FANG stocks took a beating this week in what Jim Cramer described as the biggest rotation of stocks he has ever seen.
FANG stands for Facebook, Amazon, Netflix and Google, now Alphabet. When Cramer initially coined the term FANG, it was to highlight four stocks that were in charge of their own destinies. They were able to do well, regardless of how the economy fared.
"FANG and the other high-growth stocks get sold to raise money to purchase the likes of CAT and Wells Fargo, because they will have the highest estimate revisions, and that is what causes stocks to roar," the "Mad Money" host said.
Cramer likes FANG stocks because they have the ability to provide upside surprises, and it is always the magnitude of the adjustment higher that drives big moves in a stock.
However, there can also be moments like what happened this week, where investors' core beliefs and sentiments change about the market. Donald Trump's election transformed the entire perception of what companies could deliver the best earnings beats.
"Managers are looking at what they regard as the incredible pro-growth, anti-regulation, lower-tax fueled economic vision they think President-elect Trump could be able to ram through, and they are thinking the economy is going to accelerate rather dramatically," Cramer explained.
The rotation in stocks this week reflected that they expect overseas profits will be repatriated tax-free, which means aggressive stock buybacks and expansion could occur. Those moves will require more borrowing by both the federal government and companies to take advantage of the opportunity. This also means interest rates go higher.
As a result, money managers are now salivating over a company like Caterpillar that is heavily dependent on basic industrial activity. As much as they hate Wells Fargo for what happened to its culture, the company could see bigger earnings for 2017 than anyone even imagined a few weeks ago.
"Remember, it's not the beat. It's the magnitude of the beat," Cramer said.
If things go right, Cramer expects these companies to report more earnings and sales acceleration than any other company out there. Hence, FANG got sold and Caterpillar and Wells Fargo were bought.