Cramer’s ‘D’-Lovely Earnings Season Strategy
With apologies to Cole Porter, the best slogan for this earnings season may be, "D-lightful, d-licious, d-lovely."
After taking a hard look at the price action in three stocks that start with the letter 'D' – Cramer identified what may be an important trend in the market broadly - just because a stock disappoints doesn't mean you should write it off.
When Disney reported earnings in November, shares slipped after the company's revenue number came in lower than expected. Specifically, revenue increased 3.2 percent to $10.78 billion from $10.43 billion a year ago, but fell short of the $10.92 billion analysts had expected.
Investors were also spooked by the company's decision to acquire the Star Wars franchise.
"But since the initial sell-off the stock has come back with a vengeance in part because people are getting wise to how smart the buy of the Star Wars franchise was, and in part because Bob Iger, the CEO, has a fascinating habit of addressing whatever weaknesses there are in the core enterprise," said Cramer.
In other words, selling Disney after earnings was the wrong trade.
The price action in this stock post earnings tells a similar story. Shares pulled back in late November after Deere reported a weaker-than-expected quarterly profit as higher manufacturing costs and other expenses cut into earnings and a strong dollar reduced the value of international sales.
"The tremendous farm equipment stock was thought to have run out of gas," said Cramer. However, flash forward a few months and shares were higher in January, not lower. "People seem to have put the negativity well into the rearview mirror and it's been on a tear."
Again, selling Deere after earnings was the wrong trade.
Yet another similar story with Discover.
Investors sent shares of Discover sharply lower in late December after the company's quarterly results fell short of Street expectations. For the period ended Nov. 30, Discover earned $541 million, or $1.07 per share. Analysts surveyed by FactSet expected earnings of $1.12 per share.
"It seemed like everyone was going to abandon ship after that report," said Cramer. But shares have been creeping higher."
Again, selling the news was the wrong trade.
All told, Cramer takes the price action in Disney, Deere and Discover as a sign that the Street is willing to forgive.
"As we go into earnings season we've got to consider this new positive in the investing equation," he said. "That is, just because a stock disappoints doesn't mean you can write it off."
Of course, you may be wondering, does this thesis only apply to stocks that start with the letter D? The answer is absolutely not.
The same is true for Mosaic – that starts with the letter M! "The huge fertilizer company reported a disappointing quarter last week but the stock didn't blink," said Cramer.
Now here's the actionable part.
"Because Tuesday begins earnings season with Alcoa - I have to wonder if the initial reaction, if it is negative, could be a chance to get in, based on this forgiveness principle," Cramer explained.
In other words, if you're inclined to sell Alcoa on weak earnings – you might want to think again.
"Instead remember Disney, Deere, Discover and the other bounce back stories," said Cramer. .
In fact, if Alcoa gets hammered, Cramer thinks you might want to hit the buy button.
"That might not seem like the smart trade ahead of the quarter but a terrific investment after."
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