Cramer’s ‘harmless’

A study by Paul J. Bolster and Emery A. Trahan, professors of finance at the Northeastern University College of Business Administration in Boston, showed that the host of CNBC’s “Mad Money” makes some valid stock picks.

They built a portfolio of Mr. Cramer’s 1,344 “buy” and 534 “sell” recommendations between July 28, 2005, and Dec. 31, 2007. Mr. Bolster and Mr. Trahan invested one dollar in each of the buys, subsequently investing an additional dollar for “buy” recommendations and selling when told to do so.

On average, “buy” stocks earned an abnormal return of 1.94% the day after Mr. Cramer made his recommendation. Abnormal returns are the difference between a stock’s performance compared with the average market performance in a given period and are sometimes triggered by events specific to the stock.

Going back 30 days before the recommendation, Mr. Cramer’s “buy” stocks yielded an average 3.55% return when adjusted for overall market activity.

However, after he recommended a stock, abnormal returns died out, declining by 2.03% between two and 30 days later, on average.

Meanwhile, abnormal returns for “sell” stocks fell by 0.71% the day after Mr. Cramer advised unloading a stock. In the 30 days leading up to the recommendation, average abnormal returns on “sells” were down by 2%.

But the stocks’ decline continued. Abnormal returns, on average, when adjusted for the general market’s behavior, kept sliding by 2.57% between two and 30 days later.

During the course of the study, Mr. Cramer’s portfolio had a cumulative return of 31.75%, compared with 18.72% for the Standard and Poor’s 500 stock index.

The findings hardly make Mr. Cramer a stock guru, the professors said.

“Fundamentally, Jim Cramer is an entertainer,” Mr. Bolster said. “But the facts suggest that Mr. Cramer’s advice has some value or, in the most conservative analysis, does no harm to his followers relative to the overall economy and market.”