Q4 2022 Inverse Jim Cramer Strategy

The majority of retail investors thought investing was simple enough after an almost thirteen-year bull market that saw even the most basic index funds and ETFs produce average returns that were north of double digits each year. These investors at least managed to keep up with, if not surpass, those exceptional returns. However, given today’s macroeconomic conditions, when achieving such extraordinary returns appears to be a thing of the past for many, the everyday investor should take full advantage of every edge that remains available to them.

As a very difficult and gruesome year has come to an end, we have revisited our pursuit of generating market alpha by attempting to replicate and invert Jim Cramer’s most recommended stock-picks well into the fourth quarter of 2022. Today’s piece is an update to a series that will examine the most frequently mentioned live on-air companies of prominent TV personalities and their relative performance to the end of the quarter. Our original article on the matter, which contains the basis of the investment thesis behind the Inverse Jim Cramer Strategy, can be accessed through this link.

Jim’s Latest Quarterly Picks

The well-known CNBC anchor had a very busy fourth quarter, having voiced his explicit thoughts 418 times on air throughout the quarter, 232 of which were favorable general outlooks on stocks and 160 of which were much less so. Adding that to the tally, we have gathered, compiled, and archived more than 4,000 of his live on-air stock-picking tips throughout the years.

Aside from the companies that were so frequently mentioned in the quarter that we ended up including them in the portfolio, Cramer also took a particular liking to DICK’S Sporting Goods (DKS), Illinois Tool Works (ITW), Chipotle Mexican Grill (CMG), Ulta Beauty (ULTA), TJX Companies (TJX), SoFi Technologies (SOFI), McDonald’s Corporation (MCD), Johnson & Johnson (JNJ), Deere & Company (DE), Danaher Corporation (DHR), and Boeing (BA).

On the other hand, Jim Cramer was much less enthusiastic about the prospects the likes of Qualcomm (QCOM), Nvidia (NVDA), ZIM Integrated Shipping (ZIM), Viatris (VTRS), Uranium Energy (UEC), Block (SQ), Star Bulk Carriers (SBLK), Roblox (RBLX), Citigroup (C), Carvana (CVNA), and Lucid Group (LCID).

Inverse Cramer Strategy Q4 Update

For years, we have been collecting data points on Cramer’s live on-air stock recommendations. As a product of the gathered data, we designed the “Inverse Cramer” strategy, which actively seeks to invert his investment decision-making process by doing exactly the opposite of what was recommended in the first place. This strategy opens a short position in Jim Cramer’s 10 most-recommended tickers over the previous 30 days and hedges it with a long position in a market index. The method employs an equal-weighted portfolio and a weekly rebalancing system.

A $100 million investment would have compounded to slightly more than $147.20 million as of today if one went against the CNBC host’s stock-picking skills for the past two years. The portfolio reached its highest point in early January of this year when the value hit $151.60 million. Going against Cramer’s stock-picking skills would have yielded an 8.21% return year-to-date in 2022, surpassing the S&P 500 (SPY) by a wide margin. The one-year return of the strategy is 10.29%, and as of this date, the Inverse Jim Cramer strategy has generated a 21.85% historical CAGR.

The biggest short position at the moment in the strategy is Estee Lauder Companies (EL) which takes up 9.12% of the portfolio’s NAV. It is closely followed by the shorts on Constellation Brands (STZ) and Eli Lilly and Co. (LLY), with both of them taking up 8.87% of the NAV, all of which are recent rebalances within the portfolio.

Other shorts in the portfolio include Emerson Electric (EMR), Nucor Corporation (NUE), Pioneer Natural Resources (PXD), Morgan Stanley (MS), Devon Energy (DVN), Coterra Energy (CTRA), and the short on Walt Disney (DIS), all companies that have been highly admired by Jim Cramer during the quarter.

Estée Lauder Companies

Estée Lauder is a relatively unique company in the Reverse Cramer portfolio that is in the business of producing, distributing, and retailing cosmetics, fragrances, and hair care products all across the world. It is a New York-based company that was founded in 1946 and has a long history of creating globally recognized brands. The brands under which the company sells its goods include its main brand, Estée Lauder, but also brands like Aramis, Clinique, Lab Series, Origins, M.A.C., Bobbi Brown, La Mer, Aveda, Darphin, Smashbox, Le Labo, Glamglow, Kilian Paris, and Too Faced, among many others. The global footprint comes at a very hefty price, as EL trades at a significant premium over the market. It is currently selling for an EV/EBITDA of 25.77x, a P/E of 43.32x, and a P/FCF of 43.31x. This is the cornerstone of the problem that Seeking Alpha Authors have with Estée Lauder, having assigned it only a “Hold” rating with an average score of 2.80/5.00, heavenly leaning on the “Sell” side. Wall Street Analysts, on the other hand, are much more enthusiastic about EL’s prospects, assigning it a “Buy” rating with an average score of 4.03/5.00. Estée Lauder has generated a negative year-to-date return of 32.30% and a negative one-year return of 32.32%. Cramer first mentioned the company on the 7th of December, however, it was included in our portfolio on the 16th of December. Shares of EL can currently be purchased for $261.25.

