The next rule: Wall Street is never bullish enough on good stocks and it’s never bearish enough on bad stocks. When Cramer says the Street, he doesn’t mean it in the abstract; he’s talking about the analysts who cover a given sector.
If analysts are never bullish or bearish enough when they’re actually right, that means you can follow their lead by just being a market lemming. The reason why these guys are never as bullish or bearish as they should be is because of how the research divisions are set up at the big investment banks. Analysts don’t just cover individual stocks, they cover entire sectors. That’s where your opening comes in.
If you’re an analyst covering oil, you always need to have some buys, some holds and some sells. Even if oil is in free fall, you’re under a ton of pressure to put a buy on at least one or two companies. It’s just one of the unwritten rules of Wall Street: if you’re an analyst, you can’t say everything is a buy or everything is a sell. It makes life hard for them, but it’s great for investors, Cramer says. Basically, it means even if a sector is absolutely on fire, the Street is going to treat it as a lot less hot than it is.
If you look back on the oil and natural gas bull market of 2003, 2004 and 2005, you’ll see that the analysts were all bullish, but they were never as enthusiastic as they should have been. They would say things like higher oil prices were caused by increased demand and not just tightness of supply. They would recommend oil stocks, but not all of them – and a lot got left behind and went up anyway.
The oil stocks didn’t keep going up just because oil prices went up. They went up because the analysts had to keep their estimates too low and had sell ratings on some stocks that kept blowing past their own estimates. This was the case with natural gas, too. And once these stocks kept beating their earnings – which was pretty much every quarter – the analysts had to come out and follow the good news by raising their estimates and maybe even upgrading some of the stocks, which obviously helped move the sector even higher.
Bottom Line: Whenever you see that analysts are bullish or bearish on a sector, and you agree, you can pretty much assume that they aren’t bullish or bearish enough. Therefore, it’s not too late for you to join the party and try to make some mad money.
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