'Mad Money' Mailbag: Martha Stewart and Value Traps

Cramer talks about what would make the media maven's stock appealing and when cheap stocks go wrong.
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Updated from 11:06 a.m. EDT

Editor's Note: The following are questions received from viewers of "Mad Money," seen every day at 6 p.m. EDT on CNBC.

What do you think of Martha Stewart's (MSO) stock?-- Amy from Massachusetts

James J. Cramer:

If the stock would come in under $25 a share, I would be a buyer of Martha Stewart. While I believe her name still carries a lot of retailing weight, I believe the stock has priced in more than enough good news at the current price.

What is a value trap?-- Amar

James J. Cramer:

I have a lot of callers ask me whether I think

U.S. Steel

(X) - Get Report

at 4 times earnings or

J.P. Morgan

(JPM) - Get Report

at just 11.5 times earnings are buys. They are drawn to the price-to-earnings ratios that are substantially below that of the

S&P 500

and believe this implies that a lot of potential upside exists in the stocks.

But what a lot of at-home investors don't understand is that these stocks are often cheap because the professionals don't have a lot of faith in the companies' abilities to hit the forward earnings estimates, and therefore aren't willing to pay a high price for each $1 in earnings. Situations such as these often turn out to be value traps, or stocks that look cheap on the estimated earnings but, in fact, turn out to be quite expensive when you factor in the lower forward earnings results.

Long JPM

Is Walgreen (WAG) a good stock to own long-term?-- Lucy from Ohio

James J. Cramer:

Along with

CVS

(CVS) - Get Report

, Walgreen is a top drug retailer. The company has grown its earnings results for as long as I have been in the business, and I believe it can double its store base from here. CVS is a bit cheaper, but Walgreen remains my top pick in the space.

What is an arbitrager?-- Joe from Ohio

James J. Cramer:

An arbitrager is an investor that looks to exploit market inefficiencies to lock in "risk-free" gains. Two highly visible arbitrage strategies are convertible arbitrage and merger arbitrage.

What do you think of Imax (IMAX) - Get Report?-- Mark from Texas

James J. Cramer:

Imax screens are incredible to watch movies on. Last year, Imax enjoyed great success with the release of

Polar Express

, and the company is now showing more box office films, including

Batman Begins

and

Charlie and the Chocolate Factory

. With overall box office revenue in decline, I believe Imax is a compelling alternative to standard 35mm films and is a buy here.

What do you think of the wireless tower stocks like American Tower (AMT) - Get Report and Crown Castle (CCI) - Get Report?-- John from Massachusetts

James J. Cramer:

I am not a fan of the wireless tower stocks. While American Tower and Crown Castle generate a lot of cash, they aren't growing revenue terribly fast and they have a lot of debt. In addition, they don't produce much in the way of earnings and that keeps a lot of investors out of these stocks. For leaders in a supposedly growing business like wireless, these companies simply don't display the attributes I look for in stocks.

Jim, I recently bought Time Warner (TWX) on your recommendation and the stock has not done anything. Is it time to sell and move on?-- Vicky from Nebraska

James J. Cramer:

I believe Time Warner will deliver share gains to its investors but unfortunately, cable stocks have been moving like molasses this year. I make it a rule not to give up on value, but you have to be patient with the cable stocks. Time Warner produces a ton of cash flow, could unlock value by spinning off AOL and trades at only 21 times expected 2005 earnings. That's not too bad, in my book.

Interested in more Cramer? Check out Jim's rules and commandments for investing from his latest book by

clicking here

. It's a series of articles from Cramer on how to become a better investor. The following table lists some of the rules that Cramer dissects.