4 years ago). More stocks made the cut when you include dividends, but still only 13 of the 30…Here are the winners with dividends reinvested: IBM up 66%, MCD up 75%, WMT up 30%, KO up 28%, CVX up 16%, HD up 15%, KFT up 15%, JNJ up 8%, VZ up 7%, TRV up 2%, CAT up 2%, PG up 1%, DD up 1%
It is true. As "Squawk on the Steet" extraordinaire Carl Quintanilla points out, only six of the Dow stocks have made money for investors since the Dow Jones industrial average peaked four years ago if you look at simple stock returns. And when you look at total returns, including upside from dividends, still only 13 of the Dow 30 have returned profits to your pocketbook.
(RELATED: Cramer's Top Dividend Stocks 2011)
When it comes to the individual making money, these dismal results realized by key members of the Dow are disappointing at best and gut wrenching at worse.
So, why even bother defending stocks as an asset class when we see such lackluster results over this snapshot in time, where a bull run was matched with a severe recessionary period ?
On "Mad Money," we are champions of the power of stocks as a means to building lasting wealth. And while this supplement to your paycheck has associated ups and downs, managing risk appropriately based on your investment goals and diversifying appropriately builds a strong case for what the market can do that no other asset class can. The notion that stashing a horde of cash under your mattress (or theoretically doing so in a bank savings account) offers a false sense of security because it does not keep pace with inflation and strips you of the potential from compound returns on your hard-earned paycheck.
While dividends helped the performance of the Dow 30 when looking at the last four years, there’s no question the above stats don’t present much of a convincing case for owning individual stocks. But how about looking at the standout stocks that allowed you to profit enormously if you were able to recognize their growth trajectories? Take Green Mountain Coffee Roasters, up 976 percent through that period on the growth of single-serve coffee. Or Perrigo , the king of private label drugs, which is up 330 percent. Not to mention Panera Bread up 116 percent or cloud computing play Salesforce.com up 115 percent. These names—which by the way are not speculative penny stocks but widely known companies—provided enormous gains over a period that included a recession. And, of course, this list is just a small representation of the winners of the last four years, not to mention the range of corporate take-overs, which were offered at significant premiums.
Recognizing the winners and separating them from the losers ahead of time is what stock homework is all about and the way that the individual investor can continue to make money.
In analyzing another headwind for investors back on Monday, Jim rebuffed the point raised by foe (secretly friend!) Herb Greenberg that stock picking by individual investors may be superseded by sectors moving in lockstep with each other thanks to exchange-traded fund dominance. Jim makes the case that recognizing names poised for outperformance through homework, coupled with “warning signs” analysis by the likes of Herb, are just the sorts of tools that allow for outperformance.
The rally we’ve had over the last week and a half, albeit with weakness today, is case in point why homework for the individual investor remains key. A market that has been dominated by macro concerns this summer is slowly starting to give way to fundamentals playing out their course, allowing for the best positioned names to outperform. Just look at the best-of-breed industrials in the last week and a half, like Cummins, Johnson Controls and Joy Global —which we have pointed out as key shopping list names. Or high quality names like Starwood in the travel sector with sizzling emerging market exposure, or Ralph Lauren and Deckers in retail, boasting pricing power and growth opportunities.
There are letdowns. But there are opportunities. And the game is not dead for the individual investor, amidst boom and bust. That’s why we stay in the game. And we will continue to analyze the reads that the individual companies feed us over the next four weeks of earnings season in particular… because we want to continue to position for upside and limit downside despite the challenges. It helps to make us on "Mad Money," and viewers of "Mad Money," stronger investors.
When this story was published, Cramer's charitable trust owned Cummins, Johnson Controls and Starwood Hotels.
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