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Don’t Get Surprised By Earnings Surprises

Thursday, 10 Mar 2011 | 7:23 PM ET

With so much commotion in the markets these days, it’s easy for investors to miss important news that could potentially have made them nice profits. Cramer points out, however, that many investors aren’t helping themselves when they’re laser-focused on the numbers alone. Even the highly-paid Wall Street analysts are subject to these number “blinders,” when they focus on spreadsheets instead of the world around them, says Cramer.

But how do these “blindsiding” events happen? For publicly traded companies, with so many onlookers, how can people miss these monumental shifts in a business that result in huge stock swings?

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Cramer points out that this happens frequently. For instance, the maker of Jack Daniels, Brown Forman surprised the market this week, shooting up 8% after a big earnings beat, and Tupperware saw a 15% pop in the wake of a spectacular January. On the other hand there are companies like Finisar, which plunged 36% on Wednesday, and likewise caught the market and analysts by surprise. The way the market looks at companies works most of the time, Cramer says, but it’s not perfect and it pays to understand how you can get a sense for when these big moves are on the horizon.

So how can you hedge yourself against getting blindsided? “Horse sense and skepticism” says Cramer. Sometimes, there are the stocks that surprise the street and looking back on it, it all makes sense. That was the case with Saks, a company that the street expected to deliver 5% same store sales growth in February, but instead posted a 15% increase. How could you have expected this? Sometimes you have to see for yourself, Cramer says, because that’s something a spreadsheet simply can’t capture.

The same goes for Whole Foods and Chipotle , says Cramer, noting that the supermarket analysts pouring over balance sheets just see them as another member in the pack. Compared to other supermarkets and restaurant stocks, these two look very expensive, notes Cramer, but these two names are growing because they’re health plays—and why they’ve both been up over 50% since Cramer recommended them in mid-2010.

So what’s Cramer’s bottom line? Don’t get blindsided by focusing only on spreadsheets. Instead, be willing to focus on subjective evidence for growth. If you’re willing to look for the underlying, subjective trends, you’ll be ahead of the game.

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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