Cramer's 'Mad Money' Recap: Best Use of Earnings News (Final)
NEW YORK (TheStreet) -- "I want to show you a new way to use earnings season," Jim Cramer told his "Mad Money" TV show viewers, as he dedicated his entire show to helping individual investors navigate the overwhelming nature of the busiest time on "Wall Street."
Cramer explained that it's important to put earnings and their accompanying conference calls into context, as earnings alone can't be relied on to predict a stock's future behavior as it once was. In today's complex markets, Cramer said that earnings are only one piece of the puzzle that determines where a stock is headed after it reports.
According to Cramer, earnings seasons are a great time for investors to re-evaluate their portfolios and decided which stocks they should trim and which they need to buy more of. He said that earnings should allow investors to "hone their thinking" on which stocks are performing and which ones aren't.
Cramer said that when he looks at a company's earnings, he first looks at the predictive value of those earnings. Did the company beat even the highest analyst estimates? If so, those analysts are likely to be raising their estimates soon. Did the company produce a genuine beat with higher revenues? If so, then the company is on track. But if the earnings came from trick accounting, like buying back stock, favorable tax rates or aggressive cost-cutting, then those earnings may not last.