Accounting irregularities always equal sell for the stock that has them, says Cramer. In Thursday’s sell block we have a case of guilt by association, where one company’s accounting problems have been highly detrimental to its clean competitors. This could offer some great buying opportunities in a market that sells first and asks questions later.
What is the company that started the wave of problems Cramer is speaking of? Huron Consulting Group, which announced last Friday that it would restate the last three years of financial results, withdraw its 2009 earnings guidance and lower its outlook for 2009 revenue as a result of an ongoing inquiry about how it kept certain payments to employees in four acquisitions off its income statement.
Huron’s stock has imploded, dropping 67% from Friday’s close, which Cramer sees as the potential tip of the iceberg, as the SEC is initiating a new inquiry into the company.
Accounting problems are a great reason to sell a stock, Cramer says, but what about when this accounting debauchery occurs at an accounting firm itself? Ironic? Scandalous? Try ridiculous. Cramer says that the fact that Huron was started in May 2002 by a dozen partners from Arthur Andersen who fled the firm after it got indicted for its involvement with Enron is probably just a fishy coincidence.
The company’s reputation has been damaged, and Cramer points out that the company now risks losing both its consultants and its clients because of its tarnished reputation. Huron makes its money providing financial and legal consulting services, and who wants to go to a consulting firm with credibility issues? Cramer is unsure whether Huron can ever recover, and that’s why it’s on the sell block.
But is there a silver lining?
Cramer points out that related companies in the sector have dropped despite recently announcing good quarters, namely, FTI Consulting and Duff & Phelps . He sees these names as dragged down and held back by the bad news coming from Huron, with FTI falling 15% since Friday and DUF remaining flat, despite the good news that should have shot both stocks higher. Add to this the fact that Huron’s demise will most likely send additional clients their way. A buying opportunity? Cramer thinks so.
Add to this the fact that both FCN and DUF have done their due diligence and re-checked their books to confirm that they weren’t in the wrong like their industry peer. Out of the two, Cramer thinks FCN is the better buying opportunity, but he thinks DUF works too, since it’s better positioned to snag consultants and clients from Huron.
The bottom line: Huron’s problems are Huron’s problems, they don’t hurt FTI Consulting or Duff & Phelps, but Huron’s accounting issues did manage to hurt their stocks, which is why Cramer is urging you to buy FCN and DUF. They’re broken stocks, not broken companies like Huron, Cramer says, and they deserve to be bought, not sold.
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