To survive in difficult markets and thrive when they’re good, Cramer suggests owning shares of companies that regularly beat their earnings estimates, including the “whisper number.”
Thewhisper number is an unofficial earnings estimate tossed around by top Wall Street analysts, and it’s typically higher than the consensus estimate, which is an average of the official estimates offered by all the analysts who cover a given company. Because there is a strong correlation between higher stock prices and the ability to beat the whisper, Cramer thinks investors should seek out these stocks. On Monday, he unveiled a new method for finding them.
In explaining his methodology, Cramer noted that many stocks are strong going into earnings, but then sell off after the quarter is announced. He looked for names that defied this pattern, meaning they performed well going into earnings and were just as strong, or even stronger, after reporting. That way, the market would be the ultimate judge of what's really "better than expected."
For every stock in the S&P 500, Cramer calculated its closing price the day it reported earnings, the closing price five days before it reported and the closing price five days after. Then he calculated how much these stocks ran up in the five days ahead of the quarter and whether they increased or decreased five days later.
He found that 163 companies had stocks that ran up at least 2 percent in the five days going into earnings. Of these companies, he looked for those that had the most momentum after they reported, meaning those that showed accelerated price appreciation in the five days after the quarter. If a stock went up 3 percent in the five days before earnings, it needed to go up by more than 3 percent in the five days after. If it ran up 4 percent before, then it needed to go up more than 4 percent after. Why?
“Because when a stock accelerates after earnings,” Cramer said, “it’s a sure sign that the fundamentals of the underlying company are actually better than most investors expected.”
As Cramer tested his methodology, he found that just 21 stocks had empirically proven earnings-per-share momentum. These stocks went higher going into the quarter and continued to climb afterwards.
So who's on the list? The 21 companies weren't limited to anyone sector, but spread across six different groups:
eBay, Jabil Circuit, Yahoo!, Western Digital and Citrix
Vulcan Materials, Allegheny Tech and Weyerhaeuser
Baker Hughes, Noble Energy and Edison International
Patterson, Biogen Idec, Tenet Health, Aetna and WellPoint
Paccar, General Dynamics and Goodrich
CME Group and The NASDAQ OMX Group
Which of these names are worth owning? Check out Cramer's brand-new momentum portfolio now.
When this story published, Cramer's charitable trust owned WellPoint and Weyerhaeuser.
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