Cramer goes behind Wendy’s 10% correction

Quarter was strongest since 2005: Wendy's CEO

(Click for video linked to a searchable transcript of this Mad Money segment)

What the heck is happening with Wendy's? Results beat expectations yet the stock tanked in a big way with shares tumbling as much as 13% on Thursday.

That doesn't make sense, does it?

Cramer says part of the weakness stemmed from the company's forecast.

Wendy's said it expects adjusted earnings, before taxes, interest, and other items, to fall 10 percent in the fourth quarter.

Nobody likes a big decline in earnings, but Cramer says dig down into the release and you'll find the lowered forecast is due to the company's intention to invest in future growth initiatives.

David Paul Morris | Bloomberg | Getty Images

"They're in the process of refurbishing stores," Cramer said. And the investment may pay-off in spades. In 2011 when Wendy's identified 48 stores for their redesign initiative - sales on average increased 25%," Cramer said.

The investment could generate significant profits over the long-term.

In fact, Cramer sees Wendy's broadly as a long-term turnaround play.

"In 2011, Wendy's brought in a new CEO who embarked on a massive plan to win market share," Cramer explained.

"It involved rolling out hot new products, dramatically changing the balance of company owned versus franchised locations, and fending off the competition with a two-tiered menu system that includes selling higher-quality fast food offerings at higher-prices, while also catering to the cost-conscious with a much cheaper value menu."

The plan has finally begun to gain momentum and therefore expectations on Wall Street were relatively high going into earnings.

"The stock had run up a lot going into this quarter," Cramer said. In the three months leading up to earnings, shares march from $7.87 to over $9 or about 14%.

"I think this is a testament to the power of expectations and what happens when those expectations get too great," Cramer noted.

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Instead, in the case of Wendy's, the Mad Money host suggests focusing on accomplishments, which he says are significant. "Wendy's is now executing at the top of the quick serve game," noted Cramer.

That matters.

"The stock hasn't pulled back too much lately," Cramer said. If you agree that Wendy's has become a leaner and meaner company since 2011, then a 10% sell-off is probably a buying opportunity.

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