Cramer: Good Companies Are Horrible Shorts

NEW YORK (Real Money) -- If you are running a hedge fund you live to find a short idea that might produce sharply worse-than-expected earnings. You pray that the CEO is upfront on the call and just outright says the quarter was disappointing. You want to see terrible earnings, weak sales and slipping gross margins.

In short, you wanted to be short the stock of General Mills (GIS), the cereal company, the breakfast of short-selling champions everywhere, because of its recently fessed-up to -- admittedly subpar -- quarter.

Yet how has the stock done since CEO Ken Powell put right up top in its release, "Our sales and operating profits were disappointing"?

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Sure it got hit, falling from $53.70 to $51.70 in a single day. But now, amazingly, it's coming right back, closing at $53 last night.

You have to ask yourself how this can be. How can a company that has 1% growth in sales and a decline of 2% in profits, a company that admits to falling prey to rising inflation and promotional spending that wasn't effective, not have a stock that gets hammered and stays hammered?

How about because the company returned $2.7 billion in cash to shareholders in the last year in the form of a 17% dividend hike and a purchase of 36 million shares in the open market?

How about because this company gives you a 3% yield, much better than Treasuries, after taxes? How about that it announced that it will do a big restructuring and cost-cutting that will presumably produce even more free cash flow for more stock buying and dividend boosting?

Yep, in this market it's hard to keep a good stock down. Nor is General Mills that much of an aberration. Unless an analyst very specifically says that a dividend is in question, or a CEO says the company's doing its best to preserve the dividend, a quality name brand stock just doesn't get rocked the way it used to.

Consider General Motors (GM), a stock I like very much and which is owned by my charitable trust. We have been buying it consistently on the way down, in part because it has huge cash flow -- more than enough to be able to boost that already outsized dividend if the board wants to, despite the recall charges. As long as that dividend remains unquestioned -- and I don't know a soul who does question it -- the darned stock seemed to be able to withstand pretty much everything the market could throw at it. Now that it turns out the sales are terrific, it's gone from what seemed to be a lay-up decliner to an outright frightening short.

Now you can't just stand there and buy every higher-yielding play out there. Conagra (CAG), a second-tier consumer products company that also reported a hideous quarter, recently wrote in its release: "the company plans to continue its $1 per share annual dividend and is committed to maintaining a strong dividend policy." Frankly, though, the fact that they even had to mention that policy I found worrisome. Still, the stock plummeted four points from the $32.90 level only to recover half that loss already.

Now all of this doesn't mean there aren't good shorts out there. When you consider all of the junk this market brought public in the later winter and early spring, when you drill down to all of the companies that don't have earnings but just have hopes, you know that as they rebound, another chance to sell short will beckon.

The simple fact is, though -- as my friend and writing colleague, Matt Horween, who pointed out the resilience of the stock of General Mills to me, said -- companies with good balance sheets, good dividends and lots of free cash just don't stay down the way they used to. Sure, they don't make for great longs, so to speak. But wow, are they horrible shorts and maybe that's a defining aspect of this stock market as we head into earnings season.

Random musings: If I don't catch you later, have a very happy Independence Day!

Would you like to test drive all of TheStreet's premium products for free? Sign up for our all-access pass for July at absolutely no cost to you and read Action Alerts PLUS picks from me and Stephanie Link, Doug Kass' Daily Diary on Real Money Pro, Stocks Under $10 picks from David Peltier and much more. Learn more here.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long GM.

This article was originally published on Real Money at 6:21 a.m. on July 3.


Now let's look at TheStreet Ratings' take on some of these stocks.

TheStreet Ratings team rates General Mills as a buy with a ratings score of A. TheStreet Ratings Team has this to say about its recommendation:

"We rate General Mills (GIS) a buy. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, notable return on equity, expanding profit margins, good cash flow from operations and increase in net income. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • GENERAL MILLS INC has improved earnings per share by 18.2% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, GENERAL MILLS INC increased its bottom line by earning $2.83 versus $2.79 in the prior year. This year, the market expects an improvement in earnings ($3.03 versus $2.83).
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Food Products industry and the overall market, GENERAL MILLS INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • 38.48% is the gross profit margin for GENERAL MILLS INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 9.44% is above that of the industry average.
  • Net operating cash flow has slightly increased to $816.80 million or 4.67% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -9.83%.
  • The stock price has risen over the past year, but, despite its earnings growth and some other positive factors, it has underperformed the S&P 500 so far. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.


TheStreet Ratings team rates General Motors as a buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate General Motors (GM) a buy. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • GM's revenue growth trails the industry average of 20.9%. Since the same quarter one year prior, revenues slightly increased by 1.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has significantly increased by 141.26% to $1,976.00 million when compared to the same quarter last year. In addition, GENERAL MOTORS CO has also vastly surpassed the industry average cash flow growth rate of 40.62%.
  • The debt-to-equity ratio is somewhat low, currently at 0.89, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.81 is somewhat weak and could be cause for future problems.
  • GENERAL MOTORS CO has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, GENERAL MOTORS CO reported lower earnings of $2.35 versus $2.93 in the prior year. This year, the market expects an improvement in earnings ($3.13 versus $2.35).
  • Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.

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