Cramer: Beware This Dangerous Stock

(Click for video linked to a searchable transcript of this Mad Money segment)

Nobody loves a contest more than Jim Cramer.

And after watching Miami face-off against San Antonio in the NBA Finals, Cramer decided to develop a Mad Money contest that would run parallel with the basketball championship; but one that was relevant for investors.

All week Cramer has been pitting a Miami based company against a San Antonio based company in an attempt to make more informed investment decisions.

In this third installment of the Mad Money series, Cramer looked at the least valuable players or companies in Miami and San Antonio.

That is, when compared to one another, which company is more challenged and therefore which stock has more downside?

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Carnival Cruise

"The honor of least valuable player in Miami has to go to Carnival Cruise," said the Mad Money host. "Here's a giant cruise line operator that's doing a pretty effective job of making it so that nobody ever wants to board a cruise ship again."

Cramer reminded that back in February one of their ships caught on fire and then spent five days somewhat adrift off the coast of Mexico. About a year before that a Carnival ship capsized off the coast of Italy.

"At this point, I can't help but wonder if these horrible accidents are becoming an annual occurrence," Cramer said. And it appears some travelers aren't interested in finding out.

"Not only have prices come down but cancellations have gone up. The company is now spending aggressively in order to get its ships up to snuff," Cramer said

Looking at the price action, Cramer explained that after Gulf of Mexico incident, the stock tumbled from $39 down to $34, and since then it's continued to pull back, closing at $33 and change on Thursday.

"At the time, Carnival told us that the incident would ding their earnings per share by 8 to 10 cents in the first half, but it turns out that was way too optimistic. In mid-March, the company cut its full-year guidance from the $2.20 to $2.40 range down to $1.80 to $2.10. And then last month, they lowered their earnings forecast again, taking it down to $1.45 to $1.65."

Rackspace Hosting

You might think San Antonio would be hard pressed to have a company that faces issues as challenging as Carnival. But Cramer said it does – at least from an investor perspective.

"It's Rackspace Hosting," he said.

Rackspace resells data center space and leases server and networking equipment to companies that use the cloud. Although Cramer is typically bullish of cloud plays he reminds that they're popular on Wall Street because of their growth potential.

And the latest results called the rate of growth into question.

"In mid-February, Rackspace reported a dismal quarter where numbers came in much lower than expected, which caused the stock to slip from $75 to $60 overnight," Cramer said.

Since that time, Rackspace has not said what the Street wants to hear.

"Rackspace had to cut pricing for its cloud bandwidth and content deliver services by 33%. Then, a month ago, Rackspace reported another hideous quarter - the stock dropped from $52 to $39, again in a single session."

Cramer said pros now view Rackspace as a serial disappointer. "And when a turbocharged momentum stock disappoints, it can keep getting crushed for years before its valuation comes back to earth," Cramer said.

Looking at Carnival vs Rackspace, Cramer then posted the ultimate question. Which stock is the more dangerous stock?

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"I think San Antonio's Rackspace Hosting is far more dangerous than Miami's Carnival Cruise," Cramer said. "Carnival has no real reason to go higher, but at the same time, the stock sports a healthy 3% yield, and that dividend should generate some downside protection."

By contrast, Cramer said Rackspace could slide even more. "Things could get a lot worse. Even after all of these declines, Rackspace is far from cheap, as the stock sells for 40 times next year's earnings estimates. That's way too expensive for a stock that's lost its mojo. I think it still has room to go a lot lower," he said.

Call Cramer: 1-800-743-CNBC

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