In an effort to reap higher profits, to beat the next guy, money managers pay big sums for nonpublic investing information. The result for some of them has been to have their offices raided by the FBI on the assumption they’re allegedly taking part in insider trading.
But the money managers see it differently. To them, it’s the simple use of “mosaic theory.” This is the idea that they piece together bits of non-material information—meaning it’s too small to move a stock—to form a whole picture that they can then use to generate an investment strategy. And they think this gives them an edge on the competition.
Now, whether or not this constitutes insider information is irrelevant to Cramer. This week he put the whole idea of so-called inside information in the “Sell Block.” Because in the end, investors don’t need this kind of info at all. There’s plenty of public information available to all investors that’s dependable enough to make them money.
Cramer always looks at industry analysis, then reads up on public statements from the companies and their competitors, as well as their suppliers and distributors. And he looks at Securities and Exchange Commission filings, company presentations and, most importantly, the quarterly conference calls.
Look at the semiconductors as an example of how this works. The Semiconductor Industry Association recently announced that 2010 chip sales are expected to be up 32.8 percent thanks to strong global demand, and it predicts another 6 percent jump in 2011.
Next turn to the chip distributors, because they’re the middlemen between the manufacturers and the customers. If the distro shops are doing well, then that means the products are, too. Well, a key company in this space, Avnet , told “Mad Money” in January that “there is growth everywhere” and that business is “very, very strong.” And Avnet CEO Roy Vallee said that Cramer’s favorite secular growth story, the wireless Internet, would continue to drive semiconductor sales in a big way.
Cramer saw this as huge buy sign. Sure enough, the Semiconductor HOLDRs exchange-traded fund SMH is up 27 percent since then, while the Philadelphia Semiconductor Index has climbed almost 25 percent. That’s much better than the 11.8-percent gain in the S&P 500.
There was more publicly available information out there, too. On Nov. 22, distributor Tech Data said this about the semis, “Looking ahead to the fourth quarter, we expect solid demand trends to continue and sales to follow stronger than historical seasonal patterns.” And: “The combination of a technology refresh cycle, exciting and innovative products, and the need for businesses of all sizes to improve productivity continued to drive strong IT demand throughout our regions.”
Similar companies like Arrow Electronics , Ingram Micro and Synnex all said the same thing, talking about all the positive trends in North America. The fact that these distributors were moving so much product, combined with the industry analysis was all the mosaic investors needed, Cramer said.
“As I always say, you can beat the big boys doing your own long-term research,” Cramer said. “And, here’s a new wrinkle, my method has the added advantage of keeping you out of prison!”
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