An important tell on where a company is going, Cramer said on Monday's Mad Money, is its earnings momentum. Take his C.A.N.D.I.E.S., for example, those special-situation stocks that continue to do well, even volatile markets: Chipotle, Apple, Netflix, Deckers, Intuitive Surgical, Express Scripts and Salesforce.com.
"These stocks aren't going up because their charts are pushing them higher," Cramer said. "They're going up because their earnings estimates continue to get pushed up higher, over and over again, so they're outpace their competitors."
Here's how Cramer values stocks: Share price, P, equals the earnings per share, E, times what's known as the multiple, M. The multiple is what investors are willing to pay for the company's future earnings. Like algebra, solve for M.
Multiples across the board have been falling because investors fear that high unemployment, a double-dip recession or meddling from Washington will cut into earnings. But Cramer thinks the C.A.N.D.I.E.S. are exempt from this because their earnings estimates seem to always be increasing. So even if their multiples remain constant, those higher earnings translate into higher stock prices.
Also, the boost in earnings estimates means that these companies had more growth than most investors expected, and that growth fetches a higher multiple. So these stocks, therefore, are being pushed higher by the E and M side of the valuation equation.
All of the C.A.N.D.I.E.S. – aside of the Deckers , which registered a paltry 15% – have seen major increases in their earnings estimates. A year ago, Apple was expected to earn $7.40 in 2011 and it's now expected to earn $16.14 in 2011, which is a 118% increase. Chipotle’s estimates for 2011 are up by 50% from a year ago. For Netflix's , it’s 48%. Intuitive Surgical , 39%. Express Scripts , 32%. And Salesforce.com , 49%. Cramer thinks the estimates for DECK are wrong, and the market knows it, because the stock is up 118% regardless over the same one-year period.
To further illustrate the importance of earnings momentum, consider Research In Motion . While the BlackBerry maker beat the Street by 4 cents when it reported last week, its stock keeps falling. But that’s because its earnings estimates for 2011 climbed just 18%. Compare that to Apple’s 118%. And RIMM’s estimates fell from a 9% increase in December 2009 to no more than 2% up in the months that followed. Apple, however, started lower that December and have ramped up ever since. Earnings acceleration versus deceleration is very important, Cramer said.
This is why RIMM's share price over the past 12 months is down 24%, while its estimates have increased 18%. The stock may trade at 9 times 2011 earnings, versus Apple’s 16, but money managers look at those numbers and think RIMM could get even cheaper.
“The disparity makes sense because Apple has a superior growth rate, and more than that, it has superior earnings momentum,” Cramer said. “Its growth rate is increasing much faster than RIMM's.”
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