Mad Money

Cramer: What's really behind explosive earnings

Cramer: All about expectations

If there is one thing that Jim Cramer has learned over the course of his long career on Wall Street, it is what really drives the direction of a stock.

"Once I learned more about what drives stocks, I realized that great expectations, or poor expectations for that matter, often determine where a stock or even an entire market can go," the "Mad Money" host said.

A few textbook examples of low expectations working in a stock's favor on Wednesday were Panera Bread and Buffalo Wild Wings. Often people like to buy what they know, and Cramer can't blame them for doing that as long as they do their homework.

But the way that an ordinary investor buys shares of a company is very different from the way the big institutions do it, as they will purchase hundreds of thousands or even millions of shares to establish a meaningful position.

Buffalo Wild Wings Inc. signage is displayed outside of a restaurant in San Ramon, California.
David Paul Morris | Bloomberg | Getty Images

That means these big money institutions aren't deciding to buy a stock because they like the chicken salad at Panera. They often meet with management, check with the big boys are saying about the company and read all of the research out there. Most importantly—they assess expectations.

"So let me say point blank that the expectations for Panera and Buffalo Wild Wings were about as low as they could go," Cramer said.

In fact, there was chatter on the street for both companies that things had gotten worse and sales would fall short. That exactly the reason why Cramer thinks both Panera and Buffalo Wild Wings stock blew it out of the water on Wednesday.

Simply, the expectations were so low that they had to be beat.

Cramer doesn't think either of these stocks would have shot up so high if it wasn't for Chipotle's huge run after earnings. But that's just how things work, as the big institutional money managers now know that a negative analysis on Panera and Buffalo Wild Wings will have to go positive. Cramer wouldn't be surprised if analysts upgrade both stocks on Thursday.

The inverse of these low expectation stocks was with the great expectations given to Tableau Software. Tableau posted 65 percent revenue growth, and topped estimates by $9 million. Yet the stock still tanked more than 10 percent on Wednesday. How the heck did that happen?

One word—expectations. Analysts wanted to see 70 percent growth and $15 million in revenue beat, and their bullish expectations were totally deflated.

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The concept of great versus poor expectations can also be applied to topics outside of stocks. For instance, there were poor expectations about the Fed statement on Wednesday. Many though the Fed would be tough on rates soon, but it delivered the same old song and dance. That was enough to beat the poor expectations.

There were also low expectations for the oil market, and when the wire story that the Saudis will cut back on oil supply at the end of the summer hit it was enough to make Cramer think crude will begin to rebound and take stocks with it.

"It's all about expectations, and as long as you know what the expectations are, you can understand what would otherwise be stupendously counterintuitive moves," Cramer said.

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