Mimicking Mutual Funds

Whirlpool stock right now is a perfect example of why the business cycle trumps all other factors in investing, Cramer said.

Analysts have cut estimates on Whirlpool , July shipments might have been down significantly, the U.S. is in at least something that resembles a recession, and the strong dollar is hurting a company that makes big money through exports. That doesn’t seem to matter, though, because the stock is up to $83.99 from $58.22, a 44% jump. And Cramer doesn’t think Whirlpool’s done.

It all comes down to a long-term focus on the business cycle rather than the near-term stresses that everyone seems so preoccupied with. Mutual funds believe in this, so they’re buying early-cycle names like Whirlpool, along with retailers, durable-goods companies and even some autos. Since it’s this big institutional money that moves stocks, that’s why these stocks are up.

Here’s how it works: Whirlpool is your classic early-cycle play. That means you buy it during an economic slowdown when the Federal Reserve is cutting rates in hopes of jump-starting a recovery. We’ve been dealing with high oil prices and a housing slump, so that recovery had been put on hold. But there are signs we’re back on track now.

Cramer’s called a housing bottom for the third quarter of 2009. Toll Brothers is just a couple of points off its 52-week high, and that means new homeowners are buying appliances. Home Depot and Lowe’s have been saying that business is improving, and Whirlpool’s a part of that, too. Then there’s the lean inventory at Sears, which means more orders with Whirlpool will be placed. The mutual funds see this action, and they’re buying it.

Admittedly, this doesn’t look like the best environment to buy stocks. But this is exactly when early-cycle buying takes place. Whirlpool’s year-over-year gains are just the type growth mutual funds look for, so they’re ignoring the short term. Instead, they’re using this volatile market to get in at a good price before the market takes off. They see a recovery on the horizon, so they’re making their move.

As for you Homegamers, Cramer won’t recommend you buy Whirlpool right now. The market’s too hard, he said. He just wanted to explain how mutual funds and the business cycle affect certain stocks. He’s confident that there will be a better entry point in WHR than today’s pullback. The same goes for other early-cycle names in homebuilding and retailers.

That said, Cramer did endorse buying Whirlpool on any “serious pullback…because the mutual funds never deviate from the long-term playbook.”

“They’re not going to reconsider Whirlpool now,” he said. “They’re in.”

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