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Why You Should Ignore Analyst Calls

Mad Money viewers should never take their cues from analysts, Cramer said Tuesday. These Wall Street insiders seek to do more than simply make money, which is the goal of most retail investors.

“If you want to be a good investor,” Cramer said, “you have to recognize that you’re not playing the same game as the analysts.”

That’s because analysts answer to their clients, the institutional investors who buy and sell stock in volumes that MadMo viewers never would. Analysts are always in search of, not just stocks that make money, but those within a sector that will make the most money. And they’re constantly overbullish or overbearish precisely because they are trying to identify winners and losers for their clients.

The problem is that this often causes them to miss the big picture, and Mad Money viewers who follow analysts too closely can miss it, too. Case in point: Goldman Sachs’ downgrade of home-improvement retailer Lowe’s . A quick glance at the call may have spurred some investors to disbelieve in housing’s recovery, but that’s not why Goldman removed the stock from its conviction-buy list.

In fact, Goldman specifically said that it sees housing stabilizing and even the chance for upside, both positive signs for the home-improvement industry. Lowe’s got cut from the list purely on a valuation basis. LOW had been trading at a lower price-to-earnings multiple than Home Depot when it first was added but had since started trading at a premium to HD. So Lowe’s got dumped. This wasn’t a statement about housing’s fundamentals so much as a matter of how Goldman chooses to compose its conviction-buy list.

“So if you sold on the downgrade,” Cramer said, “you sold for no good reason.”

Cramer said that Home Depot right now is a better play than Lowe’s. But if you believe in housing’s rebound as he does, “both stocks are good enough to do the job.”

Cramer's charitable trust owns Home Depot.

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