March 14th, 2009

AIPC? What Was He Thinking?

You think he’d learn a lesson but it seems that he just can’t change. Everyone seems learns from their mistakes, from their pain but in Cramer’s case, he just doesn’t ever learn. I don’t want to turn this into a Cramer bash-piece but it’s just too easy. But more importantly, people have to learn not to take things he says at face value. More importantly, you’ll probably make more money by turning his recommendations into a “contra-Cramer”. In other words, do the opposite.

Take tonight’s spotlight recommendation AIPC (American Italian Pasta Co.). He recommended it because (and I’m paraphrasing): 1) they’re the only company selling pasta to Walmart, 2) Walmart is growing in groceries and staples, 3) the largest cost component for AIPC is wheat and wheat prices have dropped hugely and those lower costs are going to flow through to their financials over the next six months, etc., etc.

Now Cramer says he’s not a “technical analyst” (although as a result of increased demand and market pressure he’s been forced to begin talking about it … even though he says he doesn’t understand it). However, I am and after his presentation I ran to take a look at the chart and was shocked:

Anyone who knows anything about can see this is the most bizarre, no let me say stupid, recommendation anyone could or would make. I’ll tell you why:

  1. While the market was collapsing, AIPC was appreciating by leaps and bounds (itself a red flag). Furthermore, among nearly 5500 stocks, AIPC increased 621% in exactly one year (March 13, 2008 to March 13, 2009). Not bad, you say? Can you name any other stocks with comparable gains? The answer is that only one other did; AIPC had the second largest gain among the 5500.

    Some might think this a good thing but I call it a bubble. The increase might have been due to anticipation of increased sales and higher earnings but there’s nothing to indicate that it will continue.

  2. It could be an attempt to manipulate the stock to a significantly higher price. It might be to position the stock for a future buyout offer (at these higher prices). Here’s an interested piece of information:

    “Corporate turnaround firm Alvarez & Marsal LLC has exercised a warrant and received 387,482 shares of American Italian Pasta Co.’s common stock, or 1.8 percent of AIPC’s outstanding common stock as of March 4….AIPC issued the shares to Alvarez & Marsal on March 4 with an exercise price of $5.67 a share, for a total of almost $2.2 million…..AIPC hired Alvarez & Marsal in late 2005 to help the pasta-maker restructure…..In the past year, AIPC has settled lingering problems stemming from a scheme by former executives to make the company’s financials look good even as sales fell. The scheme had fallen apart in August 2005, drawing lawsuits, pummeling the stock price and requiring the company to refile financial statements.”

    I doubt that Alvarez & Marsal are going to hold on to their stock long but I wouldn’t want anyone to be suckered into taking it off their hands at these manipulated high prices. What I’m most concerned about is Cramer making the irresponsible move of today promoting this latter-day CROX, KKD or other mania stock.

  3. Was AIPC ever a good buy? Clearly when it broke out through the neckline of the double-bottom it took two years to form. While everyone was liquidating and shorting their financial stocks, some money was flowing into the only stock that seemed to be going up, AIPC. But it couldn’t have been much since daily trading volume on this small capitalization stock was relatively minor (but a high percentage of outstanding shares).
  4. How high might AIPC go? The conventional measure is that the neckline is 50% of the move … the percentage move above the neckline will likely approximately equal the percentage below. The neckline was 150% above the low of 4.26 on March 13, 2008. AIPC has appreciated 142% above the neckline to today’s close.

    There’s a high probability that AIPC will soon start forming some sort of a pattern, be it reversal (top) or continuation (consolidation). But the odds are this is about the last place you’d want to buy the stock. It’s criminal that someone with Cramer’s following would give a sales pitch to buy the stock at this juncture.

There might be buyout offer at a slight premium over today’s price but the risk/reward on this happening is not good. It might be at 35 or a 10% premium over today’s close and Cramer can crow about the 10% he made for viewers who followed his recommendations; if it happens, it might be next week or it might be next year. I just wouldn’t want to take that amount of risk for so small a reward. As a matter of fact, if you’re a real gambler, a contra-Cramer short might have the better risk/reward relationship.

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