A Good Time to Buy Lowe’s?
Never trade off the headline earning numbers, Cramer said Monday, because expectations are everything.
Take Lowe’s for example. Its stock dropped Monday morning after reporting earnings of 34 cents a share, a 2 cent miss, before the opening bell. Its revenues also fell 1.6 percent year-over-ear, and it lowered guidance. But it was a mistake to sell into the weakness, Cramer said, because this was a great buying opportunity.
You could have bought into that panic, Cramer said, and you would have made money as it rebounded.
The retailer’s news should have come as no surprise, Cramer pointed out. Lowe’s was downgraded last week by Buckingham Research, the bad weather factored into store sales and it was facing tough comparisons versus last year. Plus, the housing market has been terrible for ages and higher oil prices were an issue.
In fact, when you dig a little deeper, Lowe’s actually posted slightly better than expected results. Its gross margins expanded by 20 basis points and its operating expensive ration fell by 48 basis points. It also kept inventories in check, and bought back more stock than it said it would. These are all things that are in the company’s control, Cramer said, and that means Lowe’s is doing better.
“Now that management has shown that they can deliver,” the “Mad Money” host said, “just imagine how well Lowe’s will do when demand returns.”
Lowe’s is far from perfect, and won’t be until demand recovers. But Cramer said the company apparently feels good enough, based on what it sees in May trends so far, to forecast two percent same-store sales growth. Lowe’s did lower its full year earnings forecast due to higher gas and inflation costs, but Cramer believes oil will keep falling. And Cramer said that leads him to believe the company’s guidance will turn out to be very conservative.
Cramer said Lowe’s may not be better than Home Depot , who reports Tuesday before the bell. However, he pointed out that HD is in the third year of its turnaround while the comeback for Lowe’s has only just begun.
“Lowe’s is making progress, that’s what matters,” Cramer said. “They’re doing what they need to do in order to build a better company.”
Another retailer saw the opposite scenario happen Monday. J.C. Penny reported it earned 28 cents a share, up from 25 cents. It took out its 52 week high before reversing, giving back all its gains and then some. Cramer said the expectations for J.C. Penny were out of control high, and once people realized the quarter was a low quality beat and that inventories grew faster than sales, they dumped out of the stock.
Cramer said the lesson here is that expectations matter. Once investors Lowe’s quarter was what people were anticipating, the stock rebounded. Expectations remain low even as the comparisons are getting easier. Stores will also see an increase in sales due to the rehabilitation after the recent storms. “That, my friends, is exactly how bottoms get formed,” Cramer said.
*When this story was published, Cramer’s charitable trust owned Lowe’s.
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