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In Investing, Homework Over Headlines

“Never, ever, ever trade headlines!” Cramer told viewers on Wednesday. “Whenever you buy or sell a stock, you always have to do the real homework, especially because, as we’ve seen lately, the headlines are often wrong.”

He was referring to the panicked selling that brought down both Salesforce.com and Phillips-Van Heusen following what looked like – at least according to the headlines alone – bad quarterly earnings. Investors saw “Salesforce.com forecast disappoints, shares fall” and “Hilfiger Buy Holds Back Phillips-Van Heusen” and dumped their shares en masse. CRM fell as much as $7 in after-hours trading.

But anyone who follows Cramer’s advice – do the homework, read the earnings releases, listen to the conference calls – would have known what a huge mistake it was to unload these stocks. Because a deeper look at both companies shows how strong their prospects really are.

The headline writers harped on what they saw as disappointing guidance from both Salesforce.com and Phillips-Van Heusen for coming quarter and full year. But they failed to take into account that acquisitions at each company were the reasons for the earnings pressure – Jigsaw by CRM and Tommy Hilfiger for PVH.

“When earnings are depressed from an acquisition,” Cramer said, “that’s a rearview look. Not something that gives you much insight about the future.

What should the headline writers and investors have looked for? How about Salesforce’s huge revenue growth, up 24% year-over-year. That was the company’s best performance in five quarters. Plus, CRM generated $140 million in cash from operations, a 40% increase form last year. Plus, 4,800 net new customers were added, the biggest growth in new business since the fourth quarter of 2008. The quarter was strong across the globe, Cramer said, including Europe, the Americas and a 50% jump in Asia.

As for Phillips-Van Heusen, its takeover of Tommy Hilfiger closed earlier than analysts expected, on May 6. That, as well as the seasonality of the Tommy brand, the dilution from new shares the company issued in the deal as well as an interest expense on the debt incurred to make the deal happen, would account for the gap between its forecast and that of analysts. But Cramer’s not concerned about the “temporary ding” to the quarterly numbers because PVH is “smartly putting its money to work” and the quarter was “fantastic.”

PVH’s earnings per share were up 54% year-over-year, with revenues accelerating 11% and gross margins expanding by 230 basis points. The company also kept inventory levels to an increase of just 1.2% while taking market share in key domestic department stores like Macy’s.

The bottom line here is that homework pays off. Investors who do the work won’t get caught up in these mini-sell-offs. Even better – they’ll get to take advantage of them.

“You could end up making money off the morons who take action without facts,” Cramer said, “who panic out when they should be buying in.”

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