Don't trade stocks based on headlines

Always do your homework before buying or selling shares -- especially during earnings season, when the news tells only part of the story.

By Jim Cramer Oct 15, 2010 8:37AM

jim cramerBy Jim Cramer, TheStreet

 

Why do I emphasize endlessly that you can't trade off the headlines in earnings, that you can't make snap judgments?

 

Because of Pepsi (PEP).

 

Not that long ago, with its stock trading at $68, the company reported a strong quarter and then told people that it was doing so well in the emerging markets that it had to spend more money to take advantage of the opportunity. I liked the call because I love to hear a CEO, in this case Indra Nooyi, talk about spending -- not cutting back but spending because there is accelerated growth to be had.

 

With so many companies preserving cash or firing employees because there aren't opportunities worth exploiting, the Pepsi news was a breath of fresh air.

But what was the fallout? The stories almost unanimously were about Pepsi cutting guidance! Did anyone listen to the call that gave you that takeaway? Did anyone understand the positive, not the negative, of it?

 

Not in the journalism business.

 

Subsequently, the stock plummeted to $65.

 

Now the stock is fighting back at $66.64, as it seems to be dawning on people that the guidance was never cut; the company guided to higher expenses deliberately spent to gain share and exploit markets.

 

Pepsi wasn't penalized for taking advantage of an opportunity and telling you it costs money to do so. It was penalized because people read the headlines and presumed that demand must be bad and expenses were up.

 

That's why earnings season is so hard. That's why I say do the work, listen to the calls, read the research and ONLY THEN take action.

 

At the time of publication, Cramer had no positions in the stocks mentioned.

 

Jim Cramer is co-founder and chairman of TheStreet. He contributes daily market commentary for TheStreet's sites and serves as an adviser to the company's CEO.

 

Click here to follow Cramer's trades for his Charitable Trust.

 

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