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[Beginning of
Cramer's
verbatim
comments for
this segment...]
Jim:
Welcome back to
this
disciplinary
edition of Mad
Money… where I
am doing
everything that
I can to help
beef up the
disciplines that
can make you a
great investor…
this is a market
that is full of
misdirection…
and if simply
trust what the
people on
television are
saying… then you
will get singed…
this next rule,
to paraphrase
“Public Enemy”
is all about
helping you to
not believe the
hype… see not
all upside
surprises are
worth getting
excited about…
that is
something that
we hear
endlessly… oh
upside surprise,
upside surprise…
you want to
reach for the
stock right.
Whenever a
company reports
its quarterly
results and its
earnings per
share are higher
than what the
analysts on Wall
Street who
research the
company for a
living had on
average
expected… than
all the
headlines about
the quarter will
describe it as
an upside
surprise… stocks
are supposed to
go up when the
underlying
companies that
they are
attached to
deliver higher
earnings than
anyone expected…
but what the
headlines call
an upside
surprise and
what truly
impresses the
professionals in
a quarter are
two different
things… this
distinction can
get confusing…
sometimes when a
company reports
an upside
surprise for the
wrong reason,
its stock will
actually go
down.
For a regular
investor looking
at the coverage
of a quarter,
the market
probably seems
totally
arbitrary and
capricious after
that happens… if
an upside
surprise can’t
reliably send a
stock higher…
than what the
heck can… and I
am not talking
about situations
where management
also lowers its
guidance.. what
it expects to
earn in the
future… at the
same time that
it delivers
higher than
expected
earnings… then
its stock will
go down… as that
is not really
baffling right…
when we buy
shares in a
company that we
care about… what
it will earn in
the future… not
what it has
already earned
in the past… so
if they lower
guidance, it
really does not
matter what they
say about the
past.
Now, I am not
talking about
that kind of
confusion… I am
talking about
the confusion
that results
from headline
writers not
drawing a
serious
distinction
between a high
quality upside
surprise and a
low quality, a
loser, an almost
slight of hand
upside surprise…
we like
companies that
can deliver the
first kind… but
a low quality
slight of hand
upside surprise
does not attract
much interest…
and is just
fooling you…
okay, so how can
you tell the
difference…
simple, one is
organic… the
other is
manufactured by
management.
A high quality
upside surprise,
a real better
than expected
quarter… is
generated by
higher than
expected sales
which then leads
to better than
expected
earnings per
share… stronger
sales could mean
a few different
things, but they
are all good… it
could single
that the
industry is
improving… and
that more people
overall are
buying the
companies
product… that is
a great
indicator when
sales are higher
that that is
happening… or it
could mean that
the company is
taking market
share from its
competitors… or
that it has
growth coming
from an entirely
new business… so
a real upside
surprise tells
you that either
the environment
is improved, or
the company is
improved… since
both indicate
that it should
be able to grow
its sales and
its earnings at
a faster clip in
the future… and
that is a reason
to buy… as the
big boys on Wall
Street
ultimately still
value stocks
based on growth
of sales.
It is very rare
for a stock to
go down off of
this kind of
high quality
sales driven
upside surprise…
even when we
were in the
depths of our
Garden Variety
Depression…
these revenue
upside surprise
stories
advanced… as you
can see by
looking back at
Apple’s
phenomenal run,
regardless of
the economy…
which Apple
produced upside
after upside
almost entirely
based on much
better than
expected sales…
particularly of
the products of
the iPhone and
the iPod.
What about this
low quality
slight of hand
kind of thing…
it is easy to
tell the two
apart, even if
the press rarely
bothers to draw
any kind of
distinction… a
low quality
earnings beat is
based purely on
a better bottom
line… that is
the earnings per
share… better
than the top
line… that is
the sales
number… here the
upside surprise
is generated not
by improved
business… but
because
management cut
costs… maybe
even manipulated
the tax rate…
all legal…
aggressive,
legal accounting
treatment… or
maybe it bought
back a lot of
stock so that
whatever number
it reported was
magnified by the
fact that there
were fewer
shares… the
latter, bought
back shares
earnings
surprise is now
regarded as
almost totally a
loser by market
professionals…
as the increased
earnings per
share only
indicate a
smaller share
count… and not
profits that
were generally
better than
anyone was
looking for.
Who does this
stuff… you know
what, almost all
of the food and
drug companies
often generate
slight of hand
style upside
surprises when
they can’t
manage the real
thing… there is
very little true
growth in either
business… and
this is the
dirty little
secret… the
reason the big
boys do not care
about those so
called upside
surprises… even
if journalists
think that they
matter… any
large enough
company with a
half way
competent
management that
is in a
predictable line
of business…
like the food
and drug
industry… not
tech… can almost
always ensure
that its
earnings per
share beat the
streets
expectations… as
long as the
quarter isn’t
actually a
really bad one.
The food and
drug names tend
to fire a lot of
people or use
buybacks to
generate their
earnings per
share… the
earnings per
share upside
surprise… or
they chose to
repatriate as
much profit as
necessary from
the foreign
markets… the
amount is
entirely at
their
discretion… to
beat the
estimates… it
does not take
anything
special… it does
not indicate
that things are
in any way any
better… it just
tells us that
management is
shrewd enough
when it comes to
making sure that
its earnings per
share number
does not
disappoint
anyone… if
creating an
upside is that
routine… than it
is really hard
to consider it
much of a
surprise.
▼ ▼
▼ ▼
▼
 The Bottom Line!:
Do not dig in your
heels… change your
mind. My first new
rule in this special
show… when the facts
change… you have got
to change your mind.
[verbatim recap]
[end of segment]
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