Jim Cramer's Action Alerts PLUS (original) (raw)
I'm issuing a special edition of the Action Alert Roundup based on the new scrutiny that the market is giving to "earnings quality."
Dear Action Alerts PLUS Subscriber, I'm issuing a special edition of the Action Alert Roundup based on the new scrutiny that the market is giving to "earnings quality." All companies have been blindsided by this new focus but some have been doing the right thing for years. This bulletin will just look at stocks through the "earnings quality" and Enron ENRNQ prisms. Aetna (AET) : Arguably has books that are less than "clean" as it has been writing down its businesses massively. I happen to be friendly with the chief financial officer of this company who has a history of no tolerance of shenanigans from his previous job at Chubb (CB) . I am not worried at all about AET from an accounting point of view. Alcoa (AA) : Straightforward, although the company has done a lot of mergers. It has been pretty rigorous about trying to have simple accounting and prides itself on being the first DJIA stock to report because of its simple systems. I give it an A-plus in this department. AmerisourceBergen (ABC) : This company is a product of a merger; therefore, I think you have to be more skeptical. I think that they accounted for the merger fairly, but be aware that many of ABC's gains will come from consolidating the operations of the two competitors. Its growth is therefore not apples to apples. All that said, I think they do a pretty clear job of things. AOL Time Warner (AOL) : Questionable and, frankly, disappointing in this category. Huge writeoffs, lots of hard-to-understand accounting, not a simple story. No wonder it is going down. And its advertising business is in the dumper! Bank of America (BAC) : A tough-minded firm that did take out its subprime lending division in a fair and honest way. However, it did have a big gain from some sort of tax benefit that made me nervous. Decent culture historically since the time that the bank almost went belly-up in the early '80s. These guys have religion. Audited by Fed tough guys, which is good. Best Buy (BBY) : Traditional retail accounting. I have heard periodic gripes about a return policy that people think may not be honest, but I have never heard criticism of the way BBY accounts for revenue or profits. (Circuit City (CC) used to make too much money from guarantee policies, so this industry is not a clean industry, and Crazy Eddie Antar obviously lied about his inventory and was prosecuted for it.) Caterpillar (CAT) : CAT's got a big finance division but that's used to finance the purchase of goods, not as a way to make the numbers. I think CAT is a clean and honest company. ChevronTexaco (CVX) : Both cultures had a good reputation for doing the right thing. The stock is going down because of the potential hostile bid for Conoco COC or Phillips (P) . Cisco (CSCO) : Not good. Lots of potential leasing problems. Lots of potential accounting issues related to takeovers done at much higher prices. I can see this stock being under pressure even as I think that the quarter is excellent. Citigroup (C) : Lots of room to fudge numbers, but that's never been Sandy Weil's style and I don't think he is going to start it now. Plus, you get that Fed Reserve audit, which I like. Clorox (CLX) : Good, clean and simple. Comcast (CMCSK) : Arguably complicated and with a tough merger coming with AT%26;T (T) , but I like it very much. Family owns too big a stake to fool around! Conexant (CNXT) : Simple, but getting more complicated because of the spinoff and breakup. Not worried, though. Constellation Energy (CEG) : Held for sale. Dell (DELL) : Used to have a reputation for derivatives that could upset the apple cart. I think it has totally cleaned up its act. EMC (EMC) : Used to be cleaner. Lots of writedowns now. Can't vouch for it. General Dynamics (GD) : Visible and clear, with lots of information available. I like the way these guys handle their accounting. General Electric (GE) : Tough, tough situation. A finance company, and an unregulated one at that. Will be under extreme pressure here for months, I believe. I think it could go to $30 because of these concerns. Guidant GDT: Solid, clean, clear. Halliburton (HAL) : Held for sale. HCA (HCA) : Had a reputation for doing fraud, but all of those guys are gone and now is pristine. A recovered alcoholic, so to speak ... Puritanical now. IBM (IBM) : Nope, managed numbers for years in ways that are Coca-Cola-like (KO) . I think this stock will have a total lid on it for months because of this. Merck (MRK) : Held for sale. Microsoft (MSFT) : Lots of cash, but lots of investments that are hard to keep track of. That said, it comes down to a smell test, and I like John Connors, the CFO, very much. Conservative guy. Morgan Stanley Dean Witter MWD: Well-scrubbed investment bank, but still a finance company so will be under pressure. I think a lot of it is in the stock. Nokia (NOK:NYSE ADR): No foreign company is as good as an American company about this stuff. That said, I think that this is as close as you are going to get to American accounting. I think these guys are honest, but because it is a foreign company I can't claim that it's squeaky clean. Oracle (ORCL) : Always a problem when you have licensing deals. I think that Oracle will have a cloud over it during this period. Pepsi (PEP) : Clean, clear, transparent. Pfizer (PFE) : Clean, clear transparent. As good as it gets. Philip Morris (MO) : Clean, clear, transparent. Target (TGT) : Traditional, clean retail accounting. Tyco (TYC) : See Herb's columns about Tyco on RealMoney.com. United Technologies (UTX) : Considered to be a pretty straightforward company when it comes to accounting. UnitedHealth Group (UNH) : Clean, clear, transparent, never got caught up in that Oxford Health Plans OHP kind of stuff. Universal Health Realty (UHT) : Fine, but not as clean as I would like because of some defaults by its related entity. Verizon (VZ) : Hard to understand its accounting, but it's heavily regulated by tough guys. Viacom (VIA.B:NYSE): Seems honest enough to me. Both Redstone and Karmazin are known for being tough, honest business people. Wells Fargo (WFC) : Audited by the Fed. Considered to have been aggressive in the early '90s, now more conservative. More transparent than most banks. Should you take action on, say, a General Electric because of what is written here? Can you take pain? If you can, you don't need to do anything. If you can't, by all means, I would sell. Regards, James J. Cramer DISCLOSURE: At the time of publication, Cramer was long Aetna, Alcoa, AmerisourceBergen, AOL Time Warner, Bank of America, Best Buy, Caterpillar, ChevronTexaco, Cisco, Citigroup, Clorox, Comcast, Conexant, Constellation Energy Group, Dell, EMC, Fluor, General Dynamics, General Electric, Guidant, Halliburton, HCA, IBM, Merck, Microsoft, Morgan Stanley Dean Witter, Nokia, Oracle, PepsiCo, Pfizer, Philip Morris, Target, Tyco, United Technologies, UnitedHealth Group, Universal Health Realty, Verizon, Viacom and Wells Fargo. These Action Alerts are intended to provide opinions about and analysis of stocks and markets. They are not intended to provide personalized investment advice. DO NOT EMAIL CRAMER SEEKING PERSONALIZED INVESTMENT ADVICE, WHICH HE CANNOT PROVIDE. Cramer welcomes your editorial comments at jjcletters@thestreet.com. James J. Cramer is Markets Commentator for TheStreet.com and CNBC, and a director and co-founder of TheStreet.com. 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