Mad Money Machine

by Paul Douglas Boyer

Jim’s 10 Rules for Diversification

I just found out (SEE! I told you I can’t keep up!) that the Mad Money repeat show that aired on Friday 26 May (which I didn’t watch because it was a repeat) was the all-important show where Jim discussed his 10 rules for proper diversification. These are the ones I’ve been talking about that form the basis of the Cramer Portfolio.

You can read the show notes at

http://www.thestreet.com/_tscs/funds/madmoneywrap/10288433.html

or here (printable version)

http://www.thestreet.com/pf/funds/madmoneywrap/10288433.html

The show originally aired on July 5, 2005 so of course the actual stock picks in there aren’t current.

Tue, June 6 2006 » Announcements

6 Responses

  1. adokmano June 6 2006 @ 11:53 am

    Good show this week.

    A fellow listener & I were trying to verify Jim’s math when it comes to comparing P/E to growth rate. I can not find this in his book, if anyone could help point out where it’s covered?

    Here’s our interpretation, anyone care to comment/correct?

    Use PTEN as an example:

    Price $29
    P/E 11
    Gr 44 (around 44% for 5 year earnings growth)
    Earnings ~$4 (approximately $4/share for FY06)

    Therefore 2 x earnings growth rate x earnings = 2*44*4= $352
    Therefore he’d be willing to pay $352 for the stock, with the expectation it COULD head to $352 within the next 5 years, all things considered.

    Does this match everyone else’s way of thinking?

    Appreciate it very much!!!

    Andy & Joe

  2. Paul Douglas Boyer June 6 2006 @ 1:08 pm

    Let’s look at PTEN from a Rule #1 perspective:

    P/E of 11
    Growth rate 44% (WOW! Can it really grow like that EVERY year?)
    Current EPS is $2.71.

    So if we extrapolate that out ten years (like Phil Town likes to do) we get a future stock price of $1142.84!!!
    Then work backward to a sticker price today by dividing by 4 (that works out to be a 15% stock price growth per year) and we get

    Sticker: $282.49
    Margin of Safety (MOS): $141.25

    A current price for PTEN is $30.79

    All I can say is HOLY COW. Do we really believe 44% growth per year???

    If not, let’s try a humble 18%…
    Sticker $38.57
    MOS $19.28

    Makes a big difference how much you believe the company will grow earnings each and every year.

  3. adokmano June 6 2006 @ 2:19 pm

    I like it, it’s good to have comparitive perspectives.

    But am I looking at Jim’s way of thinking correctly?

  4. Paul Douglas Boyer June 6 2006 @ 2:45 pm

    Yep you got it.
    Like GOOG. Jim said he will pay twice the growth rate. If GOOG grows at 30% then he’d pay a P/E of 60. And with $10 of earnings per share in 2007, that’s $600.

  5. adokmano June 6 2006 @ 6:47 pm

    Good. I guess then I just have to say booYA!

  6. adokmano June 6 2006 @ 6:47 pm

    And, thanks.

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