Top Stories
Top Stories

Cramer: This kind of call can be brutal business

Cramer: This kind of call can be brutal business

Just because the consensus of a stock skews negative, that doesn't mean the consensus is wrong! And Jim Cramer thinks a topic like commodities is not one that pays to be overly bullish about.

"That is why being a contrarian about the wrong stocks can be a really brutal business," the "Mad Money" host said. (Tweet This)

Cramer referenced a bullish report written by an analyst at Seeking Alpha on Freeport McMoRan in Dec. 2014. The analyst speculated that the prolonged slump in commodity prices had crushed Freeport's stock, but that there is an upside to the stock if the prices of gold, copper and oil went higher.

The report also stated that the stock had been beaten so badly that to sell would not make sense, since Freeport trades at just 10 times 2015 earnings at 1.09 times book value.

"Pretty much everything this guy wrote last December either turned out to be wrong or simply didn't come to pass, including the fact that the kicker, Freeport's 5 percent yield, is now gone because yesterday the company suspended its dividend," Cramer said.

When you are dealing with commodities, cheap is not in the eye of the beholder. It is in the eye of the marketplace
Jim Cramer
Freeport-McMoRan oil and gas drilling in Los Angeles, part of Freeport-McMoRan Copper & Gold Inc.
Mario Anzuoni | Reuters

At the time that this call was made, Freeport's stock had just been on a rollercoaster ride following the great recession. In December of 2012, Freeport spent $20 billion to buy Plains Exploration and Production, along with McMoRan Exploration — two oil companies.

That was the deal that pretty much sealed Freeport's fate. A year ago when this report was written, oil was at $55. It closed at $37 on Thursday. Copper is now down to $2.06 from $2.80 and gold is at $1,071 from $1,173 in the same time period.

Read more from Mad Money with Jim Cramer

Cramer Remix: Kinder Morgan is a disaster
Cramer: Damage of a rate hike is happening now
Paypal in the digital revolution sweet spot: CEO

However, Cramer thinks the reason why Freeport's stock has sunk so low was entirely due to commodity prices. What crushed it was the debt that the company took down to make those acquisitions in 2012. That is what prompted Freeport to suspend its dividend, amend its credit agreement and sell assets.

After the great recession, Freeport's stock was able to recover so quickly because of strong demand for emerging market infrastructure, particularly from China. With infrastructure spending glutted by the reduction in the amount of copper being used in China this year, Cramer fears that there will be no snapback for Freeport this time.

Cramer used the case of this analyst's bullish call on Freeport McMoRan to point out that sometimes a negative consensus that has crushed a stock remains right. It just doesn't always pay to be a contrarian.

"Let this naïve bullishness in the face of oversupply and lack of demand remind you that when you are dealing with commodities, cheap is not in the eye of the beholder. It is in the eye of the marketplace," Cramer said.

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

Want to take a deep dive into Cramer's world? Hit him up!
Mad Money Twitter - Jim Cramer Twitter - Facebook - Instagram - Vine

Questions, comments, suggestions for the "Mad Money" website?