Wall Street is often, if not always, wrong, he says. If you listen to the analysts and don’t check what’s happening at the company and what the company is saying, you’re going to miss out on way too many opportunities.
Cummins exemplifies this tenet of Cramerica perfectly. It was a stock that nobody believed in – not the Wall Street moneymen, not even Cramer himself. All the research said the company, which primarily makes heavy-duty diesel engines as well as emissions-control systems and power generators, was hopeless. New emissions standards were going to kick in, making 2006 the last year to buy “dirty engines.” This meant, to the analysts, that all the orders Cummins processed were front-loaded and borrowed, and ’07 would be an absolutely terrible year for the company. In addition, truck sales in America have been weak, and the Street assumed that would mean even weaker engine sales for Cummins.
Cramer isn’t disassociating himself from the pack here. In fact, he’s even more to blame than the analysts. At least they came up with their own reasoning for why Cummins was to be avoided – Cramer just listened to them. He didn’t do his homework. Wall Street analysts are supposed to have a lot of credibility, but they were way off here, Cramer says.
Cummins beat the expectations by implementing manufacturing changes in emissions during the back half of ’06 that should make for big improvements starting around now. In addition, the theory that weak American truck sales equals weak numbers for Cummins turned out to be wrong, too. The analysts didn’t take into account the rest of the world – especially Mexico – whose orders saved the company.
So when the company delivered much better than expected guidance for 2007 and said they were expecting more strength from the global trucking market, the analysts did nothing. This is an addendum to the lesson: Wall Street moneymen are stubborn to the point of stupidity, Cramer says. Right now, the stock has five sells, five holds and only one buy.
The Bear Stearns analyst who covers Cummins has had a sell on the stock since it was at $72. It has now doubled, and he’s still saying sell.
But you don’t have to follow the lead of the analysts. When it’s obvious that Wall Street’s been beaten – this time by the Indiana heartland – don’t be too stubborn to change your mind. Cramer changed his.