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Weird trend with big profit potential

Tuesday, 11 Feb 2014 | 6:00 PM ET
Estimate cuts 'buy' signal: Cramer
Friday, 27 Dec 2013 | 6:00 PM ET
Sometimes the best time to buy stocks is after analysts have cut their earnings estimates. Mad Money host Jim Cramer explains why.

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

Sometimes Jim Cramer spots trends in the markets that are downright weird.

After reviewing some of his best investment decisions, made on behalf of his charitable trust, the "Mad Money" host came to realize that, "Sometimes the best time to buy a stock is right after the analysts cut their earnings estimates."

That's right, when estimates are cut.

At first glance, the thesis may seem misguided if not backwards. After all, lower estimates are a sign that a company's profits may not be as robust as previously expected.

Jon Feingersh | Blend Images | Vetta | Getty Images

However, Cramer believes one of the best paths to prosperity is buying the stocks of solid companies for the long-term. That is, companies, with good balance sheets, strong leadership and winning positions in their respective industries.

If and when these kinds of companies become the object of downgrades, although they may be facing near-term headwinds, Cramer believes weakness will only be temporary.

Over the long-term he believes the strong leadership will tackle the problems and return the company to greatness.

Therefore he's a strategic buyer of the decline triggered by the estimate cut.

And the "Mad Money" host isn't just talking the talk, he's walking the walk.

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"One of the best investments my charitable trust ever made was back in March of 2009, near the big generational bottom, when Caterpillar had been going down for weeks on end as analysts raced to cut their estimates ahead of what looked to be a particularly bad quarter."

However, had you bought CAT at that time, you would have gotten it for about $27. Five years late the stock regularly traded above $80.

Cramer said the same set of circumstances played out again in JPMorgan in 2012 during the so-called London Whale scandal.

"As the market kept trying to get a handle on the magnitude of the pain, estimate cuts went lower. Ultimately, the stock was clubbed down to $31, however, the last round of number cuts failed to take down the stock any lower. From there the stock worked higher over the next twelve months."

Cramer is convinced the phenomenon will play out again. "I know it seems counterintuitive," he admitted, but when the Street gets extremely negative on an otherwise solid company, a shrewd investor may be looking at opportunity.

The preceding insights are discussed in far greater detail in Jim Cramer's book Get Rich Carefully.

Call Cramer: 1-800-743-CNBC
Questions for Cramer? madmoney@cnbc.com
Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

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