Cramer's 'Mad Money' Recap: Anatomy of a Short Squeeze (Final)

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NEW YORK ( TheStreet) -- "Sometimes stocks make no sense," Jim Cramer told his "Mad Money" TV show viewers Monday.

He said that sometimes, big moves in a stock have nothing to do with earnings, valuations or news about a stock. Instead, it's simply a matter of supply and demand.

Consider stocks like Whirlpool ( WHR), Netflix ( NFLX) and Green Mountain Coffee Roasters ( GMCR), all three of whom have seen their shares rise day after day for seemingly no reason at all.

But Cramer said for those with inside knowledge of how the markets really work, these moves make perfect sense. In the case of Whirlpool, he said, the company has only 76 million shares of stock available. While that may seem like a lot, Cramer put the number into perspective by comparing it to the 4.6 billion shares that Exxon-Mobil ( XOM) has.

Cramer explained that when a company like Whirlpool continues to disappoint investors quarter after quarter, it builds up a sizable number of short sellers. In the case of Whirlpool, almost 10% of the company's available shares were sold short ahead of its most recent release. So when Whirlpool not only surprised Wall Street with great earnings but also raised guidance, it caught all of those short sellers completely off guard an d on the wrong side of the trade.

What ensues is a classic short squeeze, explained Cramer, where hundreds of short sellers all look to cover their positions at the same time, only to find there are no shares available at the current price. So the price rises. As the situation becomes more and more desperate, the share price will continue to rise, sometimes day after day, until all of the short positions have been covered. Cramer said the situation is often made worse by retail investors, who are also looking to buy shares since the company now seems to be on the right track again.

Cramer said the same pattern can be seen with Netflix and Green Mountain. There is no news propelling these stocks, he said, it's merely short sellers looking to buy huge quantities of stock, only to find no takers. They'll continue to bid up the price, dollar by dollar, tick by tick, until they can cover their mistakes.

Caterpillar vs. Joy Global

For the first installment of "All Request Week," a viewer wanted to know which was better, Caterpillar ( CAT) or Joy Global ( JOY)? Cramer said while he wouldn't be a buyer of either company right now at these levels, there is a clear winner amongst the two.

Looking at just the metrics, it appears that Joy Global, which trades at 11.5 times earnings with a PEG ratio of 0.66, would be the better investment when compared to Caterpillar, which trades at 10 times earnings with a slightly higher PEG ratio of 0.88. But Cramer said that metrics alone can be misleading. He said that Caterpillar's recent acquisition of Bucyrus is a game changer, and it makes Caterpillar the clear winner.

When talking about big machinery it pays to be diversified, said Cramer. Joy Global is levered to just mining equipment, he said, with 66% of sales coming from coal mining equipment alone. Caterpillar, on the other hand, has a diversified portfolio of machinery which includes infrastructure, mining and also agriculture. Joy Global is at risk, said Cramer, with natural gas prices plummeting to levels that give coal a run for its money.

Cramer said the China is also a factor for these two companies, and while the Chinese use three times as much coal as the U.S., a pickup in the Chinese economy would also bode well for Caterpillar, as the country would also need more infrastructure equipment. Then there's Europe, a soft-spot for Joy Global as many European nations are phasing out coal-fired power plants. Caterpillar, on the other hand, expects sales in Europe to at least match that of last year.

With en excellent management team and a record backlog, Cramer said there's a lot to like a Caterpillar. He said if the U.S. economy improves, that would be a bigger boost for Caterpillar than Joy Global, further solidifying his nomination for the king of big machinery.

Art of Stock Picking

"Individual stock picking is back in style," Cramer told viewer, as he compared the stocks of Tiffany ( TIF) to that of Coach ( COH), two high-end luxury retailers that on the surface may seem similar, but in reality, are world's apart.

Cramer explained it might seem perplexing that Coach is near its 52-week high while rival Tiffany is just 10 points off its lows for the year. Both companies are high-end retailers, both derive about 20% of sales from Japan and both are betting big on China. But that's about where the similarities end, said Cramer.

While Coach reported a terrific holiday season, Tiffany lowered its guidance on Jan 10, forecasting truly ugly numbers for its holiday season. Cramer explained that unlike Coach, which has a very broad customer base, Tiffany is levered to Wall Street bonuses, a perk that was virtually non-existent this year. Tiffany sells a lot of high-end items that require big bonuses, said Cramer, while Coach has big exposure to the outlet market with many items that retail for $300 or less.