Constellation Brands

Ironically, another New York-based corporation occupies the second-largest position in the Inverse Cramer portfolio. The firm is the largest global producer and distributor of beer, wine, spirits, and other alcoholic drinks. It has well over 100 alcoholic beverages in its brand portfolio. Their portfolio includes iconic brands such as Corona Extra, The Prisoner, Kim Crawford, SVEDKA Vodka, Meiomi, Modelo Especial, and High West Whiskey, among other famous names. STZ has had a very good year in the markets, having outperformed both in terms of their one-year and year-to-date returns. Constellation Brands commands a relative premium to the market as it is currently trading for an EV/EBITDA of 14.68x, a P/E of 19.92x, and a P/FCF of 30.92x. Seeking Alpha Authors have assigned it a “Hold” rating with an average score of 3.33/5.00, while Street Analysts rate the company a “Buy” with an average score of 4.25/5.00. The beverage company was on Cramer’s mind all the way back in November but has since become one of his major convictions. We have included it in our strategy since the 16th of December. Constellation Brands is currently selling at $231.64.

Eli Lilly and Co.

LLY has a market cap of close to $350 billion and is one of the pharmaceutical industry’s top-performing stocks in 2022. Eli Lilly and Co. has had one of the year’s most spectacular runups, outpacing the market by 60%. The stock has gained nearly 36% over the past year. It is estimated that over 49 million people around the globe count on Lilly’s medicines each year. Such a reputation does not come cheap. LLY shares are trading at an extraordinary premium, being sold in the public market for an NTM EV/EBITDA of 35.19x, an NTM P/E of 46.12x, and an NTM P/FCF of 47.93x. The company has been in Cramer’s focus for years, but he recently refocused on it in mid-November. On the 23rd of December, it found its way to the third position in our portfolio. It represents one of the lowest-rated companies among Seeking Alpha Authors and is assigned a “Sell” rating with an average score of 2.33/5.00, with most talking points surrounding the question of extravagant valuation. On the other end, Wall Street Analysts are in fact quite bullish on the stock, having assigned it a “Buy” rating with a 4.12/5.00 rating. This is one of the rare situations when there is a lot of distance to cover between the two groups. Eli Lilly and Co. shares are currently selling for $362.04.

Emerson Electric

Emerson Electric is a global provider of engineering solutions for industrial, commercial, and consumer markets. It does business through its two main operating segments, Automation Solutions, and Commercial & Residential Solutions. The company did well this year and is one of the rare ones that can pride itself on having not only outperformed the market but also generated a positive return for its shareholders, albeit a low-single-digit one. It also carries a slightly less high-end valuation, Emerson Electric is trading for an NTM EV/EBITDA of 18.26x, an NTM P/E of 23.35x, and an NTM P/FCF of 23.19x. The diversified industrial play has been held in very high regard by both Seeking Alpha Authors and Wall Street analysts. SA Authors have been long bullish on the company, assigning it a “Buy” rating with an average score of 3.50/5.00. Wall Street analysts on the other end, are slightly more optimistic and have rated the firm as a “Buy” with an average score of 4.00/5.00. It grabbed Cramer’s attention a couple of weeks ago and is the latest addition to our Inverse Cramer portfolio. EMR currently trades at around $95.14 per share.

Nucor Corporation

Nucor is a Charlotte-based steel manufacturing company. It is the largest steel manufacturer in the United States and one of the largest producers in the world. After a boom in commodity prices, the company had arguably one of its best years in almost a decade. Interestingly enough, it’s one of the rare companies of this type that is not unionized. Nucor has without a doubt the most appealing valuation on Cramer’s top pick list, but it is perhaps inflated due to rising commodity prices. They are currently trading for an NTM EV/EBITDA of 6.49x, an NTM P/E of 9.70x, and an NTM P/FCF of 8.68x. This valuation is accompanied by a relatively small 1.52% dividend yield. NUE, besides the previously discussed LLY, is the second-best performing company on our list today, having generated an 18.31% year-to-date return in 2022. Seeking Alpha Authors have a very high opinion on the future of the company, granting it a “Buy” rating of an average score of 3.80/5.00. Wall Street Analysts remain cautious, assigning it a “Hold” rating with a score of 3.25/5.00. Jim last discussed the company live on the air on December 20th. It joined our portfolio only days later. Shares of Nucor Corporation can be bought for $136.59 as of today.

Closing thoughts and conclusions

Inverting Jim Cramer’s highest conviction recommendations has yielded another quarter of extremely lucrative returns for our Cramer-based investing strategy. It ended the year on a strong note, gaining an additional 3.49% during the last quarter and now has outperformed the market twice in a row for a compounded annual growth rate of 21.85%. Given that his market underperformance has solidified to the point where inverting his stock recommendations in actuality tends to deliver alpha on the market, we will persist with our efforts tracking his on-air performances as we believe it represents an intriguing and potentially profitable investment strategy. When reviewing his stock picks, there is one clear underlying pattern that stands out: the vast majority of them tend to underperform. The true benefit of being capable of collecting and organizing such data is becoming more obvious by the day.