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Mastercard Inc (MA), Family Dollar Stores, Inc. (FDO): How Jim Cramer Loses Even When He Wins

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As a contributor on the Motley Fool blog network, I get quite an assortment of “colorful” comments. One of my favorites went something like this:

You’re a complete fool! Everybody knows that if Jim Cramer says to buy a stock, you buy it!

Jim CramerThis comment reflects a common investing strategy: choose an analyst and follow their recommendations every time. In so doing, you will win in the stock market. However, I believe that — by not having a buy-and-hold strategy — many famous analysts can lead investors astray. To illustrate this, let’s look at Jim Cramer’s track record.

Cramer at his best

‘s moves are tracked with Motley Fool CAPS. In an effort to be overly fair, I’ve picked his best performing buy recommendations.

Company Start Date/Price End Date/Price Time/Return
Mastercard Inc (NYSE:MA) 5-31-06/$44.71 7-31-08/$244.15 26 mo/446%
Cypress Semiconductor 3-8-06/$3.92 1-22-11/$20.25 58 mo/416%
Salesforce.com 11-21-08/$5.58 12-06-11/$31.25 37 mo/460%
Apple 1-28-09/$92.22 6-13-13/$435.96 53 mo/373%

If you had invested $1,000 in each of these stocks when Cramer had suggested, that original $4,000 would now be worth about $21,000. No matter what ruler you use, that is called absolutely annihilating the market.

But here’s the catch: Cramer lost. Big time.

Company End Price Today’s Price Left On The Table
Mastercard Inc (NYSE:MA) $244.15 $596.12 $7,872
Cypress Semiconductor $20.25 $11.31 ($2,280)
Salesforce.com $31.25 $40.59 $1,674
Apple $435.96 $422.78 ($146)

If you disregarded Cramer’s suggestion to sell, your original investment is now worth $28,000. In his attempt to time the market, Cramer left $7,000 on the table. And remember, these four are the best of the best.

So what?

I’m not trying to say Jim Cramer is a bad stock analyst. In reality, I tune in to him because often he has good insight into companies and the risks they face. But he falls short by having a short-term view of companies, the stock market, and the economy in general.

Take Mastercard Inc (NYSE:MA) for example. Why did he sell? He said,

Mastercard is not as good as Visa. Sell, sell, sell.

Whether or not Visa Inc (NYSE:V) is the better company is irrelevant to whether or not Mastercard Inc (NYSE:MA) is a great company.

MA Revenue TTM data by YCharts

Mastercard Inc (NYSE:MA) is growing revenue, earnings, and free cash flow. On top of that, the company has a strong cash position and zero debt.

Valuation is the only lingering concern. Mastercard Inc (NYSE:MA) is currently priced at 20 times next year’s earnings, as opposed to the industry average of 20 times this year’s earnings. However, the company’s above-average valuation is due to growth potential. Domestic growth opportunities exist, but more exciting are the international opportunities. Foolish blogger Rupert Hargreaves pointed out Mastercard’s deal with the Nigerian government to eventually issue 100 million cards to Nigeria’s citizens.

When you weigh Mastercard Inc (NYSE:MA)’s risks and opportunities, the argument to sell seems very weak. A long-term view of this company would have kept you in when Cramer said to “sell, sell, sell.”

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