Don't Listen to Jim Cramer When It Comes to This Stock

Amiable stock market guru Jim Cramer seems to change his mind faster than I can keep up with the news flow. Just the other day I was about to quote him in an article about embattled LINN Energy (NASDAQ: LINE  ) only to find out that he'd already changed his mind on the matter. While I understand his logic, that doesn't mean I agree with it.

Has the sun finally set on LINN Energy? (Source: LINN Energy.)

The quick one-eighty on the company came after LINN's voluntary disclosure that the SEC is investigating its accounting procedures. Those procedures have been in the spotlight all year, after short-sellers called them aggressive and overstated. What surprises me is that Cramer is throwing in the towel now when it's really only logical that the SEC should look into the situation, given how aggressive these short-sellers have been in attacking the company.

In changing his mind, Cramer said:

I had liked the company, but they're under the microscope for accounting irregularities. ... And whenever a company is scrutinized for issues such as these, I sell. Even though the stock is cheap and I otherwise still like it, I practice discipline and sell.

While I can understand having a discipline like that, you're talking about a company that's being aggressively attacked by short-sellers in a way that just seems a bit over the top. 

Not only that, but this isn't a company that's going to zero because the SEC discovers it's a mirage. The company has real assets to back its business. LINN has amassed more than 3 trillion cubic feet equivalent of proved developed reserves, another 2 billion cubic feet equivalent of proved undeveloped reserves, and its hedge book, a gas plant, and other facilities to boot. That's $10 billion in real tangible value, and it doesn't count the 14 trillion cubic feet of unproved drilling inventory, estimated to be worth between $6.5 billion and $11.2 billion. That equates to a net asset value that's conservatively worth $37.34 per unit and potentially worth up to $65 per unit.

I'm not saying that SEC investigations are something to ignore. However, high-profile short-sellers have a way of dropping a stock down by bringing in the SEC. Take the case of Green Mountain Coffee Roasters (NASDAQ: GMCR  ) . Famed short seller David Einhorn put together a 110-slide PowerPoint presentation on the company's accounting issues. That would seem to be what prompted an SEC investigation, which caused its stock to really take a dive. Despite the attacks and that additional scrutiny, over the past two years the company has continued to sell coffee. All the while its stock has steadily recovered.

Another even more recent example is the high-profile short-sale argument against Herbalife (NYSE: HLF  )  This case also drew in the SEC as another famed short-seller had called the company "the best-managed pyramid scheme in the history of the world." Because many investors have rules to sell when the SEC is involved, it creates a lot of selling pressure as investors bail, which can make a lot of money for a short-seller.

None of this is to say that these short-sellers don't have any valid arguments, but there does appear to be some gamesmanship going on. Knowing full well that at some point the SEC has to look into these accusations, it's bound to drop the stock price when investors run for the hills once an inquiry is disclosed. Investors in both LINN Energy and its affiliate LinnCo (NASDAQ: LNCO  ) are unfortunately learning that lesson this week.

Smelling blood in the water, these same short-sellers can continue to pick off similar targets. That's why I'd go out on a limb here and say that it wouldn't surprise to see the SEC launch an inquiry on Breitburn Energy Partners (NASDAQ: BBEP  ) . It seemed that as soon as news hit that the SEC was looking into LINN, the same short-sellers that had targeted it then dubbed Breitburn as "LINN Energy Junior." Here again the accusations are scathing, as the company's distribution is being called "largely a mirage," which makes its units worth single digits. This has knocked the stock down over the past week, and the volatility isn't likely to abate anytime soon.

That's why I really don't understand Cramer's call on LINN. He knows the Street's "game" better than anyone else. He should know that these pubic accusations are going to catch the eye of the SEC. That's why I don't agree with his advice to simply sell because of some rule. There is real tangible value in LINN Energy, and while it's quite possible that the SEC might find something it doesn't like, it won't find a mirage.

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Read/Post Comments (29) | Recommend This Article (33)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 07, 2013, at 10:18 AM, zorro6204 wrote:

    Kind of stating the obvious, I think you could have replaced "this" with "any" in the title.

    I don't think there's going to be an SEC inquiry into BBEP, there's nothing going on besides a financial press thing. I believe it was the structure of the Berry deal with Linco and all that which drew the scrutiny, to whatever extent an "informal non-public inquiry" represents scrutiny.

