This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Jim Cramer: Folly of the Righteous (Part 1)

For that consistency and the regularity of earnings, pretty much regardless of worldwide strength- -- it is a global company -- the stock of Disney gets a premium to the average stock in the S&P 500. That makes sense to everyone, dogmatists and otherwise. Plus, if you get any event out of the ordinary that is positive, you will see a growth spurt coming from the higher earnings that the event may precipitate. So if you see, for example, a new franchise like Frozen develop, you are actually able to estimate that it could raise numbers now and in the out years as the franchise is developed through merchandise, television, the stage and ultimately theme parks.

But now we are going to get our first bout of indignation. If Disney's stock goes up too much without a concomitant increase in earnings estimates, then the purists would say that Disney's going up because of multiple expansion, a.k.a. the Greater Fool Theory. That's right, the sticklers would say, "Hey, I am perfectly happy to pay a premium price-to-earnings multiple to the average stock for Disney because it is an above-average company with superior management. But listen clearly. Do not ask me to pay a higher premium for those future earnings as the earnings go up. Or in dollars and cents, if the average stock is trading at 17x earnings and we have historically awarded Disney a premium multiple of 20x over time, three multiple points above average, don't start saying we are now going to pay 21x or 22x or 23x those earnings and think you can get away with it."

Yes, there's anger even about the notion of multiple expansion because the hide-bounders say that's not the way it works. The multiple has to stay the same on rising earnings or all you are doing is paying up and up for those same earnings. Why is this so sinful? The usual justification is something like what our mothers told us: if you have too good a time, someone is going to get hurt.

Me? If an institution is changed and changed for the better and it is becoming even more profitable than I thought, I totally condone paying a higher price-to-earnings multiple. I do it because it's my job to spot when companies have gotten better and aren't the same old companies and because I put a super-premium on superb management that executes in all environments and that's what Iger has done with Disney.

Must Read: Jim Cramer: Never Mind the Reversals

The indignant ones get downright angry when actual professionals continue to pay up and up for a company like a Chipotle (CMG - Get Report) or Monster Beverage (MNST - Get Report) or Michael Kors (KORS - Get Report). They think no company deserves too much of a premium to the average company, particularly when you are paying well in excess for what might be the hope of an acceleration in earnings, even though when you get it, as was the case with these three, they grudgingly accept that the stock deserved (past tense) to go higher.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.

Editor's Note: This article was originally published at 6:59 a.m. EST on Real Money on March 6.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free


Chart of I:DJI
DOW 17,688.65 +37.39 0.21%
S&P 500 2,056.15 +5.03 0.25%
NASDAQ 4,735.0280 +9.3890 0.20%

Our Tweets

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs