Cramer's 'Mad Money' Recap: Trading on Expectations

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NEW YORK ( TheStreet) -- No, the market is not nuts, it's just trading on expectations. That was Jim Cramer's lesson to "Mad Money" viewers Thursday as he tried to explain the market's positive reaction to bad news and its bad reaction to good news.

Cramer said the notion of expectations may make the markets seem impossible to understand, but once you grasp the theory it makes as much sense as two plus two. So why did shares of Wal-Mart ( WMT) blow up after the company beat the estimates and guided higher? Because that's precisely what Wall Street was expecting the company to do, which was very disappointing to the bulls who wanted more.

The opposite is true for Cisco ( CSCO). Wall Street was expecting to hear the same old commentary from the network equipment maker but instead got a rosy outlook and a 75% boost in the company's dividend. Exciting indeed, enough for a 9.6% pop in the stock.

Even more bizarre was reaction to Sears Holdings ( SHLD), the all-but-deceased retailer that reported its usual decline in revenue and same-store sales, but behold!, its gross margins actually expanded, sending shares up 6.5%.

Other stocks in similar situations included NetApp ( NTAP), generic drug maker Perrigo ( PRGO) and pet superstore Petsmart ( PETM), which had a great move up today.

Cramer said once investors understand expectations, the markets make a whole lot more sense.

Executive Decision

In the "Executive Decision" segment, Cramer sat down with Cheryl Bachelder, president and CEO of AFC Enterprises ( AFCE), the country's second-largest quick-serve chicken chain with 2,000 locations under its Popeye's brand. AFC, which stands for "America's favorite chicken," delivered a stellar quarter with an earnings beat of one cent a share on a 12.2% pop in revenue and a 7.5% increase in same-store sales. Shares of AFC initially rose 9%, but closed down by the end of the day thanks to an analyst downgrade.

Bachelder attributed AFC's terrific quarter to her company's new image and new products including chicken, shrimp and crawfish dishes. She said there's a lot of pent-up demand for AFC's unique New Orleans-style cooking. AFC just delivered the company's best profit quarter in its history.

Part of the Popeye's success story is a new re-imaging of the chain as a "Louisiana Kitchen," a makeover that's costing the company only about $100,000 per location, well below the industry average.

While the makeover is only complete at 14% of the company's locations, the change has proven to be a terrific investment, said Bachelder. The Popeye's brand is "getting back on its feet," said Bachelder, and is making money for its franchisees and getting them exciting about the chain.

Popeye's is not just a U.S. story. however. The chain is proving to be wildly successful in Turkey, of all places. Bachelder explained that Turkey has a growing middle class that loves spicy foods, making Popeye's a natural fit for that country.

Responding to today's analyst downgrade, Bachelder said that AFC reported that it has its commodity costs under control and the report failed to account for the growth potential of the company.

Cramer agreed, calling AFC one of the most exciting stories in the restaurant industry.

Holding Your Liquor

Liquor stocks have been on fire as of late, Cramer told viewers, but of the three major players, Brown-Forman ( BFB), Beam ( BEAM) and Diageo ( DEO), there can be only one true winner.

There's been a transformation going on in the liquor business, Cramer explained. People are drinking less and less beer and instead opting for liquor and cocktails. That explains why shares of Brown Forman are up 34% over the past 12 months, with Beam coming in at 37% and Diageo at 39%. Cramer said all three of these companies have great brands and great growth potential around the globe, which makes choosing the best a matter of coming down to just the numbers.

After crunching the numbers, Cramer concluded that Diageo is winner of the liquor wars. He said the company is not only the largest, which means it generates the most cash for its shareholders, it also has the biggest dividend yield at 2.5%. Diageo trades at just 16 times earnings, compared to Forman at 21 times and Beam at 22.6 times.

Beyond the numbers, Cramer noted Diageo also has the least exposure to Europe, just 21% of sales, while having the largest exposure to emerging markets at 40%. With 58% gross margins, Cramer said Diageo would be his way to play this red-hot sector.

Despite this, Cramer said that while Diageo has had a great run he would wait for a pullback before pulling the trigger.

Lightning Round

Here's what Cramer had to say about callers' stocks during the "Lightning Round":

Wells Fargo ( WFC): "It's time for more Wells Fargo!"

Magnum Hunter Resources ( MHR): "It's a great spec on oil. Oil needs to hit $110 before it'll really kick in though."

First Solar ( FSLR): "Come on. That was the first good quarter that you could sell off of. I'm a seller, not a buyer. "

Roundy's Supermarket ( RNDY): "Very disappointing. I'll be revisiting this one."

American Capital Agency ( AGNC): "That yield is good. I like AGNC. It's done a good job."

Liquidity Services ( LQDT): "I like this model and I think it's OK. I would dip my toe in it here."

Oracle ( ORCL): "I am not going to go against Oracle in the fourth quarter when it's seasonally strong."

Ellington Financial ( EFC): "I think it's fine. This is a residential REIT."

Westar Energy ( WR): "That is a terrific company with a great yield. Safety never takes a vacation."

Mad Mail

In the "Mad Mail" viewer feedback segment, Cramer followed up on Jazz Pharmaceutical ( JAZZ), a stock that stumped him on an earlier show. Cramer said he likes this company. He was also bullish on Gaylord Entertainment ( GET), a company that will be converting itself into a real estate investment trust in the near future.

His final stumper, NXP Semiconductors ( NXPI). Cramer said this company could have a nice spike higher during the fall season.

When asked about Kodiak Oil & Gas ( KOG), Cramer said this stock has been too hot and needs to cool off before investors buy in. Likewise with Hershey Foods ( HSY), where Cramer advised selling half a position and letting the rest run.

Cramer said that DR Horton ( DHI) is terrific and will be making money as housing recovers, but said that Lion's Gate Entertainment ( LGF) needs a another catalyst to move higher than it already is.

No Huddle Offense

In his "No Huddle Offense" segment, Cramer said that he found the Cisco conference call "refreshing," a return to the days of old when the company was taking share and taking names.

Cramer said after years of perpetually disappointing Wall Street, Cisco finally had some positive things to say. Europe, which accounts for 20% of Cisco sales, didn't hurt the company that much and its business in Asia, 40%, was also impressive. Here in the U.S., telco and cable spending was also on the rise. Good news all around.

Cisco also announced a huge dividend boost, breaking from its traditional of ill-timed stock buybacks. Dividend boosts signal confidence, said Cramer, something Cisco has not provided for quite some time.

--Written by Scott Rutt in Washington, D.C.

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At the time of publication, Cramer's Action Alerts PLUS had a position in WFC.

Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for TheStreet.com, Inc., and CNBC, and a director and co-founder of TheStreet.com. All opinions expressed by Mr. Cramer on "Mad Money" are his own and do not reflect the opinions of TheStreet.com or its affiliates, or CNBC, NBC Universal or their parent company or affiliates. Mr. Cramer's opinions are based upon information he considers to be reliable, but neither TheStreet.com, nor CNBC, nor either of their affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Cramer's statements are based on his opinions at the time statements are made, and are subject to change without notice. No part of Mr. Cramer's compensation from CNBC or TheStreet.com is related to the specific opinions expressed by him on "Mad Money."

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