May 13th, 2009

AIPC: Another Suspect Recommendation

It’s so important to view critically nearly any recommendation you hear or read before acting on it, especially when they are recommendations based on what is presented as unbiased, fundamental analysis.

I’m a salesperson’s worst nightmare. I usually view fundamental analysis as the “sales pitch”, the sizzle that justifies a stock as an outstanding and solid value. But it definitely isn’t the meat since it usually ignores, if not actually intended to cover-up, that the steak they’re trying to sell is actually tasteless, tough and difficult to swallow. Enough with the analogy, let’s get to the case in point, AIPC (American Italian Pasta Company).

The stock was a Cramer recommendation on March 13 and the topic of my piece that night entitled “What was He Thinking?” (you’ve got to read that post for a complete picture). Cramer had been recommending the stock for some time but I actually first heard his recommendation in that evening’s show. Cramer said on the show (as quoted in the recap on theStreet.com):

“American Italian Pasta is not only the largest producer of dried pasta in America but also the largest private label pasta maker. Cramer said this combination makes it a huge winner…..Pasta is a cheap alternative for cash strapped consumers, said Cramer, and that’s helped propel the stock from $4 to $30 over the last year. Additionally, American Italian Pasta is the sole supplier to Wal-Mart, a company’s who’s making an even bigger push into private label brands later this year….Cramer said there’s lots to love about this stock…The company is benefiting from falling commodity prices, with wheat dropping from $25 a bushel to just $6.75 a bushel currently….Cramer told viewers to wait for a good entry point in this stock, adding “don’t go crazy.”

When I looked up the stock’s chart, I saw a completely different picture:

“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.”

I gave as one of my main reasons for avoiding the stock was the possibility that a turnaround firm brought in to fix problems at the company might soon want to unload shares they acquired – or given – in 2005 at a much lower price.

On March 13, AIPC closed at 32.09; today it was one of the biggest % losers closing down 14.08% at 27.47 after being down as low as 25.50. I’ve been watching the stock since and waiting for today’s break down. Here’s an update of that chart:

The formation I saw evolving has turned into a Head-and-Shoulder top which broke down today. The stock may recover back to the neckline but I suspect it may continue sliding to around 20-21 or even down so far as to attempt to close the gap formed last December in the 16-18 range. Once downward momentum begins it’s hard to stop. (I wish I’d acted on my instincts and a classic contra-Cramer trade and shorted the stock the day after his recommendation … but it’s not too late if you are into shorting stocks).

I’m not suggesting that Cramer was in any way fronting for the turnaround firm’s attempt to unload shares. What I am saying is that technicals and the market don’t lie; momentum is real and usually more important than fundamentals. This stock has bucked the headwinds of a collapsing stock market so that when the market did turn, the “hot” money that found a home in AIPC now had other places to go and the momentum would turn leading to a major decline for the stock.

Wonder if this is the “good entry point” Cramer was looking for. I wonder whether he’d still recommend it today? [I ask with my tongue firmly lodged in my check.]

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