Wall Street commentator Jim Cramer seems to be wrong about everything these days. However, we seem to be on the same page as him on at least one thing:
Be wary of companies with accounting problems!
In his 2013 book Get Rich Carefully, Jim stated that “when there are accounting issues, you should sell, no matter what.”
How did he come to that conclusion?
Jim learned the hard way by promoting an oil and gas company called Magnum Hunter Resources.
He was enamored by its CEO, Gary Evans, who was invited as a guest in Jim’s show Mad Money in early 2012. At the time, the company was trading at $6 per share.
Jim’s promotion of Magnum Hunter gave it a temporary uptick.
But eventually, disclosures on accounting issues surfaced, and the company’s value dipped significantly.
Towards the end of 2012, Magnum Hunter discovered an accounting error and fired its chief accounting officer.
However, Jim still was bullish and brought Gary Evans back to Mad Money.
Shortly after Gary’s appearance, Magnum Hunter filed late on its form 10-Q and reported ineffective internal controls!
Still, Jim was bullish, and again, Gary Evans was invited back to Mad Money in April 2013.
Jim finally gave up on Magnum Hunter when the company fired its auditors PwC in mid-April 2013.
At this point, its share price was $2.50.
Jim Cramers conclusion?
“Accounting irregularities must trump all emotional attachment, and that must never be violated.”
Where is Magnum Hunter today, you ask? Well, it filed for chapter 11 bankruptcy in 2016 and later rebranded as Blue Ridge Mountain Resources, Inc.
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Through machine learning, Hudson Labs extracts red flags on publicly traded companies.
Accounting red flags are often not widely announced.
Magnum Hunter was disclosing red flags the whole time Jim Cramer was promoting the company on his show!
Fortunately, Hudson Labs highlights these irregularities clearly for the prudent investor.