We are beginning to see a sharp bifurcation between what traders are doing and what investors are up to. That’s how I feel about the instant negative reaction to Best Buy ‘s quarterly numbers the other day and subsequent vindication, as well as the double-digit percentage drop in the stock of Dick’s Sporting Goods after earnings versus Wednesday’s nearly 10% increase at the close. Quite a trough to peak type of day. It’s not just retail. We saw a similar instantly wrong reaction in the stock of Toll Brothers after its breathtakingly strong earnings report. Here you saw a premier homebuilder’s stock looking down big, a verdict overturned by investors no doubt cheered by a strong forecast, even in the face of multiple, further Federal Reserve interest rate hikes — something that you have to feel is even more certain of after the afternoon release of the hawkish minutes from the central bank’s May policy meeting. What do all three of these companies have in common? Ridiculously low price-to-earnings multiples out one to two years. Best Buy comes in at about 8 times the next 12 month earnings estimates. Dick’s and Toll are at 5.6 and 4 times forward earnings, respectively, according to FactSet. These are multiples that are saying one thing: We are going to have one doozy of a recession. But what if “doozy” can be taken off the table? As I go through these quarters, I see domestic companies getting giant haircuts. I see international companies, like Club holdings Cisco Systems (CSCO) and now Nvidia (NVDA), getting buzz saw cuts from China and Russia. The commonality here: your stock will either be hit by the Fed or by China’s strict Covid lockdown or by the Russia’s Ukraine war — one, two, maybe even the trifecta. Now the instant rebounds we saw I think reflect the notion that it is worth the risk not that we will avoid recession — that’s not even possible or we would not get single-digit multiples — but that we will avoid the “doozy.” Your equity can be protected if your company makes things or does stuff and returns capital to shareholders via dividends, buybacks or both, while also selling at reasonable prices. But the protection is more like that of two vaccine shots: You can still get omicron but you’re less likely to end up in the hospital. For now, though a simple judgment can be made: The traders’ instinct are the wrong ones. They see degradation where investors see obvious short-term impairment. We continue to believe that it is worth taking the two shots and staying in (the market) rather than fleeing. We wish for a booster but don’t have one yet. Stay the course with those companies that fit our descriptive. Even Nvidia gives you a buyback. (More on that later when we publish our full analysis of Nvidia’s earnings to Club members.) Avoid the others. Lose less than the other guy until the bear is declawed and then make more money in a few days than you lost in months. That’s how it has been. That’s how I think it will be. (Jim Cramer’s Charitable Trust is long CSCO and NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