  • Report this Comment On July 07, 2013, at 10:20 AM, MFMotleyStool wrote:

    I'm no Cramer fan at all and I don't know the details of LINN's accounting regularities but I pretty much agree with him here. Step carefully with any company being investigated. One day the stock will most likely shoot in one direction or the other based on the SEC investigation. Much money could be made or lost quickly so you can only do your due diligence and take it from there. There are 10,000 other stocks out there aren't there? Just saying.

  • Report this Comment On July 07, 2013, at 10:54 AM, mr091468 wrote:

    At the risk of repeating myself, LINN is exactly the reason not to invest in single issues. One or two articles (in this case at least three) and it's all but over. We're in KMR (for tax purposes in an otherwise taxable account) and CEF'S TYG and TPZ. Much safer bets IMO.

  • Report this Comment On July 07, 2013, at 11:09 AM, werawc wrote:

    A couple of years ago there were highly negative articles on Stonmor (STON) also, but luckily the shorts gave up and the SEC never publicly inquired. The shares (units) tanked for a while but have recovered, and guess what? STON has kept paying it's quarterly distributions, even raised them.

    If BBEP's distributions were "largely mirages", the checks would bounce. So far, take another guess, the checks are good!

    BBEP's hedge book has only very small put positions in only 2 coming years, they hedge with mostly collars and swaps. Therefore they are no LINE junior. I have met with all senior BBEP management and many board members over the last few years at their annual meetings, and at analyst and investor conferences. In my humble opinion, we have nothing to worry about at BBEP. I will continue to be an opportunistic acquirer of BBEP units.

  • Report this Comment On July 07, 2013, at 12:00 PM, amesthefirst wrote:

    Agree with first poster. Never listen to that twerp, and his eviler twin adam f. Anyone who follows that jerk deserves to get hosed.

  • Report this Comment On July 07, 2013, at 12:02 PM, expoiltthespread wrote:

    I don't follow Mr. Cramer when it comes to any stock...at the end of the day, he is just an entertainer.

  • Report this Comment On July 07, 2013, at 12:25 PM, MotleyFoolStinks wrote:

    I listen to cramer as much as I listen to motley fool.

  • Report this Comment On July 07, 2013, at 12:48 PM, plange01 wrote:

    cramer really should not be on tv

  • Report this Comment On July 07, 2013, at 12:51 PM, jbrt wrote:

    His ( Cramer's ) opinion is only one more to consider if one wants to . I gave up on these " Babbler's " a long time ago being they weren't very accurate in 08' and 09' .

  • Report this Comment On July 07, 2013, at 12:52 PM, dsandman999 wrote:

    Actually Cramer has always said (going back at least to the 2006 range when I first started listening to him) that he will sell a company on the least hint of accounting irregularities. In this case, he may be pulling the trigger a bit early since it is an SEC inquiry and not an investigation, but it is consistant with what he has preached before. You will often loose money when you follow Cramer's advice. He has been monumentally wrong, especially with his themes, ie wind, solar, natural gas, in the past. I still have watch lists from those days including his European theme that included radio, tv and alcohol distribution and many of them have a lot of stocks no longer even around, some are .PK (Pinsheets).

    However, you can also pick up some great buys, often from those where he gets to interview a CEO or such. Linn erergy was at a 15% dividend back when the CEO came on the show (years ago) and he told Cramer that he could cover the dividend - and he did for the next 4+ years and I got at least a triple out of the stock and almost another 100% in the dividend (which also went up nicely).

    The SEC would have no basis to prevent the BRY deal from closing. They might come up with rules about disclosing DCF that might or might not change the distribution, but that is unlikely. They are more likely to add to the disclosure requirements, but LINE has been very transparent so this is unlikely to be a problem for them.

    Sadly, the SEC might just be documenting the case for future comparison purposes since there are aspects of the deal that would be desiable for others in that industry.

    There has been nothing discussed worth between 30 and 50% of the stocks value.

  • Report this Comment On July 07, 2013, at 1:49 PM, EVplusEV wrote:

    Cramer does not preach a "buy and hold" strategy. Your assertion that he "changes his mind faster than I can keep up with the news flow," just demonstrates that you don't understand his fundamental approach; which is to buy, monitor the story of the company, set an exit price, and get out at the price target - monitoring the company story means you have to be flexible and willing to admit you made a mistake if the company story changes. In this case, I will bet he was recommending before the accounting irregularities - the story has changed, now he's not recommending. He's simply following the strategy that has worked for him and made him a lot of money.

  • Report this Comment On July 07, 2013, at 2:41 PM, amesthefirst wrote:

    His strategy is well documented all over youtube. He should not be on TV is right. But he knows there are new suckers born everyday. People get lazy doing their own DD, so they rely on this hoser to tell them what to do. Can't stand the jerk.

