Mad Money

Cramer: A massive mistake to sell Facebook now

Cramer: Removing emotion from the equation

Jim Cramer refuses to be shocked or upset with the stock market anymore. He says that sometimes it is best to just remove all emotions from the equation and make decisions based on key metrics, comparisons and cold hard facts.

This was exactly why the "Mad Money" host was not shocked or troubled when he saw Procter & Gamble leading the Dow Jones industrial average down on Thursday. Instead, he became clinical and skeptical.

Cramer used the example of Procter & Gamble because it is so well-known; it's is the biggest consumer-packaged-goods name in the world and has a long history of outperforming its competitors.

But, it is not killing the competition anymore. That could be due to lack of innovation, its huge size or its pricing, but the numbers don't lie.

Mark Zuckerberg
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Procter can throw around all the snazzy numbers it wants and talk about the revenue number, dividend size, earnings per share and constant currency. But there is only one number that matters: its organic growth.

Procter's organic growth number? 1 percent.

Considering that Kimberly Clark had 4 percent and Unilever had 2.9 percent, Cramer totally understood the logical action behind the consumer-products stocks.

Another case of emotions at work instead of common sense was Facebook, the F in Cramer's acronym FANG—Facebook, Amazon, Netflix and Google—which represents growth stocks in the market.

Many investors wondered if Facebook deserved to be in the illustrious FANG group on Thursday when it reported a fantastic quarter but the stock got clobbered.

But Cramer still believes in Facebook and says it belongs in the FANG cohort.

"Put aside the fact that I think you would look like a moron for selling Facebook here. Forget that the brilliance of Mark Zuckerberg and Sheryl Sandberg might make you feel like an idiot by comparison—that's certainly what they do to me," Cramer said.

After listening to Wednesday night's conference call, Cramer thinks that Facebook can earn $3.75 a share in 2017. That would make it the fastest growing large-capitalization company on Earth.

Cramer was completely blown away when he learned that Facebook's monthly-average-user figure is up a staggering 23 percent, year over year, and the company has achieved $4 billion in quarterly revenue in such a short period of time.

The reason why Cramer cares about these numbers is because that kind of low-expense structure and trajectory allow him to put a pen on paper and crunch numbers to figure out what he would be willing to pay for Facebook.

"When I see a company growing this fast, I'm typically willing to pay as much as two times the growth rate for what I think it can earn in the key 2017 out-year that I use to analyze growth stocks," Cramer added.

So, with these awesome numbers, Cramer could argue that investors would pay up to 60 times Facebook's future earnings. Some quick arithmetic of a 60 multiple applied to $3.75 in earnings, means the stock has a $225 price target.

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Even if that number is totally absurd and he cuts it in half, that's still a $112 target for Facebook.

Think that's crazy?

"I'm telling you that when the smoke clears, the big-money managers will use my arithmetic and come back to Facebook," Cramer said.

Cramer has been doing the exact same analysis for years on his charitable trust, and he has been right. It is the only clinical and emotional way to evaluate a stock, and it's exactly what the big-money managers do.

Taking the emotion out of the equation, the numbers allow you to think with a clear head and ignore the noise. Forget the current price of the stock, and instead think about where they are going. For an investor, Cramer thinks it is the only way to think longer term.

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