Cramer: If Ackman Has You Smelling Blood...

Editor's Note: This article was originally published at 6:39 a.m. EDT on Real Money on August 12. To see Jim Cramer's latest commentary as it's published, sign up for a free trial of Real Money.

NEW YORK ( Real Money) -- Sharks smell blood. Hedge funds can be like sharks. It seems like yesterday when the sharks smelled my blood. I was flailing in the deep sea in October of 1998, a victim of an ill-timed opening to please one of our investors at a time when my numbers were quite poor. It was my worst year against the market, ever.

I had some big holdings, mostly banks, and it became obvious that the stocks were heavy, as we say, pretty much every day. I remember Karen Cramer coming to work and saying to me, "You know they are shooting against us." I said, "No, that's paranoia." She said, "In your dreams it's paranoia. Go speak to these traders off the desk."

Sure enough, she was right. Even though I had a stellar record, and even though I vowed to come back, and even though I plainly showed the flag by buying more of the positions, I would be wrong to say it wasn't touch and go. Fortunately, we got double-long at the right time and the market roared back. Those who had shot against me, betting that there would be a big run on my fund from disappointed investors, paid the price.

Right now a bunch of shark hedge funds are circling around Pershing Square, Bill Ackman's company, betting that he's in the same kind of partner-fleeing trouble that they thought I had been in. The vocal nature of his short position in Herbalife ( HLF), the direct-selling company, has given long-time adversary Carl Icahn a chance to run up the stock up -- aided, by the way, by a quarter with some nice growth at the company.

Then there are Ackman's antics involving J.C. Penney ( JCP). He pushed for Ron Johnson to become CEO, who promptly destroyed shopper loyalty to the place, and now he's embarked on an angry campaign against Mike Ullman, Johnson's replacement. All this has brought more opprobrium, this time by Howard Schultz, the CEO and founder of Starbucks ( SBUX) -- who, unlike Icahn, doesn't even have a dog in the hunt, unless you consider decency a dog.

Now, I have no idea how Ackman's really doing or what his investors are thinking. Is he a wounded tiger? Is he a smug Master of the Universe who makes Gordon Gekko look like Ghandi? Could be. But let's say that you think he is going to struggle for the moment, and you want to profit from that struggle. You want to wager that his investors have had enough with Penney and Herbalife. You could just go short Penney and go long Herbalife, shooting against him much as some had shot against me back then. But remember: Those who did this got hurt because of the rising tide that bailed me out.

So, when I look at what happened to me and then to my opponents, I know that the adversaries in each of these scenarios would have been better served by hedging themselves against a rally. That at least applies to the bank stocks that figured prominently in my battles.

Again, for all I know, investors could be showering Ackman with money because of a terrific long-term record. But, for those hedge fund managers who smell blood, here's what I can see them doing. First, Ackman's Penney position would need to be protected by the purchase of another second-rate retailer, and I would pick Sears Holdings ( SHLD). That way, if the back-to-school turns out well, you'll have a nice hedge.

Beyond that, just a few weeks ago we learned that Ackman has taken a huge position in Air Products ( APD) -- a stock that is now up more than 26% year to date. If you want to bet against Air Products, may I suggest you purchase some Airgas ( ARG), a better company that's only up some 15% for the year? 

Canadian Pacific ( CP) is a huge and profitable position for Ackman. But CanPac's not even a close No. 2 to the operators at Union Pacific ( UNP). Ackman has cleaned up on Procter & Gamble ( PG), but that stock looks extended and I don't think it can challenge Colgate-Palmolive ( CL) effectively in emerging markets, where the real growth is. That's another good pair. The records show a position in Burger King ( BKW), as well -- and I prefer to bet with McDonald's ( MCD). Finally, there are two other long-short positions. Go with Diageo ( DEO) over the position Ackman has in Beam ( BEAM), according to the records, and take Kimco Realty ( KIM) and short General Growth Properties ( GGP). Diageo is the better liquor company, and Kimco is a better real estate investment trust with a better dividend.

If Ackman thinks Herbalife isn't cricket in its recruiting and selling methods, an analogous name is the very successful Nu Skin Enterprises ( NUS). If the government is going to investigate direct-selling practices, any investigation would, per se, hurt Nu Skin as well as Herbalife.

Now, here are the usual caveats. Those sharks who fought me didn't profit from it. You might not profit from betting against Ackman. But if you want to challenge the man Schultz called the "destroyer of companies," at least now you have your hedged buy-and-sell list. May the best person win?

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the securities mentioned.

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