Jim Cramer's Best Blogs
NEW YORK ( TheStreet) -- Jim Cramer fills his blog on RealMoney every day with his up-to-the-minute reactions to what's happening in the market and his legendary ahead-of-the-crowd ideas. This week he blogged on:
- When and how you should buy Whole Foods; and
- the compromise that needs to take place on the fiscal cliff.
Click here for information on RealMoney, where you can see all the blogs, including Jim Cramer's -- and reader comments -- in real time.
How to Play a Selloff
Posted at 7:23 a.m. EDT on Friday, Nov. 9
You can go back to stocks of companies that have done well that got hammered anyway. You can decide to start picking at stocks you have been waiting for to come down, the preferred way of Action Alerts PLUS. But the one I want to focus on this morning is to look at stocks of companies that are doing terrifically, but they simply got too expensive.
Consider the case of Whole Foods (WFM) . Here's a company that reported 8.3% comparable sales numbers, one of the highest of all the companies I follow. It has a huge growth path as it only has 342 stores with the ability to have as many as 1,000 before it starts cannibalizing itself. It remains a revered institution with a Good Housekeeping seal of approval aspect that amazes while at the same time it has been able to close the price gap between "regular" supermarkets and itself to the lowest level since it came public.
Best of all, it is spewing cash and has the least-stretched balance sheet in the business, one that allowed the board to raise its dividend to 20 cents from 14 and to continue to buy back shares.
There's only one problem: It has a price-to-earnings ratio of 31. In this environment, where people are selling anything that's not nailed down, where Whole Foods represents a huge capital gain and therefore a giant tax hit next year if nothing is done about the fiscal cliff, Whole Foods becomes Public Enemy No. 1 for the taxable investor. There's just too much gain not to take.
So what do you do? You figure out, OK, where would Whole Foods be a gift? At what price would a 15% grower that can grow for years and years be regarded as cheap? What would you pay for the roughly $3.00 that the company can earn next calendar year?
To me, an ideal price might when it has a P/E of 25. You are not going to get a quality company like this on the cheap, not one with this reputation, this management and this balance sheet.
I think anything more than a P/E of 25, or $75, you take a pass. Remember, this is how you use a sale, not how you let it use you. Plus, when it gets to $75, I wouldn't even put on a full position. Much better to buy half and then wait, say, until it has a P/E of 22 to buy more and then a P/E of 20 to buy the rest.