How to play this baked-in sell-off

The violence in Libya is weighing down stocks, but it will not ultimately harm the earnings of many companies.

By Jim Cramer Feb 22, 2011 10:04AM

jim cramerthestreetI never like these weird days off, when we are gone and they aren't. But I particularly don't like them now, when the books are all one and the same -- so, basically, we have to get Monday's hammering plus Tuesday's hammering.

 

There are two ways to approach this kind of baked-in sell-off. You can decide that it is just the beginning of a larger downward slide, or you can make a bet that things will get better and pick your opportunities.

 

My instinct during this period is to err on the side that it is baked in and that selling now would mean locking in losses from Middle East unrest that, most likely, will not harm the numbers of most of the companies I want to buy. It will hurt the consumers of oil, but I don't want those anyway.

 

So I take the "beginning of the end" off the table.

 

Post continues after video:

 

I then look for special situations, such as shares that might be dragged down by futures even though they shouldn't be. Maybe Southwestern Energy (SWN), which most closely resembles what BHP (BHP) bought from Chesapeake (CHK). BHP purchases acreage in Fayetteville, SWN is dominant in Fayetteville, and a back-of-the-envelope evaluation says that SWN should be worth at least twice what it is currently valued at just on its Fayetteville assets alone.

 

Or you can buy one of the industrials that people think will be hurt by the Middle East tumult but most likely won't be -- maybe Caterpillar (CAT) or Joy Global (JOYG) or Terex (TEX) or Manitowoc (MTW).

 

Or you can buy one of the regional banks that will simply be pushed down by futures as they always are. Or a tech connected with cell phones or server storage. They will work, too.

Of course, you can just do nothing. But the problem with doing nothing is that if Libya calms down, like Egypt did, you miss gains of 3% to 4% very quickly.

 

And if it keeps going down? Then you keep picking, because the thesis -- that ultimately these uprisings will not impact earnings per share -- remains intact.

 

At the time of publication, Cramer was long Southwestern Energy and Caterpillar.

 

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.

 

Follow Cramer's trades for his charitable trust.

 

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5Comments
Feb 22, 2011 2:14PM
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APPL drops 3% because of Libya?  It will make that up and then some in a week.  Easy money.
Feb 22, 2011 12:29PM
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If Crammer says he's buying, I'm selling.Wink

Feb 22, 2011 1:04PM
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Market's looking for an excuse to correct, Unemployment, Home Prices Failing, Oil Up, It's May Sell, Riots in Wi, Spring, States Bankrupt, Summer, it don't matter, take some off of the table until it corrects 5-10% Smile

Feb 23, 2011 8:53AM
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always late to the party...


"no inflation"...U gotta be shirting me...corn,oil,wheat,sugar,plastics,rubber...hitting all time highs...



have u thought about getting into the commodity business...??


Feb 22, 2011 3:26PM
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Surprised  i am also a cpa, and manage about $70mm for clients as an indi ria.  i sure hope that you don't manage money for anyone and that you have no clients parked in stocks.

 

easy money?  that is both nonsensical and extremely unprofessional, showing an utter lack of knowledge in this subject area.  there is not, and never has been, any easy money in either casinos or the stock market. stock prices are set by the last trade by some pimple-faced youngster putting up his birthday money via his new i-pad or i-phone or mac on scott-trade.

 

if a true market rout ensues, likely bringing certain tech stocks back to earth ala 2001-2002, then the sheeple will not be able to exit the pens at the same time and will be forced to wait in line based on order flow. some tech losses of 20 to 30 percent could take place. people may be hurt and it will leave a mark.

 

please uphold the credential and cease posting such foolishness. be a trusted adviser and practice some prudent posting please or least throw in an IMO or IMHO caveat.

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