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Stocks that Tricked Cramer

Monday, 31 Oct 2011 | 6:23 PM ET
Is This Stock a 'Trick' or 'Treat'?
Cramer says investors need to tell tricks from treats when a momentum stock tumbles; like Netflix or Ancestry.com, sell no matter how much you like the product or believe the story, because you can always buy it back when the pain is over.

In honor of Halloween, Cramer decided to analyze the stocks that tricked him into making frightening mistakes over the past year.

First, you could have made money on Ancestry.com if you sold it earlier this year, after it had run up 223 percent from its $13.50 IPO price in November 2009 to $45. But the “Mad Money” host didn’t sell. Instead, he “duped” himself into staying in the stock. Since then, ACOM, which helps people trace their genealogies online, has dropped to under $23.

So what went wrong? The company has had two disappointing quarters in a row and has hit a wall when it comes to adding new subscribers. It raised its monthly subscription prices in order to drive people to annual plans and that’s scaring investors and customers.

“We were too fascinated by the product, and had too much confidence in the business model,” he said. “So in the future, we need to be more aware of potential hiccups, bumps in the road that can totally derail a high-flying growth stock … and we have to be more willing to take the money and run after a big rally.”

Cramer did go negative on Netflix before it “imploded,” but admits he made a mistake when he stuck with the stock after the big pricing changes were announced in July.

“I loved the product too much, but mostly I overstayed my welcome,” he said, “and you should never to do that in a battleground stock … [especially] once the growth has been called into question.”

Lastly, Cramer thought Lufkin Industries , the maker of oil well pumps he recommended in September, was about to be hit with a wave of demand for its products thanks to the drilling boom. But the company lowered its earnings and sales forecast when it reported October 5th because of a number of supposedly one-time worries. But those were the same problems that caused Lufkin to miss in its previous quarter.

“When company is having problems with execution … you have to wait for those problems to be resolved before you can buy the stock,” Cramer said.

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ACOM
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LUFK
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NFLX
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VA71
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LUFK
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NFLX
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