META - Inverse Jim Cramer Strategy - Q3 2023 Update

2023-10-25 12:01:11 ET

Summary

• Here is an update on our Inverse Jim Cramer strategy by taking a look at the results of his top stock picks for the quarter ending in September.
• This quarter, we collected and analyzed more than 400 of Cramer's stock picks.
• Cramer discussed stocks like Eli Lilly and Company, DraftKings, and Oracle the most in Q3.

Inverse Cramer Q2 '23 Update

The end of September marks another update on our Inverse Cramer strategy which we have been running since the beginning of 2021. We've been tracking and aggregating Jim's recommendations and stock picks made on CNBC shows like Mad Money and Halftime Report and then using them to create an automated trading strategy based on the stocks he discusses the most. Our first analysis and summary of our work on this project and data can be found at this link while last quarter's update can be found here .

In what is now close to three years, an initial investment of $100 million into this strategy would have now compounded to around $182.5 million. This represents a minimal gain since our last update in early July but the portfolio has fallen about 4% since its all-time high in August, when it reached a value of about $190 million. Similarly to last quarter's update, betting against the TV host would have yielded YTD returns of around 15% and one-year returns of around 22%, just barely outpacing the S&P 500 ( SPY ) over both time frames. Our strategy currently has a CAGR of 24.5%, down from 27% last quarter, and still works by shorting Jim's 10 most-discussed stocks over the previous 30 days. It then hedges them with a long position in the market index. The method implements an equal-weighted portfolio, as well as a weekly rebalancing system in order to achieve the highest possible results.

The current shorts the strategy is holding are shown in order in the photo above. If you remember the holdings from our last update this is almost an entirely updated list of stocks.

Jim's Second-Quarter Picks

In the third quarter this year, Jim made a total of 421 total stock picks. This represents a notable slip from last quarter when he made close to 600 recommendations in the period. He expressed bullish sentiment in his recommendations 278 times and bearish sentiment 143 times. Last quarter the ratio between bullish and bearish recommendations was a bit less at around 1.67x. The average 1-month return during Q3 of Cramer's positive calls was around -1% while the average return of negative calls was around -2.2%. In a rare occurrence, both of these actually outpace the market over this period which has slipped nearly 4% during Q3.

In addition to the stocks discussed more at length below, our Cramer portfolio also held shorts on Amazon.com, Inc. ( AMZN ), Alphabet Inc. ( GOOGL ), DuPont de Nemours, Inc. ( DD ), The Walt Disney Company ( DIS ), and NVIDIA Corporation ( NVDA ).

Eli Lilly and Company ( LLY )

LLY is one of the five largest pharmaceutical firms in the US by market cap with annual revenues also amongst the highest on the globe amongst pharmaceutical companies. The short against the stock was added to the portfolio early on in Q3 on September 22nd and still makes up a large percent of the AUM in our Inverse Cramer strategy. LLY shares slipped initially but have since reversed course and are up about 10% since late September. Overall, 2023 has been extremely kind to LLY. The stock is up more than 60% YTD, far outpacing the S&P 500. Annual revenue looks set to grow more than 17% YoY. Growth in more recent months can likely be attributed to estimates from Goldman Sachs ( GS ) that the market for weight loss drugs could reach $100 billion by 2030. With drugs like tirzepatide, which can be expected to receive FDA approval shortly and is in phase-3 trials, LLY is expected to control a sizable portion of this market. In addition to this, the company will also probably receive FDA approval for its Alzheimer's drug, donanemab, by the end of the year. Concerns about LLY usually revolve around its valuations which are quite lofty. The pharmaceutical giant trades at a P/E of around 85x and a P/FCF of 170x. As for Cramer's thoughts on the stock he mentioned it a total of three times, twice giving it a 'trim' recommendation and once a 'hold.

