This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Cramer: This Market's the Smarter Fool Theory

Click here to read "Greenberg: This Market's the Greater Fool Theory"

Editor's Note: This article was originally published on Real Money on Sept. 18. To see the latest commentary as it's published, sign up for a free trial of Real Money.

Cramer: Two Sides of Cult Stocks

Lots of times, people just don't understand that it is OK to dislike a company but like the stock. Other times it is OK to think a company's terrific but its stock is horrendously overvalued, and yet still worth buying. This is a debate that is age-old, but is being rekindled -- aggressively rekindled -- now that Herb Greenberg has rejoined the fold.

My logic to this conundrum of when good things happen to bad stocks is simple: I am gaming the life cycle and the process of the "loved" enterprise, not the valuation -- or, more precisely, overvaluation of the stock. I am predicting the mania and harnessing it for profit, and much as Herb Greenberg wants to call this the "Greater Fool Theory" (see his rebuttal here), I think that my way can make us all money, which is why I, of course, promptly renamed it the "Smarter Fool Theory."

I am saying that, if my method works for you, use it. Just be mindful that, when it is done working, it can really crush you. So at all times do it with deep-in-the-money calls to cut off your downside. You buy Netflix (NFLX - Get Report), Tesla (TSLA - Get Report) and Herbalife (HLF - Get Report), or even Ulta (ULTA - Get Report), Lumber Liquidators (LL - Get Report), and Tractor Supply (TSCO - Get Report), with deep-in-the-money calls, so if it does go bad, you are stopped out.

How important is this? You could have saved yourself 100 points of loss in both Chipotle (CMG) and Intuitive Surgical (ISRG) when the music stopped. That's the best way to game the process of cult love, even if it is an expensive way to create a stock.

Now, when I was at my hedge fund I used to come on "Squawk" during the Mark Haines days and during the break Mark would ask me what I was thinking about. I would say, "Oh, that company's awful but its stock is going higher" or, "This company's stock is ridiculously expensive but much loved." He never questioned me as being two-faced or lacking in rigor. He never said, "Cramer you are being preposterous, it can't be a bad company yet a good stock." He said, simply, "you know what? I am going to call you a preacher and I am going to call you 'reverend Jim Bob from the Church of whatever's working now.' "

He understood. He got me. He got that I wasn't being a duplicitous joker but I just understood what was working now.

I am no longer at my hedge fund. I run a charitable trust, along with Stephanie Link. It is definitively not about what's ever working now. I don't advise most people to play whatever's working now because when it stops working -- even if I say the day before that it is going to stop working -- people who didn't hear that sell call will be all over me and it will be played on YouTube endlessly as if I never told you to sell.

But when I do a series like the anointed stocks, meaning when I say that Netflix is going to go higher I am not going to pass judgment on Netflix. I am not going to say "it shouldn't be anywhere near here," because that's not the point. The point is that Netflix is working and because it is working the buyers will keep flooding in to it. I have been saying the same thing about Tesla, because Tesla is the definitive "church of what's happening now," stock. Its valuation is absurd but it's been absurd for 120 points, 120 points that I wanted you to catch.

Now, let's take the case of Ulta Salon. Now here's a company that's been red hot, there's no denying it. I am predisposed to like it because, again, it's working. But when I read Herb Greenberg's excellent piece on Ulta and the potential inventory issue, as Herb did some terrific ratiocination about Coty (COTY) and Ulta's sales I said, ah hah, real red flag, that stock's going to get hammered some day. But the emphasis must be on some day because, given the fact that the company just reported you won't know if Herb is right for a very long time. In the interim I think the momentum funds take it ever higher.

That's an example of a company I don't like that's appended to a stock that is most likely going higher.

Same with Herbalife. Do I like the practices of the company? I don't particularly care for that kind of direct selling model where I think that recruiting can be more important than actual sales of the product. But that model sure works for Tupperware (TUP), so I don't judge it negatively. Is Herbalife using best practices within its model as I think Tupperware is? I think it wants to. I think it tries to. However, I think it's very hard to police.

Now, here's where it gets really sticky. I have read the brief against Herbalife from Bill Ackman, and I recognize that Ackman paints a picture of a company that should be shut down. I would never, in a vacuum, ever consider owning the stock of a company that the regulators might want shut down and Herbalife has a better chance of being shutdown than just about any company I follow.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free


Chart of I:DJI
DOW 17,740.63 +79.92 0.45%
S&P 500 2,057.14 +6.51 0.32%
NASDAQ 4,736.1550 +19.0610 0.40%

Our Tweets

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs