A Step Ahead of the Shorts

Cramer remembers the importance of gritting his teeth and buying when bad news turns out to be not so bad. This way, the short-sellers can take him out at higher prices.
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Did you catch the action in CVS (CVS) - Get Report yesterday? First we got the news: accounting problems. Restatement of earnings. "Oh my," I said to Jeff Berkowitz, my partner. "Now we know what was dogging that stock. It wasn't Drugstore.com (DSCM) or PlanetRx (PLRX) . It was accounting!"

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We figured the stock would get clobbered on the news of the restatement. Crushed. Smashed to

Tyco

-like

(TYC)

smithereens. I was waiting for the

Herb Greenberg

accounting death

dance!

Rite Aid

(RAD) - Get Report

without the aid of a

Gene Marcial

take-out column in

Business Week

! Man down!

And then more news came out. The restatement did not affect earnings. In fact, it was just a juggling, taking a few pennies out one year and putting it into another. As Rite Aid's auditors were quitting and the world seemed to be coming to an end, the story at CVS was, well, a nonstory. There was nothing to it.

At that very moment, we should have bought stock. Because whenever a stock has been acting doggy, you have to presume that the shorts are not far behind. Just like buyers who sell when the story gets bad, short-sellers have to cover when the story gets good. This story had just gotten better.

We weren't cynical enough yesterday. We forgot that when the bad news comes out -- even if you didn't know there was going to be bad news -- and it isn't that bad, you have to grit your teeth and buy.

And let the short-sellers take you out at higher prices with their frantic covering. As they would have yesterday in CVS.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Tyco. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.