Cramer: Find Out This Earnings Season's Pecking Order

From out of his stock screen on Thursday Cramer discovered a pecking order in the market that could predict how investors will react to company earnings as they’re released.

It’s a pecking order of expectations and performance that’s largely dictated by highly visibly tech stocks, he said. Not the foods, the drugs or utilities, but the techs. Apply these lessons to your own portfolio and you should know what to expect when one of your favorite companies reports its quarter.

First up, Apple . Steve Jobs’ company reported a blowout quarter, but still the stock sold off anyway. Why? Because AAPL had run up too much going into the report. Expectations were so high, that even the Apple’s great numbers weren’t enough to propel the share price higher.

Now compare that with IBM , which also reported a great quarter buy nothing as good as Apple’s. IBM’s stock went higher after the numbers were released for the exact same reason Apple’s share declined—expectations. But in this case, expectations for IBM were much lower. So with the stock looking very cheap on a price-to-earnings basis, investors happily bid it up.

Then there’s Google , which took a hit ahead of its numbers delivered Thursday after the bell. But those numbers turned out to be good, and that pushed the stock up.

So to recap: A run-up in price and a strong quarter a la Apple, and shares could sell off. Lower expectations with a solid number a la IBM, and shares could climb. And if shares get slammed ahead of a nice report a la Google, you could see a rally. Even if there’s a CEO change like the one that was announced tonight, with Larry Page taking over for Eric Schmidt.

Below these three are the companies that merely meet expectations. See: F5 Networks . This high-growth stock needed to report much better numbers than it did in order to maintain its momentum status, hence the $31 decline it saw following the announcement. But Cramer still thinks the thesis behind owning FFIV—its exposure to cloud computing and the mobile Internet—is still in tact, so if anything the market just put this great stock on sale. That gives investors the chance to buy it on a discount before it restarts its upward move again.

The last three rungs of Cramer’s ladder are as follows: companies like Cree that just plain missed their quarter and took a deserving hit as a result; companies like disk-drive maker Western Digital that reported good earnings but whose business is in secular decline (flash memory is all the rage now); and what Cramer called “losers that are changing their stripes.” Think Micron Technology , which is trading in its commodity DRAM products for that popular Flash memory. Cramer said Micron brings the list full circle because people expect so little from the company that it may end up being the next IBM.

“When you’re dealing with earnings,” Cramer said, “it’s all about the expectations game. And now that you know the pecking order, you can figure out the market’s likely reaction when your stocks report.”

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

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