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Trust, but verify.
Jim Cramer, host of CNBC’s Mad Money, has made a name for himself since 2005 offering up investment advice and stock speculation on TV. Most people recognize him for his wild persona, often shouting “Booya!” and blasting air horns from his zany sounds effects panel. The show, although considered soley entertainment, often makes 2-10 buy or sell recommendations for publicly traded stocks five nights per week.
Even though the show, and its recommendations, are only considered entertainment, the question remains…Are Jim Cramer’s Stock Predictions Any Good? To answer that question, I analyzed over 1,000 of his recommendations from May 10, 2015, to June 09, 2016.
Here is what I found:
The “Cramer Bounce”
First, people don’t view the show as mere entertainment. Cramer’s audience takes action on his advice.
So much action, in fact, that his opinion becomes a self-fulfilling prophecy for a short period following the recommendation. This reaction is called the Cramer Bounce.
The Cramer Bounce is a spike in a stock’s price immediately after Cramer recommends buying it. So, in other words, exactly what it sounds like.
Makes sense, right? Viewers are anxious to take action on their newly acquired financial tip from the “pro,” so they begin trading before the market opens the next day – driving the price up (despite Cramer instructing the people listening to him to wait a few days before buying).
The Cramer bounce has been discussed before. But perhaps this is the first time we are able to put numbers to it (at least numbers for the date ranges I have). So, what exactly happens to the stock price of a company that Jim recommends? Let’s look at the first 10 days after his show airs:
About This Graph
As we can see from the data, cheaper stocks have a sharper increase in price during “the Bounce,” on average. And the entire Bounce tends to plateau between 3 to 6 days, as the price starts to return to pre-Cramer levels by the seventh day.
“But what happens to the stock after that,” you ask? Good question.
Cramer Stock Performance: 90 Days
About This Graph
Data Says: “Stocks Don’t Do All That Well”
- For stocks >$50/share, there was on average an upward trend after the Cramer Bounce until 30 days out, but then plateaued
- For stocks <$50, stocks fell consistently for the next 90 days (short opportunity?). The spread between the top of the Cramer Bounce, and the low of 90 days was 3%
Buying the stock? Shorting the stock?
I’m not a financial advisor, nor do I play one on the internet.
With that said, you may want to consider waiting over a week before buying one of Cramer’s recommended stocks if you are planning on holding that position for a while.
However, shorting the Cramer Bounce may be a more fruitful risk. If you were interested in speculating and decided you wanted to short sell a stock after Jim Cramer recommended it, the data suggests the following type of stock:
- Choose a stock under $35 per share
- Choose a stock with a price less than 70% of its 52-week-high
- Short that stock at the end of the third day after its buy recommendation
About This Graph
Now that I’ve armed you with my analysis, here are some top results from others who have tested Jim Cramer’s stock prediction abilities:
- Retired finance professor, David O. England, gains notoriety after challenging 49 stocks Cramer recommended in April 2015. The test results show that by April 8, 2016, Cramer’s 49 stocks underperformed the S&P 500 by -7.8%.
- User TrackJimCramer on the Motley Fool has done a fantastic job tracking Cramer’s stock picks over a much longer period of time. The data on fool.com reports an accuracy of 44.66% (slightly worse than flipping a coin)
- Another popular website, pundittracker.com, did a write-up after testing a holding time of 3 months for each of Cramer’s stock picks, during years 2011 and 2012.
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