Cramer's 'Mad Money' Recap: Beware 'Treacherous' Contrarians

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NEW YORK ( TheStreet) -- Don't pay attention to which sectors are "under-owned," pay attention to companies that are improving. That was Jim Cramer's thoughts to "Mad Money" viewers Wednesday as he sounded off against the notion of contrarian investing.

Cramer explained when a sector has been going down for a while, the contrarians -- those betting against the prevailing market wisdom -- will come in and say that sector is a buy. Their thinking is that big money managers will own less, or be under-weighted, in that sector as a percentage, compared to that sector's weighting in the Standard & Poor's 500 index.

But Cramer called contrarian investing "treacherous," noting that sometimes even out-of-favor sectors can still fall lower. Contrarian investing to too risky, he said. Case in point: the banks and the industrials, two sectors that have been "under-weighted" by money managers ever since Europe took its latest turn for the worse.

The contrarian view totally backfired for the industrials, said Cramer, as executives announced things were looking weaker than expected in Europe, sending shares even lower than they were. The banks, on the other hand, have been gaining strength, thanks in part to stronger than expected real estate loans. Two contrarian theses, two very different outcomes.

Cramer said that he doesn't think contrarian thinking matters much in today's markets. He said that the smart money seeks out and invests in companies that are improving and those that offer protection from Europe and the other ailing sectors in the economy.

Executive Decision

In the "Executive Decision" segment, Cramer spoke with Dinesh Paliwal, chairman, president and CEO of Harman International ( HAR), the auto infotainment company whose shares fell 4% Tuesday on the news that nine automakers would integrate Siri, Apple's ( AAPL) popular voice assistance, into their cars.

Paliwal said the Apple news is actually good news for both Harman and the entire auto industry as it helps promote the value of integrated electronics systems, something only two out of every 10 cars currently have installed. He said Harman has been a big advocate of hands-free systems such as what Apple has proposed with Siri. Harman sees Apple as a collaborator, not as an adversary, said Paliwal.

Harman shares also came under fire two years ago, noted Paliwal, as Google ( GOOG) announced its Android smartphones would include maps with turn-by-turn directions. However, since then sales have increased by 20% because Harman was able to integrate the new maps and directions into its existing systems. Paliwal said that more choices for consumers is always a good thing.

Finally, when asked about sales in Europe, Paliwal said they remain strong. The company derives 35% of its total sales from Europe, most of that from Germany.

Cramer said it took guts for Paliwal to appear on Mad Money and refute the negative reports. He remained bullish on the company's prospects.

Weakness at Home, Strength Abroad

In a second "Executive Decision" segment, Cramer spoke with Mike Sutherlin, president and CEO of Joy Global ( JOY), the industrial machinery maker whose shares are off 27% so far this year on the weak global economy. During the 2008 and 2009 recession, shares of Joy Global lost 70% of their value on similar concerns.

Sutherlin said Joy Global is seeing weakness in the U.S., primarily as coal production has been slowing. But in the rest of the world, demand remains strong as companies and countries are not cutting back on the projects already under construction. This strong demand, he said, is offsetting any U.S. weakness.

When asked about that U.S. weakness, Sutherlin said that only about one-third of the decline in cola production has stemmed from utilities closing plants to meet EPA regulations. The other two-thirds, however, stem from short-term economic weakness, something Sutherlin expects to turn around soon.

So why should investors believe that Joy Global won't lose the lion's share of its value this time around? Sutherlin said Joy Global still has a 12- to 14-month backlog and, unlike 2008, nearly 60% of the company's revenue now comes from the aftermarket rather than new equipment sales. Joy Global is able to level off any weakness in its revenue, said Sutherlin, all while continuing to grow earnings.

Cramer agreed that Joy Global is far from a cyclical company and investors are simply overreacting to the fears in Europe. He said for investors that can weather the short-term, the time to start buying Joy Global is now.

Lightning Round

Here's what Cramer had to say about caller's stocks during the "Lightning Round":

Chesapeake Energy ( CHK): "Why would I want to own Chesapeake when Devon Energy ( DVN) has better assets? I don't want to own Chesapeake."

Avnet ( AVT): "Cheap, cheap, cheap, cheap. It has Europe and semiconductors so people hate it, but I think that's a great story."

Dr Pepper Snapple ( DPS): "I think that's a terrific stock to own here. They generate a lot of cash. I say buy, buy, buy."

Nabors Industries ( NBR): "No, no. This has been a terrible performer. "

Vertex Pharmaceuticals ( VRTX): "I want to be hopeful, but the latest data did not give us as much hope as we wanted. "

Red Hat ( RHT): "I think they tell a good story. People get nervous and they keep selling it, so be careful. But I like it."

Walter Industries ( WLT): "There's too much takeover fluff in there. I don't want to touch it."

SeaDrill Limited ( SDRL): "I don't really care for this stock. I like Ensco International ( ESV)."

Emerson Electric ( EMR): "This is a terrific company but the industrials are hated. I'd buy it at a 4% yield."

Am I Diversified?

In the "Am I Diversified" segment, Cramer spoke with callers and responded to tweets sent via Twitter to @JimCramer to see if investors' portfolios have what it takes for today's markets. The first portfolio included: Johnson & Johnson ( JNJ), ConEd ( ED), Walt Disney ( DIS), Randgold Resources ( GOLD) and Joy Global.

Cramer said that Randgold is gold and Joy Global is mining, so he'd bless this portfolio.

The second portfolio's top holdings included: Exxon Mobil ( XOM), Boeing ( BA), United Technologies ( UTX), Royal Dutch Shell ( RDS.B) and BP ( BP).

Cramer said he'd get rid of Exxon and BP and add a health-care and a utility stock like Johnson & Johnson and ConEd.

The third portfolio had: Apple, Newcastle ( NCT), Kodiak Oil & Gas ( KOG), AT&T ( T) and Netflix ( NFLX) as its top five stocks.

Cramer said this portfolio was properly diversified.

Shame on J.P. Morgan

Did J.P. Morgan Chase ( JPM) CEO Jamie Dimon do well testifying in front of Congress today? Cramer's answer, who cares!

Cramer said it doesn't matter whether Dimon did well or not. He and his firm were wrong when they walked into the hearing room and were just as wrong when they walked out. The real issue, said Cramer, is J.P. Morgan was betting against the interests of its clients.

Cramer explained that trading losses are one thing, loan losses another. But when a company makes directional bets that are not in sync with what it's telling clients, that's wrong. J.P. Morgan may claim these losses were just hedges, but Cramer challenged that notion by asking, "Hedges against what, intelligence?"

In the end, J.P. Morgan's actions cost its shareholders billions of dollars, and everyone there should be giving back their bonuses to help repay those losses. "Shame on them," Cramer concluded.

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

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

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To watch replays of Cramer's video segments, visit the Mad Money page on CNBC.
At the time of publication, Cramer's Action Alerts PLUS had a position in AAPL, BA, DIS, DVN and JPM.

Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for TheStreet.com, Inc., and CNBC, and a director and co-founder of TheStreet.com. All opinions expressed by Mr. Cramer on "Mad Money" are his own and do not reflect the opinions of TheStreet.com 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 TheStreet.com, 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 TheStreet.com 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 TheStreet.com. 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 TheStreet.com, 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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