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Defending Cisco, Endorsing NVIDIA

Contrarian is one thing, but sometimes the logic on Wall Street seems convoluted.

Consider the reactions to Cisco Systems and NVIDIA’s quarterly reports, both announced last week: Cisco beats earnings estimates by a penny, but sells off 10% the following day. NVIDIA, however, posted an 8-cent loss on weaker-than-expected revenues, and then the stock followed up with a 4.7% jump during the next trading session.

What was to blame for this seeming contradiction?

Expectations. And for Cisco, they were “sky high” going into the quarter, Cramer said. The stock ran up big head of the report, only to fall right back down when CEO John Chambers warned of mixed signals from customers and unusual uncertainty in the business. Not to mention, given that 36 of the 45 analysts covering CSCO rated it a “buy,” Cramer said, “The pullback was inevitable.”

NVIDIA, meanwhile, gave Wall Street just what it expected: a disappointment.

“People had become so pessimistic about NVIDIA's prospects,” Cramer said, “that every negative was already baked into the stock.”

What did surprise investors, though, was NVIDIA’s improved guidance for next quarter’s gross margins, which should reach 47.5%, or 1% more than originally expected. That’s why the stock ramped the following day, and it, along with the company’s new high-performance chips for both gaming and workstations, is why Cramer thinks this stock should be bought.

“The downside [is] limited,” Cramer said of NVIDIA. “The upside? Potentially enormous.”

Cramer also defended Cisco, saying that he expected post-quarter pullback. But the story here is still intact, and the company, still above its long-term growth target of 12% to 17%, is strong. So investors can buy this stock, too.

When this story published, Cramer’s charitable trust owned Cisco Systems.

Call Cramer: 1-800-743-CNBC

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