In the World of Earnings, a Few Little Cents Mean a Lot

Don't get lured into snapping up a stock just because it says it will meet expectations.
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You see a stock down 20%. You read that it expects earnings to be "within the range" of expectations. Do you immediately go out and try to scalp the stock to make a couple of points as it rallies back to unchanged?

Nope. Buyers of

Synopsys

(SNPS) - Get Report

found out the hard way Monday when the stock failed to rally after it issued just such a statement.

What do you do in these tempting dislocation situations?

The first thing you have to do is check the range! Then ask yourself whether reporting a number "within the range" is good enough to propel that stock higher when it sells at a lofty level. Both would have helped you answer the question of what to do with Synopsys on Monday.

For example, while most analysts were expecting 60 cents for the quarter, one analyst was looking for 56 cents. Does the range that Synopsys says it will meet include that 56-cent analyst? If so, that means that earnings could be 3 cents below most people's expectations. What's a few cents among friends?

Well,

Gillette

(G) - Get Report

announced that it was going to miss its quarter by a penny after the close, and I wouldn't want to be anywhere near that stock when it opens on Tuesday. Two cents on a tech stock can be lethal. Three can be a serial killer.

Secondly, who gives a darn about the range? With tech you have to beat numbers. If everybody is at 60 cents, 60 cents may not cause the stock to go up. This is tech we are talking about, not natural gas or aluminum. At a minimum, the upside is now gone.

Finally, the whole Synopsys trouble set in when an influential analyst from

Needham

sowed doubt about the strength of the quarter, citing the potential for some contracts not to be booked in time for the quarter. Synopsys' statement did nothing to allay those fears.

So, what looked like an easy trade turned out to be quite a treacherous one. Remember, in these markets what looks to be damaged goods often is, and you can't take it back for a full-price refund.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in the stocks mentioned, although holdings can 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

letters@thestreet.com.