Jim Cramer (see Jim Cramer’s Wall St. Watchdog page) has become famous for sputtering uninformed opinions with the manic excitement of a dog in heat. A case in point is a recent claim that he made about the companies Netflix (NFLX) and US Steel (X). He argues that because US Steel is losing money, Netflix is a buy. Let’s start from the point of incoherence: this is an incoherent argument because Netflix and US Steel operate in vastly different sectors of the economy, have very different capital needs, very different capital structures, and very different levels of legacy costs. To conclude that one is a buy on the basis of the other losing money is to assume a relationship between these two stocks that does not exist. Take a look at what Cramer says:
More importantly, Cramer said these metrics mean nothing when it comes to valuing stocks. He said that what matters is earnings. Netflix is estimated to make over $3 a share in earnings this year, while U.S. Steel will lose $2.47 a share. Netflix does trade at a high 50 times earnings, he said, “but how can you put a multiple on losses?”
It may be true that it is a bad idea to invest in a company that is losing money. But you can’t conclude from that that it is a good idea to invest in a company that is earning money. And, to Cramer’s mind, investing in a company that trades at 50 times forward earnings is a good investment.
Note that Cramer’s purview is firstly entertainment and secondly trading. Neither of these skill sets are those of an investor, and his prattling about that which he is ignorant ought to be discounted entirely. Netflix may be a good trading strategy for someone who is talented enough to discern something about it over the short term that others have missed. But under no rational conception of “investment” can it properly be called such.
About the author: David Friedman is the Editor-in-Chief of our sister site Wall St. Watchdog, which aims to bring back “truth, trust and transparency to Wall St.” Please take a moment to visit us, follow our Twitter feed, and join our Facebook fan page.
Disclosure: No holding in either NFLX or X.