Cramer: Avoiding Unexpected Stock Drops

In a previous post, Cramer talked about how you can expect the unexpected and avoid getting blindsided by events that can juice a stock’s price.

On the flip side, he’s got a strategy for avoiding unexpected and dramatic slides in individual stock prices that defy analyst projections. How do you avoid being caught in a stock’s downward spiral? Cramer has a strategy for you.

Take the “Tablet Bubble” for example, the idea that has hurt a number of handheld computer component makers— from Qualcomm and Skyworks, to Micron, NVIDIA, SanDisk and Cypress Semiconductors. Cramer points out that this was motivated by research from JP Morgan that suggested the iPad2 was better than any other tablet and competitors would be left with too much inventory when they can’t compete with the new iPad. But in retrospect, should this have been a surprise? Cramer doesn’t think so, and although there may have once been bullishness in tablets, it may in reality have be bullishness in iPads.

Another big blindside was in Finisar, says Cramer. With companies like Netflix, YouTube and Hulu taking up bandwidth, companies in the optical component space like Finisar seemed to be a likely beneficiary of this growth. But what investors didn’t count on was a drop in demand from China, which leaves Finisar in a “hot potato” situation, says Cramer, with the company holding too many hot potatoes. Now that everyone in the industry, including firms like JDS Uniphase , feel that they have too much inventory, it’s a nasty space to be in, says Cramer.

But how could you have known? First, Chinese telco carrier spending had been decreasing for three quarters, and the market knows that Akamai , which helps deliver faster video over the Web, said things are going slower.

Regardless, Cramer says that sometimes this type of blindside is unavoidable. The crux of the matter is that some of these hot stocks have little control over their own destinies and at some point, you’ll inevitably get blindsided. These types of companies are either “great or awful,” says Cramer, and many tech companies like Finisar don’t have the stability of a dividend-generating household name. From recent events, Cramer says the optical names will be in the penalty box for at least a few quarters, although he believes JDSU will recover faster than the rest.

So how do you avoid getting hit by these blindsides? Cramer’s bottom line is that there’s really only one option: Don’t get too greedy. For these optical names, they had a big run-up and greed can keep you holding on longer than you should.

Know when to ring the register and take profits when you have them, says Cramer, who labels other optical stocks “down until proven innocent” as long as they can’t explain why they’re not susceptible to the problems plaguing Finisar, or the tablet producers who may be the real victims of the “tablet bubble.”

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