  • Report this Comment On July 07, 2013, at 3:18 PM, pancratski wrote:

    Cramer is a little late. Why didn't he sell when the Barrons article came out. Why sell now? The SEC is only gathering data.

  • Report this Comment On July 07, 2013, at 5:10 PM, Medicalrecordman wrote:

    I don't know why people think Cramer's out of the stock, as he posted in his action alert (must be a subscriber) that he only sold about half at $29.

    He knows this will rebound nicely, but he has to protect his reputation as well.

  • Report this Comment On July 07, 2013, at 5:31 PM, mmctim wrote:

    i was already short LINE when cramer sent a sell half position- double short till not available btc friday 10:00 am 20.72 went long 2 24.50 gr8 day .. many times i short cramer calls 1-2 days then reverse good dollars - i use action alerts for this

  • Report this Comment On July 07, 2013, at 8:02 PM, grahamsway wrote:

    I've been investing in oil & gas for about 30 years and of course I looked at Linn. I didn't look long though as it seems they do a lot more financial engineering than production engineering.

    The tricky LinnCo transaction was clearly a red flag. I didn't bother studying it enough to assert it was really dubious but anybody with money in Linn should be aware there might be more than just operating risks involved.

  • Report this Comment On July 07, 2013, at 11:57 PM, julianiNY wrote:

    I already short bbep and line. you hold you loose sooner......

  • Report this Comment On July 08, 2013, at 1:06 AM, ImbyArt wrote:

    Oversold. You left and lost; no trust for the greedy. Will enjoy a very nice distribution this week. Thank you shorters!

  • Report this Comment On July 08, 2013, at 1:13 AM, JesseJamesFinn wrote:

    Traders who subscribe to Briefing.com have known this about Crammster since he broke away with Kudlow.

    The obvious message Crammster is sending all his investors is it is ok to be a Waffle! Jon Stewart destroyed Jim Crammer as he lied on the Daily Show about his calls on Bear Sterns.

    Fools need to realize Jim Crammer is not a man who is willing to take responsibility for his stock picks. "The Crammer Effect" known by subscribers of Briefing.com were taught to Short his picks and Buy his Shorts. Head back to 2001-2005 with Jim Crammster moving stocks After Hours while Market Makers bullied those picks up so Professionals could take the opposite of Jim's Quick Picks that were often "Pump and Dumps".

    Has anyone done any long-term research on Jim Crammer's own picks he does himself? When was the last time Jim Crammer actual picked a stock without using his army of interns, Wall Street Analysts or the CEO of his Fab Five?

    Jim is no Gardner Brother, they do their own due-diligence themselves instead of relying on their interns to tell them how to think. I still do not trust Jim after all these years, what about the "Smart Money" debacle Cramer walked away from unscathed? Too bad it did not silence his wrong picks for life, Mad Money is the CNN of fake news, look to the Fool, Dow Jones and WSJ for ideas, not Variety Show comic hosts like Cramer!

  • Report this Comment On July 08, 2013, at 1:29 AM, JesseJamesFinn wrote:

    I would like to add another point to my angry post on Jim Cramer and all the Shorts who have learned to drag companies like GMCR, HLF and no doubt BBEF will be the next victim of our friends with Short Attacks killing our stock off and hitting those "Stop Loss" orders.

    LINE Energy if this company continues it's distribution rate will end up having paid out

    $14.85 per since 2008. Our CEO owns 660,000 shares according to SEC documents and he has not sold any shares of LINE, when Eddy Lampart of Sears Holdings figured his OSH Hardware was going BK, this guy sold all of his shares, less 250,000.

    Instead we have top management buying shares at $25-$35 per share, as one Short told me, "they are buying more shares to create the illusion they are not selling shares!" How do I reason with nonsense like that?

    $2.52 2008

    $2.52 2009

    $2.55 2010

    $2.7 2011

    $2.87 2012

    $1.69 paid out in 2013 to date.

    $14.85

  • Report this Comment On July 08, 2013, at 4:37 AM, awallejr wrote:

    Matt I have been liking your articles regarding BBEP. Listen to me or not, but if you have you made money since the crash. BBEP is a COMPANY. It has assets, it grows those assets through acquisitions and it pays a decent distribution.

    Cramer is a churner. End of story. One month he is for a stock, next month he is not. You WILL lose money following such a person in the long run. Miss his sell show and you got screwed.

    Anyone who thinks he's got your back is delusional. Jon Stewart called him out for what he is.

