OK, it’s Thursday. So you should know what we’re doing with this series by now. This is Cramer’s “Benefit of the Doubt” list. It’s a club for those retail managers you can trust when a bad quarter or a missed same-store sales report hits.
One downturn is not the end of the world when you’re dealing with solid management in retail – actually, a little bit of faith can sometimes make you mad money. So when the rest of the market is selling and downgrading after poor numbers, Cramer recommends you buy in when the price is down so you can ride the wave back to the top when the CEO redeems himself.
But don’t forget – this is for retail plays only. This doesn’t work for other sectors because in retail performance is much more dependent on strong management. Don’t go applying this strategy to Intel or Exxon Mobile.
Tonight, Cramer’s backing more than just individual managers – he’s focusing on teams. Ralph Lauren might be the visionary behind Ralph Lauren , but it’s the chief operating officer, Roger Farah, who’s in charge of the day-to-day operations. He’s also the one who has taken this overlicensed and diluted brand and turned it back into a powerhouse. RL is the ultimate high-end play, Cramer says, with 12% to 15% growth at 20 times earnings.
So why do Ralph Lauren and Farah deserve the benefit of the doubt? Because even after reporting a strong quarter the stock dropped to $81 from $89 because analysts thought that Farah has “shaded down” estimates on the call. Nobody believed Farah when he said that the guidance wasn’t lowered, no one believed him when he said that the spending needed to build out the web, the new American Living line, and the new international stores wouldn’t hurt earnings.
Well, as far as Cramer’s concerned, they made a big mistake. They just don’t understand the business model, he says. Turns out the stock has recovered since the takedown – more proof that these guys deserved the benefit of the doubt. Believers in RL could have made a healthy profit off these analysts’ pessimism.
The next pair is from Saks. Cramer loves CEO Steve Sadove, but it’s merchandising genius Ronald Frasch, from Bergdorf, that generates that store’s look and keeps the sales going. On top of that, Frasch keeps returning money to shareholders -- $8 in special dividends in the last year.
But, of course, the company never gets the benefit of the doubt. When UBS raised its earnings estimates on Saks a couple of weeks ago, it still didn’t upgrade the stocks – the rating stayed at “sell.” Cramer’s perplexed: Shouldn’t you be forced to upgrade if you’re forced to raise estimates? The guys at UBS don’t understand the benefit of the doubt, Cramer says, and they don’t get that both financially and stylistically the Sadove-Frasch team deserves it.
Bottom Line: The next two stocks that deserve the benefit of the doubt, so long as they keep their tag-team managers in place, are Ralph Lauren and Saks.