Pioneer Natural Resources Company ( PXD )

The nearly $60 billion oil and gas giant made headlines just recently when they agreed to be purchased by Exxon Mobil ( XOM ) for $253 per share; a deal that was valued in total at around $64.5 billion and makes XOM the largest shale producer in the US. Cramer discussed PXD twice late in Q3 and several weeks before the acquisition announcement. A short against the stock was first opened on September 8th and in the month after shares fell around 10%. This is pretty much right in line with crude prices which slipped significantly in late September as worries about demand grew. However, post-acquisition news and increased conflict in the Middle East, PXD shares have surged. The stock gapped up more than 10% on the day word of the deal got out and has continued to rise since, about 7% to be precise. It's not too difficult to see why XOM saw this as such an attractive deal. PXD trades at a relatively cheap P/E of 10x and an extremely attractive D/E ratio of 0.6x. Revenue has also exploded in the last several years. Average annual revenue from 2015-2020 was around $5-6 billion without a single year in the double-digit billions. Then, in 2021 revenue was $17.8 billion, in 2022 it was $24.3 billion, and revenue for 2023 will break the $20 billion mark as well.

Oracle Corporation ( ORCL )

While not quite as AI-centric as fellow tech firms like Meta ( META ) or Nvidia ( NVDA ), ORCL has certainly benefited from the surge in AI oriented investing over the past 12 or so months. The third largest software company on the globe has enjoyed a 21% YTD return and has gained more than 50% in the last year. That being said, as economic uncertainty has grown and bond markets have seen some of the worst few months in their history, the stock has slipped about 20% from its yearly highs in early September. Sales growth at the firm is not entirely something to brag about growing at just about 9% over the last three years but much of that is boosted by what analysts are expecting to be about a 17% growth in revenue from 2022 to 2023. While not exactly cheap at a P/E of about 20x, it's actually quite a bit cheaper than many of its SAS peers like Salesforce ( CRM ), P/E of 125x, or even Microsoft ( MSFT ), P/E of 34x. Cramer mentioned the stock a total of 8 times throughout the quarter, each time in a positive light, giving the stock a buy recommendation 7 out of the 8 times he discussed it on his shows. He gave ORCL a buy for the first time in Q3 on August 8th and the stock actually rose about 12% in the following few weeks but has since fallen 18% without any reversal in sentiment from Mr. Cramer. He's actually given the stock a buy recommendation 3 times already in Q4.

DraftKings Inc. ( DKNG )

DraftKings is beginning to perform a bit like the Cramer curse would intend. The stock is certainly no slouch, up more than 160% YTD, but since Cramer started singing its praises in mid-July of this year its upward momentum has basically hit a wall. Since his first mention of DKNG on July 20, it's down only 3% but it's seen some volatility along the way. Following the company's Q2 earnings report on August 4, which actually revealed massive YoY growth in revenues (+88%), shares slipped about 16% over the next couple of weeks. The sports betting and entertainment giant will announce its Q3 earnings in about a week on November 2nd post market and some volatility following the results would not be entirely surprising. With both the NFL and NBA seasons starting in Q3 revenue results might surprise investors; time will tell whether that be for better or for worse. As far as the firm's fundamentals go they are relatively in line with other semi-new growth/tech-oriented firms (DKNG IPO'd in 2019). DKNG valuations might be hard for many investors to digest and free cash flow is quite low at about $9.5 million over the last 12 months but growth is exceptional. Revenue has grown at a CAGR of 107% over the last 3 years and has nearly sextupled since 2019. Current estimates for 2023 revenue are around $3.5 billion, a 91% increase from 2022. Another highlight for DKNG that some of its peers in the gambling industry do not share is its relatively low D/E ratio of 2.54x.

Closing Thoughts

We noted at the end of the last update how increasingly bearish Cramer had grown throughout the second quarter of the year and that changed quite a bit this quarter. While his total recommendations fell, he expressed bullish sentiment on nearly twice as many stocks as he did bearish sentiment, an increase of 16% from last quarter. If you recall from the beginning of the article, his calls have actually outperformed the market in Q3, and if you consider that the S&P 500 is down nearly 4% since we posted our last update on the portfolio, perhaps the famous CNBC host's fortunes are turning around. That being said if market prices erode much further and bulls potentially lose steam it's hard to see Cramer's picks continuing to outpace the market.

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