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Earnings Lessons Amidst a Macro-Driven Market

From: James Cramer
Sent: Wednesday, June 06, 2012 3:52 PM
To: Nicole Urken
Subject: Diageo / Brown Forman

Let’s look at why these rallied so much. I think we need to do another “taste” test of the liquor players.

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Wednesday, June 06, 2012 4:13 PM
To: James Cramer
Subject: RE: Diageo / Brown Forman

Will look into further. For BF.B, while it was a headline miss, there were strong underlying results (organic sales strong esp for Jack Daniels brand family with price increases coming). Case of headline vs underlying results once dig deeper… plus defensive name with growth

From: James Cramer
Sent: Wednesday, June 06, 2012 7:07 PM
To: Nicole Urken
Subject: RE: Diageo / Brown Forman

Might be a good piece just to go over how to understand headlines v. reality cause when you read the headlines you thought it would be down huge—a real good primer for us. Let’s get on it.

In the tug of war of micro versus macro driving the stock market, macro is winning — particularly with the early summer pause to corporate earnings reports. And right now, macro has frequently been tied to rumors as many questions remain on policy action in the euro zone as it relates to the region's sovereign debtcrisis. However, we continue to gather important data from individual companies that help inform us about the pulse of the market — one that forever remains irregular and uneven.

As we have always emphasized on "Mad Money," when it comes to individual names, it is key to be particularly aware of all driving factors for a stock around earnings. In addition to understanding how the underlying business is doing, it is crucial to be aware of 1) expectations (and associated stock action/valuation heading into the print), 2) the key metrics — sometimes backlog or organic growth are more important that earnings per share after all, and 3) pin action from other companies in the same cohort.

On "Mad Money," we dissected the quarter of liquor name Brown-Forman last Friday where the headline did not accurately reflect the solid growth and pricing for the underlying brands — not to mention that the stock is well positioned in the current environment.

Given that we have seen some very strong stock price moves after company earnings, here’s a look back at some additional take-aways from recent reports.

Read on for Earnings Lessons Amidst a Macro-Driven Market

Tempur-Pedic (TPX)

Shares of matress maker Tempur-Pedic fell a cool 49 percent after if gave a guidance warning last Wednesday before the open. Could it be that foam mattresses are good for sleep but not for sex, as a Barron’s article played fun with back in May? Is it no longer “chic” to catch some Zs?

Ultimately, the culprit for Tempur-Pedic is intensifying competition, especially in the specialty mattress market — which puts even better positioned names like Select Comfort at risk as well. Tempur-Pedic also has not appropriately managed expectations and the company has European exposure to boot.

Men's Wearhouse (MW)

After reporting a disappointing quarter last Wednesday after the close, Men's Wearhouse's stock dropped 18 percent. On Thursday, Cramer offered a mea culpa outlining the quarterly miss.

Ultimately, this promotional suit retailer is a name that should have been avoided into earnings, given the dismal jobs number we got the previous Friday. A decline in suit sales along with a decline in the sales at K&G, the company’s off-price brand, reflects some of the macro concerns we reflected by the labor report. Men’s Wearhouse’s shift to a younger customer base with more sportswear (a more risky business) along with competitive pressures introduce additional question marks.

What to do now?

When a stock misses this significantly with no real comments addressing the situation, it gets placed in the penalty box for at least one quarter to show it can turn itself around. Men’s Wearhouse defends that they like the way they look? Well, they didn’t guarantee it. This name is in show-me mode.

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Navistar (NAV)

After reporting last Thursday before the open, Navistar'sstock fell 14 percent. This company has reported multiple disappointing quarters and continued to fall this week after an United States Court of Appeals ruled the company can no longer sell engines that don’t comply with environmental standards.

While many value arguments have been made for the name, we know there remain truck industry growth headwinds and Cummins is a better executor. To have some exposure to the truck cycle without committing a pure play, take a look at Eaton which will also benefit from the integration of its recently announced acquisition of Cooper Industries and sports an attractive dividend yield.

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Lululemon (LULU)

Lululemon has had a high flying stock, but it fell 9 percent after its report last Thursday before the open gave disappointing guidance. The stock has traditionally been very volatile into earnings, particularly given the high expectations associated with the yoga and other athletic apparel junior growth name.

shot from interior of LULU's London showroom.
Photo by Stacey Widlitz
shot from interior of LULU's London showroom.

That said, the company has historically been conservative when it comes to guidance and its domestic growth opportunity remains substantial — along with pricing power and innovation drivers. We know from the quarter of an under-the-radar name, Ulta Salon — which surged 8 percent after its report on Monday — that there is a bull market for well-positioned domestic growth stories. Look no further than Dunkin' Brands, Whole Foods, Dollar General, Buffalo Wild Wings and Chipotle. Of course, this growth group tends to trade as a unit, so it is important to be cautious especially when expectations get high.

With Lululemon, it is prudent to lock in gains after a run into earnings, but this name remains well positioned long-term and is attractive on pull backs.

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Titan Machinery (TITN)

Titan Machinery , which is a play on agricultural and construction machinery, reported what was a decent number last Thursday before the open. You would never know, though, considering the stock fell 22 percent after it reported a very slight miss. Here is a quintessential example of high expectations into a quarter.

When Titan Machinery reported its fourth quarter on April 11, its stock rose a staggering 17 percent — and the name has a history of beating consensus by wide margins.

Lesson: Beware of stocks headed into earnings with a lot of momentum into a quarterly report — they present risk even if trends are strong.

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Scotts Miracle-Gro (SMG)

Scotts Miracle-Gro came out with what was a surprising downward division of 2012 this Tuesday evening, causing the stock to drop over 15 percent pre-market on Wednesday before recovering some its losses.

This reaction is one of the reasons that when companies report misses — as SMG did back in its May quarterly report — it is prudent to put the name in the penalty box until we see more traction of a turn. Wednesday’s downside guidance — which was accompanied by a pleading video on the company’s website by CEO Jim Hagedorn reflected continued signs of weak demand with no catalysts in sight.

Ultimately, the company’s defense of last quarter was misplaced and thus, I believe, not credible. Penalty box.

So what's the bottom line?

As always, when it comes to earnings, the key strategy is to stop, look and listen. Take a couple of lessons from the movers above even as macro continues to dominate the market moves.

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Read on for Cramer's Stocks to Avoid



"Inside the Madness" appears twice a week at madmoney.cnbc.com

Follow Nicole Urken on Twitter @nicoleurken

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