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Cramer spots classic ‘tell,’ says energy stock’s decline likely over

(Click for video linked to a searchable transcript of this Mad Money segment)

Price action in this decliner looks classically bullish to Cramer.

"When a company that's been in a rut reports a bad number and does not go down, when it, in fact, goes higher on news that's horrible, that's a fabulous tell," Cramer said.

Pros often consider that kind of price action a sign that a turnaround could be at hand.

The Mad Money host believes that's precisely the circumstance surrounding Valero, a huge oil refiner that slashed its second quarter earnings estimates, earlier in the month but rallied, gaining a little over 1% in the past 5 days.

"The company preannounced a truly heinous number," Cramer said. Valero now expects to post profits of 80 cents to 90 cents per share for the second quarter. Analysts had expected Valero to report earnings of $1.27 per share, according to Thomson Reuters I/B/E/S.

"Yet the stock went higher, which tells me that everybody who was going to sell or short Valero had already done so," Cramer said.

Largely Cramer said Valero's weaker numbers were not company specific but rather due to the declining spread between Brent and WTI.

"Refining is a margin game, it's all about what they pay for their oil versus what they can charge for refined products like gasoline, and when the spread between Brent and West Texas crude was wide, as it was for years, these companies made a bundle," Cramer said.

But it's been growing narrower lately and that dings profits at a company like Valero. However, Cramer believes the recent price action, the advance despite terrible news, is a sign that's all 'baked in the cake.'

Oleksly Maksymenko | Getty Images

"Instead the bulls are now free to focus on all of the ways in which this company can create value internally," Cramer explained. And Cramer sees lots of ways in which value can be created internally.

"Valero seems to be slowly breaking itself up," Cramer mused. "In May the company spun off a majority stake in nearly 2,000 of their gas stations. And on their last quarterly conference call, management talked about potentially spinning off some of its midstream assets."

The Mad Money host believes spin-offs are an effective way to maximize value.

Also Cramer said Valero has been building two big hydrocrackers to make more distillates like diesel and jet fuel. "Although these are expensive pieces of equipment that are going to provide a big boost to the company's cash flow as they get up and running," he explained.

Boosting cash flow is also bullish.

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Therefore, at current levels, Cramer thinks the risk is worth the reward.

"When a company in difficult circumstances preannounces an ugly number and its stock goes higher, that's often considered a classic tell interpreted to mean that everybody who was going to sell has sold," Cramer said.

Combine that kind of constructive price action with the fundamental catalysts outlined above and "I think it might be time to start buying Valero," said Cramer.

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