What Went Wrong in 2007

Cramer’s nine stocks of 2007 outearned the S&P 500, but more than a couple ended the year in the red. He spent Wednesday’s Mad Money reviewing his strategies to make sure the same mistakes weren’t made in 2008.

Cramer liked Goldman Sachs, Altria and Halliburton as value plays; Cisco, Apple and NYSE Euronext for their growth; and Rite-Aid, Level 3 Communications and Savient Pharma as speculation. In late September, the Mad Money host recommended switching out of Savient for BioMarin, and investors who did would have earned 16% for the year on Cramer’s portfolio despite some hefty losses in two of the stocks.

Rite-Aid and Level 3 lost 50% and 49%, respectively. But the stocks registered modest gains before their respective drops. Cramer said he realized that letting RAD and LVLT ride was a mistake: “When you have a gain in a speculative stock off a small base, take it off the table.”

And the balance sheets for these two companies weren’t too stellar either. If you’re going to speculate on a stock, the company at least has to have decent fundamentals. Just compare RAD and LVLT with Savient and Biomarin, Cramer’s other two spec picks. The biotechs were strong on paper, and it showed in their performance. Investors who followed Cramer’s lead on those two stocks would have seen a 77% return.

Another lesson Cramer learned is that sometimes a great stock can’t escape a struggling sector. Goldman Sachs outperformed its rivals, and even called the subprime meltdown, but ended the year barely beating the averages because Wall Street wanted nothing to do with financials.

What might have been hardest for Cramer to accept was the Street’s outright hatred of NYSE Euronext. To him, it was an undervalued stock. To Wall Street, it was a pariah. “Most of the time you can’t make money trying to be a contrarian,” Cramer said, which he learned the hard way last year.

But Cisco might have been a bigger disappointment than Apple. The networking company had lower growth and a lower multiple than Apple, but the iPhone maker was the stock to own in 2007. Apparently, cheap tech doesn’t pay, Cramer admitted.

Jim's charitable trust owns Altria, Goldman Sachs and NYSE Euronext.

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