What’s the Winning Formula This Earnings Season?
Superstorm Sandy caused U.S. markets for stocks, options and other exchange-based derivatives to remain closed for a second-straight session on Tuesday, giving Jim Cramer the chance to take a closer look at the third-quarter earnings reported thus far.
"It's been a phenomenal respite right smack in the middle of earnings season, so I've been able to read twice as many conference calls in a host of industries, admittedly by flashlight and candle, courtesy of Sandy," Cramer said. "And then draw some mid-season conclusions that could give us a real sense of what awaits us in the final months of 2012."
(Read More: Complete Coverage of Sandy.)
For years, more and more U.S.-based companies became tired of the sluggish U.S. economy and aggressively branched into Europe, Cramer said. Many businesses also started to do business in China, as well as various emerging markets, such as parts of Africa, Brazil and Russia, on the belief the new business would spur multiple years of earnings growth.
Upon further review of Q3 earnings, though, Cramer thinks things may have changed.
"This quarter has stood that whole three point paradigm on its head," Cramer noted. "Suddenly, to expand overseas is to have exposure to levels of weakness that could crush the growing profitability that the United States gives you."
Take Ford Motor, for example. The automaker's European business was so bad, it almost wiped out its American gains, Cramer said.
On the other hand, Cramer said furniture maker Leggett & Platt had little to no exposure to Europe or Latin America and benefitted from strong numbers out of the U.S. market.
"It's been two weeks since earnings season started for the banks and the Leggett & Platt scenario's playing out there, too," Cramer noted. "To me, the winners tend to be banks with scale in the mortgage business, notable US Bancorp and Wells Fargo, with the latter literally having so much business that I think it may have dinged their profit margins. Talk about a high quality problem."
Whirlpool also reported strong earnings results because it has great exposure to the U.S., Cramer said, while VF Corp.'s results disappointed because of Europe. Stanley Black & Decker is another company that has struggled because of Europe, Cramer added. A lot of technology companies have recently moved into Europe, too, which Cramer said is why Avnet reported weak results last week.
So while European exposure hasn't helped American companies, it seems exposure to China isn't ideal either, Cramer said. After all, its economy has paused for the time being. He thinks China's economy will eventually kick back into gear, but it will take time. For now, Cramer said "the easy money's from the U.S."
"The companies that failed or chose not to go overseas that are winning," Cramer said. "So don't stray too far from home if you want to invest in a way that will let you get some sleep at night."