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Cramer: Guess what? Wal-Mart's CEO is right

After Wal-Mart dropped a thermonuclear bomb last week on Wall Street, Jim Cramer has been watching the stock for signs of stabilization. Have things finally started to calm down? Well, not exactly.

"I still see plenty of reverberations. Many traders believe Wal-Mart will cut food margins to ribbons, hurting competitors like Kroger and stalling the Albertson's IPO that I said was too expensive anyway," the "Mad Money" host said.

And despite the reverberations that Cramer has felt, some of the actions that investors have taken recently seem wrong to him. For instance, there has been concern that apparel prices could go down. That was why retailers were hit so hard last week.

Cramer's not buying it.

The selling in stocks like Target was strange to the "Mad Money" host. Target has $8 billion in private label, in-house apparel brands that people like. So, why the heck would someone buy a brand that Wal-Mart makes instead?

More important, Target has a price match policy to match prices of competitors, including Wal-Mart. But that hasn't seemed to matter to shoppers who are a bit higher on the economic ladder and aren't as sensitive to prices.

"In other words, people aspire NOT to buy clothes at Wal-Mart; the numbers say they prefer Target," Cramer said. (Tweet this)

This is why Cramer recommended both Target and Kroger as a buy from the Wal-Mart fallout.





Could Wal-Mart be on the right track?

Doug McMillon, president and CEO of Walmart.
Adam Jeffery | CNBC
Doug McMillon, president and CEO of Walmart.
"McMillon is right. Think about it" -Jim Cramer

However, when Cramer dug a little deeper, he found that Wal-Mart's recent investment move wasn't about beating Kroger or Target at all. And it wasn't about giving people better goods for less, either.

It was about adopting a new investment model. Cramer heard many investors unhappy with Wal-Mart's CEO Doug McMillon when he lowered its earnings forecast the morning of an analyst meeting, not in a pre-release before trading. These number cuts were material and certainly impacted trading that day.

"Those people don't really get what was going on here. McMillon wasn't so much cutting earnings as he was laying out a whole new strategy," Cramer said.

When McMillon appeared on CNBC's "Mad Money" last Thursday, he was surprised that so many people were upset with his strategy and dumped the stock.

Read MoreWal-Mart CEO speaks out to Cramer: This was coming

Yet in Cramer's perspective, he wavered on earnings estimates and raised future revenue forecasts in order to compete better with Amazon.

"McMillon is right," Cramer said. "Think about it. Currently, Wal-Mart has much more scale and heft than Amazon, even though Wal-Mart's market capitalization is now $189 billion while Amazon is worth $267 billion."

Meaning, the market has rewarded Amazon's ability to grow. Therefore McMillon is willing to bet that it will do the same for Wal-Mart once it builds out an Amazon-like infrastructure, which it has the cash flow to do.

That could be painful in the short term, but not if the stock is owned for the long term.

Cramer interpreted McMillon as saying that Wal-Mart will never beat Amazon if it keeps up the current ways. But if it lowers expectations and reinvents itself, it has a chance to win.

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And he threw in a big buyback with a large dividend for investors to be paid to wait for the turnaround.

McMillon has given himself three years to have much less earnings growth so that he can accelerate the company's revenue growth, just like Amazon did.

"Either way, McMillon had to do something to avoid seeing his chain die a death of a thousand cuts," Cramer said. (Tweet this)

So, while the stock might not be investible right now for Cramer, he does think it could eventually make sense. If McMillon pulls it off, the stock could be a winner. Otherwise Wal-Mart will just turn into a dinosaur and go extinct.

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