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NEW YORK (
) -- "Don't be fooled by the 'better-than-expected' game," Jim Cramer told the viewers of his "Mad Money" TV show Friday.
He said when it comes to judging a company's earnings report, the game is much more complex than most people realize.
Cramer said there are six key companies reporting their earnings next week. They include
in retail, and
and most notably,
, in technology.
Cramer said there's an art, and a science, to determine whether any of these companies will deliver a true "better-than-expected" quarter, and whether the stocks will rocket higher, or get crushed, after they release their reports.
Cramer said most investors just look at the consensus estimates, which amounts to the average earnings expected from all of the analysts that cover a company.
But he said the consensus estimates are only part of the story. There's also a "high man," the analyst with the highest projected earnings. If a company fails to beat the high man's number, a stock could still get crushed, even if it beats the consensus.
To make matters worse, Cramer said there's also a "whisper" number, which is sometimes a number that's even higher than the high man. Cramer said in order for a company to truly deliver a "better-than-expected" quarter, it must blow through all of these estimates, forcing the company, and the high man, to raise their estimates.
If the key companies reporting next week fail to beat all of these numbers, the companies, and their respective sectors, could head lower.
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Know Your IPO
In this segment, Cramer said the IPO of network security firm Fortinet, which is set to trade next week under the ticker "FTNT" between $9 and $11 a share, is well worth a look.
Cramer said Fortinet is not a young, unseasoned company, but rather a great business with solid fundamentals and a stellar management team. The company's CEO, Ken Xie, was the founder of Netscan, which popped 48% when it came public, and was eventually sold to
for $4 billion.
Fortinet is the No. 1 player in "unified-threat management," a platform which provides companies with everything from antivirus and anti-spam protection to intrusion detection and data protection. The company provides a lower total cost of ownership for companies, and offers a subscription service for realtime monitoring of a company's network.
Cramer said this high margin business is worth between $13 to $19 a share based on its fundamentals, making it worth 30% to 90% more than the expected offering price. Cramer said he'd definitely be a buyer of this IPO.
"It pays to take a chance on a speculative company," Cramer told viewers, "as long as the company's fundamentals are in tact."
He said among the 21 companies he's mentioned for "Speculation Friday" over the last five-and-a-half months, all have beaten the major averages over the same time period.
( COMS), two companies up a staggering 21% and 31% respectively in just one day.
Cramer last recommended AMD on May 19, and the stock surged 46% on yesterday's news of a large antitrust settlement. He recommended 3Com on Sept. 25, saying that the company was finally getting it's act together, a sentiment that was shared by
, who tendered a takeover bid for company.
Cramer said there are other speculative standouts as well, including
, which is up 80% since that stock's last recommendation.
Speculation makes investing fun and exciting, said Cramer. And for those who invested in these high-flying names, he said it's time to take profits, closing out positions in 3Com, and letting the rest ride.
Cramer told a viewer that he's not worried about
, a stock which he owns for his charitable trust,
Action Alerts PLUS.
Cramer told another viewer that
( KFT) is not a good stock, and he'd wouldn't wait and would be a seller on Monday.
Cramer told a final viewer that unlike Kraft,
a good stock, and he'd take a few profits, and let the rest ride.
Cramer was bullish on
He was bearish on
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At the time of publication, Cramer was long Express Scripts, BP, China Unicom.
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