Cramer: Run Away from These 3 Problem Stocks
He who knows to run away, lives to trade another day! We took some artistic liberties with the expression, but it sure works in the case of these 3 stocks!
"I'm always telling you to stay away from battlegrounds, from stocks where there's so much heat that you will end up withering in no man's land. That's no place for an individual investor," reminded Jim Cramer on Friday's broadcast.
According to the Mad Money host, 3 stocks may look cheap, but he says currently they're no bargain. "I'm talking about Mellanox Technologies, Allscripts Healthcare Solutions and Herbalife, three of the most controversial stories in the market right now," said Cramer.
Mellanox (TICKER: MLNX)
Earlier in the year Cramer identified Mellanox as a buy – a play on the big data boom. However, Cramer turned negative in September when the company announced .
Since the announcement shares have tumbled - declining over 50% in only a handful of months.
"I don't like owning stocks where the CFO leaves," Cramer said. "The chief financial officer is the key man or woman, the one who handles the books."
Although the resignation isn't necessarily a sign of trouble, why take chances? If you're putting money to work – put it elsewhere. As a matter of discipline, "I sell a stock when the CFO unexpectedly announces his decision to leave for personal reasons," said Cramer.
Allscripts Healthcare Systems (TICKER: MDRX)
Back in March, Cramer changed his outlook on Allscripts Healthcare Systems after results showed that rival Cerner had been taking winning business away from them.
"Sure enough, not long after, the company reported a shortfall and fell sharply to the low-teens," explained Cramer.
In an effort to unlock value, CEO Glenn Tullman said he would sell the company.
Cramer however, remained cautious, "You don't want to own a stock for takeover purposes when the fundamentals are lacking," he said.
Turns out Cramer's investment axiom was prescient
Tullman resigned by "mutual agreement," the company said. And the board opted not to sell the company.
Although Tullman's departure was recent, for the month shares are down more than 25%.
What's the moral? Do not buy companies on takeover basis if the core business is weak. If other companies are not interesting in purchasing it, you shouldn't be either," said Cramer.
Herbalife (TICKER:HLF)
Cramer had been skeptical of Herbalife for quite some time – especially after CNBC colleague Herb Greenberg raised concerns about the way it reported sales.
"That was enough for me. I have known Herb Greenberg and his work for more than several decades. I know you don't go against him. His work is too high-quality," said Cramer.
Questions asked by top investor David Einhorn during an earnings call in May suggested he too was skeptical of the company's business model,
Then, this week, famed short seller Bill Ackman came on CNBC and called the company a 'pyramid scheme,' an allegation that CEO Michael Johnson strongly denied.
Here's Cramer's takeaway.
"If it's really a Ponzi scheme, why hasn't the government shut it down? If Ackman wants to protect us from it, why doesn't he tell the Justice Department? If Johnson, the CEO, wants to stop Ackman from attacking his company in an unfair and perhaps illegal way, why not sue him?"
More important, though, Cramer doesn't care who is right. What he cares about is price action and shares are down more than 40% in about a month.
"Facts have stopped mattering and emotions have taken over," he said.
Not only does that make the stock a difficult investment – Street savvy pros may try and game the sentiment day to day making the price action that much more unpredictable.
All told, Herbalife is way too volatile for an individual investor.
What's the bottom line?
Pros can make money from the day to day shifts in sentiment but largely "Battleground stocks such as these are no place for individual investors," said Cramer. "Run away, you will be a heck of a lot safer and wealthier if you do."
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