Cramer Misses on MD
We were going on the computer just to check out the Kids Club channel from America Online. It was a lazy Saturday, better spent doing Reading Blaster and Highlights-On-Line than watching
The Grinch
one more time.
And then I saw on the right-hand bottom corner of the America Online news page: "
Boeing
,
McDonnell Douglas
in $13 billion merger." The palm of my left hand instinctively slapped my bountiful forehead. "Oh, darn," I said. "I should have had it."
"Had what, Daddy?" my innocent five-year-old daughter piped up. "Had what?"
"The Boeing-McDonnell deal. I should have been long McDonnell Douglas," I replied.
"What does that mean, Daddy?" she asked.
"Oh never mind," I said, not willing to corrupt her innocence with a tale of lost profits. We were there to learn to read and write, not second guess.
But I'll tell you why I was angry at myself. First, every good trader likes to have takeovers: those are our three-point-shots-with-no-time-left, our 99-yard-runbacks, our glory and our success. In our business there's nothing like "delayed opening, order imbalance." You know you've gotten it right.
Conversely, there is nothing more demoralizing than having sold a stock that just got a takeover bid. (Except, of course, being short a takeover stock, which is too dark a concept to go into here.) All day you've got to hear them talk about it on CNBC, and every time you hit up the percentage gainers (I do it five times a day, at least) you'll be reminded of your big miss.
I sold McDonnell Douglas last month, tired of their bungling in commercial lines, sick of their losing big contracts, angered that they had lost a manager that was responsible for so much of their turnaround. I had made good money, but nothing compared to what I would have made had I not been so impatient.
But there were two easy lessons learned here that should be part of everyone's basic playbook. One, Harry Stonecipher, the head of McDonnell Douglas, had repeatedly said he was on the side of shareholder value. So rather than get frustrated when Stonecipher lost that big Air Force contract last month, I should have been more willing to believe that Stonecipher would work to get the stock price higher anyway.
And, two, stock prices don't lie. In the last two months MD had been hit by a parade of bad news stories, but the stock never really sold off. It had been downgraded by several major houses, and it still didn't sell off. Stocks that act that well in the face of bad news should be bought, not sold.
Next time I meet a management that is as shareholder-friendly as MD's was, and some adversity strikes, I'll remember how I felt that Saturday afternoon at the computer, and I'll be on the right side of the trade.
James Cramer manages a hedge fund and is co-chairman of The Street.