As corporate earnings season kicks into full gear, "Mad Money" host Jim Cramer had message for his viewers: earnings is all about expectations. To illustrate his point, he turned to two cautionary tales.
First, General Electric. The conglomerate recently reported lackluster performance, with flat earnings per share and revenues down slightly, and yet its stock rallied.
(Read more: The earnings excuseyou'll hear everywhere)
"The stock trades on expectations, not earnings," Cramer said. "It trades on orders, not sales, and you had great news on both of those fronts," he added, noting that orders climbed by 19 percent and a 120 basis-point margin expansion. It was expected that the company would share bad news about the GE Capital business, but it's actually shrinking that division.
Stanley Black & Decker, on the other hand, let its expectations rise ahead of its quarterly report.
"Stanley Black & Decker looked fantastic until you realized that the gain had to do with a tax change," Cramer said. "SWK's quarter turned out to be a bungling of immense proportions because the company had failed to telegraph how poorly it was doing."
As it turned out, Black & Decker said it had not done enough to integrate its newly acquired security division, Niscayah, whose earnings and management team were weaker than thought, Cramer said. In turn, the stock fell sharply.
When this story was published, General Electric owned a minority stake in NBCUniversal, which is the parent company of CNBC.
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