June 14th, 2006

Cramer’s Readers Digest (RDA)

What has Cramer been smoking? He recommended Readers Digest (RDA) tonight as a stock that’s hit bottom, a stock that’s turning around, a stock that’s a safe play in this depressing market.

First of all, let’s question his basic operating assumption that “there’s always a bull market somewhere”. I’d rather rephrase that as “there’s always a needle in a haystack somewhere”. But do you want to hope that you find it? Are you willing to bet some real money that you found that needle and not actually a just a short straw.

Jim, sometimes it’s just better to not recommend something than to recommend just any old thing only because you’re an unrepentant stock pusher.

Forget all the mumbo-jimbo about brand recognition, about owning the seniors market, about a new Rachel Ray magazine (who????). A picture’s worth two thousand of Jim’s words:

The stock (and the company, for that matter) has been in a free-fall since the end of 1992, just two years after it’s IPO. It was unable to capitalize on its so-called “brand recognition” throughout the birth and roll-out of the internet age nor has it been able to leverage that brand recognition with any other age group other than the over-60-year-olds.

So what makes Cramer so sure that they now, finally, have found the key to unlocking a more profitable and successful future. Many stocks make what appears to be bottoms ….. because they have no where else to go other than $0. What ever happened to the old Wall Street saying “never catch a falling knife”. That’s what RDA still is …. a falling knife.

Sure it bounced off a single-digit low in 2003 and rose to 17 (yes, a respectable percentage increase). But this weak market is carrying it back down. Where is the lower boundary support level? Is it 13, is it 12, or is it back around 9? And once it finds it, how long will it take to convert it into a true inflection point?

If we were in a favorable market environment, I might buy it when it seems to have found that bottom and made a turn. If it were my money, I would probably go for more certainty, give away those first few points (even though it might be some pretty nice percentage points) and buy it only if and when it breaks through the previous resistance trendline around 18. It’s a lower return but infinitely less risky.

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