He said Coach is also expanding into men's items, a market that could eventually account for 25% of company sales. Coach also has limited exposure to Europe, a mere 1% of sales. Tiffany on the other hand, sells almost exclusively to women, and men shopping for women, with no plans or possibility to expand into the men's market. The company is also having a tough time in Europe, which accounts for 12% of sales.

Then there are the gross margins. He said Coach has industry-leading margins of 72% and is expanding those margins, while Tiffany is struggling with rising costs for gold, platinum and diamonds that it can't pass onto its customers.

Given their similar valuations, Cramer said that Coach is clearly the better choice. He said even new its 52-week high, he'd still be a buyer.

Not Into Social Gaming

In a special interview, Cramer sat down with retired baseball legend Curt Schilling, now the founder and chairman of 38 Studios, a video game development company set to release its first game at midnight with partner Electronic Arts ( EA).

Schilling said that 38 Studios has created 400 jobs and is still growing. He said the company has great people who are passionate about what they do and he's never been more excited as he is on the eve of their first game launch. Schilling also said that 38 Studios is not just a place to work, it's a place to belong, and one of his main duties at the company is now to preserve and protect the company culture.

When asked why 38 Studios is not moving into social gaming to compete with companies like Zynga ( ZNGA), Schilling said that being successful is knowing what you're good at. At 38 Studios, he said, the company has great talent and the ability to make rich, immersive titles. Choosing to develop a social or mobile game would be a waste of our talents, he noted.

Turning to the company's partnership with Electric Arts, Schilling said it was a natural fit for his company. He said 38 Studios has the opportunities for books, toys, movies and apps all based on the games it's creating and Electronic Arts has the muscle and expertise to help make that happen.

Cramer said he was bullish on Electronic Arts as a result of 38 Studios imminent release.

Lightning Round

Cramer was bullish on ( BIDU), SeaDrill Limited ( SDRL), Schlumberger ( SLB), Ensco International ( ESV), Photronics ( PLAB), Broadcom ( BRCM), Qualcomm ( QCOM), Apple ( AAPL), General Mills ( GIS) and VIVUS ( VVUS).

Cramer was bearish on MagnaChip Semiconductor ( MX) and Cirrus Logic ( CRUS).

Closing Comments

In his "No Huddle Offense" segment, Cramer said the best advertisement in last night's Super Bowl wasn't an ad at all. He said it was seeing some of the best athletes in the world all pulling out their Apple iPhones after the game to take pictures and videos of their monumental win.

Cramer said that Apple didn't pay a dime for this exposure, yet it was the most honest and riveting endorsement of a product that so many people know and love and trust to capture the important moments in their lives.

--Written by Scott Rutt in Washington, D.C.

To contact the writer of this article, click here: Scott Rutt.

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At the time of publication, Cramer was long Apple.

Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for, Inc., and CNBC, and a director and co-founder of All opinions expressed by Mr. Cramer on "Mad Money" are his own and do not reflect the opinions of or its affiliates, or CNBC, NBC UNIVERSAL or their parent company or affiliates. Mr. Cramer's opinions are based upon information he considers to be reliable, but neither, nor CNBC, nor either of their affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Cramer's statements are based on his opinions at the time statements are made, and are subject to change without notice. No part of Mr. Cramer's compensation from CNBC or is related to the specific opinions expressed by him on "Mad Money."

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Some of the stocks mentioned by Mr. Cramer on "Mad Money" are held in Mr. Cramer's Action Alerts PLUS Portfolio. When that is the case, appropriate disclosure is made on the program and in the "Mad Money" recap available on The Action Alerts PLUS Portfolio contains all of Mr. Cramer's personal investments in publicly-traded equity securities only, and does not include any mutual fund holdings or other institutionally managed assets, private equity investments, or his holdings in, Inc. Since March 2005, the Action Alerts PLUS Portfolio has been held by a Trust, the realized profits from which have been pledged to charity. Mr. Cramer retains full investment discretion with respect to all securities contained in the Trust. Mr. Cramer is subject to certain trading restrictions, and must hold all securities in the Action Alerts PLUS Portfolio for at least one month, and is not permitted to buy or sell any security he has spoken about on television or on his radio program for five days following the broadcast.

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