Investors tend to dislike stocks that are going down, and Jim Cramer found that the phrase “buy the dips” seems to have lost its spark among stock-pickers.
“Really, it’s a shorthand for the process of buying stocks when enthusiasm for them cools, the flipside of selling stocks into a wave of euphoria,” the “Mad Money” host said. “When enthusiasm is tepid in this market, all stocks are abused, including many that don’t deserve it.”
Cramer said the stock of Oracle is a perfect example. The company reported one of its best quarters in years just over two weeks ago, touting its growing gross margins, new cloud offerings and steady legacy businesses.
In response to the unusually strong earnings report, the stock vaulted over 11 percent to an all-time high of $51.61. At that point, it seemed like it could be re-rated by analysts and go even higher, Cramer said.
The “Mad Money” host argued that $52 was still too cheap if the company could sustain the growth it delivered. But since the report, Oracle’s stock has declined to just over $49.
“I’d recommend buying Oracle here, as it is a classic ‘buy the dip’ situation,” Cramer said. “But here’s the issue with buying forlorn stocks: you don’t know when they’re going to become less forlorn. You have to buy Oracle here and then maybe pick up some more at lower levels if it gets hit. You have to be willing to do that. I would back up the truck at $46, where it was before it reported.”
In other words, Oracle’s quarter proved that it is a better company now, at $49, than before it reported, when the stock was just a few dollars lower, but nobody seems to care, Cramer said.
“Why?” he asked. “I’ve got an answer. Because, again, until today, the stock has been going down since its initial post-earnings spike. It sounds [like] circular reasoning: the stock is going down because nobody cares. They don’t care that it’s actually getting cheaper. But believe me, now that Oracle’s shares are changing direction, it’s going to gain adherents as it climbs as quickly as it picked up sellers on the way down.”
Cramer said the stock’s behavior exhibits a general market pattern. Shares of companies tend to fall out of favor, even after good news, when the larger averages are declining. Then, when investors remember how good the last quarter was, the stock climbs back up.
“Notice, I’m not saying you can buy anything that goes down. Plenty of stocks deserve to get hammered, like all the retailers that are being steamrolled by Amazon,” Cramer said. “I’m simply saying that if you refine the ‘buy the dips’ policy into something more rigorous, namely buying the stocks of companies that have gone down in spite of terrific quarters, you’ll be in a much better position when the market turns, just like it did today, or the sellers, of course, come to their senses.”
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