  • Report this Comment On July 08, 2013, at 2:23 PM, pvellozo wrote:

    People like to criticize Jim Cramer. It is practically a cottage industry. He clearly discloses that he does not believe in buy and hold. Instead he recommends buy and homework. He does not like to hold stocks with ongoing SEC investigations. So I have no problem with him recommending the stock right up till a SEC investigation and then changing his mind.

  • Report this Comment On July 08, 2013, at 7:24 PM, awallejr wrote:

    Except there have been whispers about LINE's book keeping for years. If he had really done his homework he should have been aware of the potential issues.

    And as for buy and hold, well next time you make a double call Cramer. He will tell you to sell half and keep the rest forever (yes he has said that many times on his show).

    Oh and let's not forget his telling people to buy deep in the money calls on AAPL when it was over 650. Had you bought the common at least you still have an ownership interest. Listened to him on those calls and you got wiped out.

    Unless you are a savvy investor never ever listen to him on buying deep in the money calls on anything.

  • Report this Comment On July 12, 2013, at 12:10 PM, Mathman6577 wrote:

    Good idea about not listening to him. While he may be right some of the time overall he does not adhere to the key Motley Fool principles like "buy and hold for the long term".

  • Report this Comment On July 12, 2013, at 6:17 PM, LAVol wrote:

    I really like Cramer. He's made me a LOT of money with some of his stock picks. And, I appreciate his "discipline". He was a hedge fund manager. He had to be disciplined, and he still practices that discipline. Although I agree with DeLallo, and am long LINE and will hold, and add to the position if it drops into the low 20's again, I do admire Cramer for sticking to his discipline even though he believes in the company. Cramer is a bit more short-sighted in his investing than us Fools.

    I do think Fools dis Cramer too much. You have to realize that Cramer has a nightly show to do, and he has to talk about something. So, what you, as an investor, need to do, is sift through all the noise and identify the best of his recs. I probably average buying less than one stock each month recommended by Cramer, and he's made me a lot of money on those buys. (F, KEY, BMRN, CRZO, KMP, LINE, GPOR, MPW, and others I've already sold).

  • Report this Comment On July 12, 2013, at 11:30 PM, awallejr wrote:

    Comment 13 and beyond:

    http://caps.fool.com/Blogs/cramer-bashing-the-one-thing/4368...

    http://caps.fool.com/Blogs/ignore-cramer-regarding-this/7894...

    Since I am basically anonymous I have nothing to sell. I post to warn or help others for the love of the game.

  • Report this Comment On July 17, 2013, at 2:55 AM, Saintramus wrote:

    I'm looking to start a position in LINE as soon as it comes down a wee little bit. I noticed it as a high yielding play early this year, then as it trashed one day a month or so ago and then as The Stock to buy in July, according to...somebody. ;-) I'm a bit befuddled why you would bring up Herbalife in a LINE article. IIRC, they are a Ponzi scheme, or as good as one, according to Warren Buffet.

  • Report this Comment On July 17, 2013, at 3:14 AM, somethingnew wrote:

    I don't listen to Cramer either but I agree, he was a successful hedge fund manager. I have a Fortune magazine from 1989 featuring him along with Eddie Lambert, Seth Klarman and other promising money managers of the day as being possible future "Warren Buffett" clones. He may not have made it but he's no dimwit either. Interestingly, he was the only admitted day trader out of the 12 featured in that article with the editor stating that it took stringent requirements to even be considered for the article profile.

  • Report this Comment On August 21, 2013, at 7:29 AM, TMFPennyWise wrote:

    I agree with LAVol, I wish TMF would end all the Cramer bashing. Most posters who rant about him don't watch regularly to understand his investment modus operandi and/or seem to make their case siting one or two bad stock calls or calls taken out of context.

    I watch Cramer almost every night and have learned a lot from him and made some good money. If you follow his line of thinking--that good investing isn't 'buy and hold' but rather 'buy and homework' , it's not that far off from TMF basic mantra. Cramer gives a lot of 'color' to many of the same stocks that are covered here, arranges invaluable interviews with many CEO's, and explains a good bit of the macro economic story impacting the market.

    Of course, not every one of his recs is a home run, but his stock guidance and his 'investing education' episodes are generally pretty good.

    Any Fool knows you have to do your own due diligence, and Cramer's info shared on his show is one more arrow in your DD quiver. So I wish TMF analysts and bloggers would do their own due diligence on Cramer and lighten up on him. And then they wouldn't sound so foolish (with a small 'f').

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