At-home investors may be wondering how to find overlooked companies in which to buy shares at a time when a historic bull market enters another decade and concerns about valuations are present.
The way to start, according to CNBC’s Jim Cramer, is a process called a “read-through.”
“So much of successful investing is about read-throughs, dissecting the less obvious pin action when a company reports earnings,” the “Mad Money” host said.
To illustrate the process, Cramer took a look at two of the best read-throughs of Thursday’s session, which saw all three major averages again close at record highs.
Those companies are Micron, which rose almost 3%, and Darden Restaurants, the parent of Olive Garden, which closed down around 6% after a light quarter.
Successful read-throughs of a company start at the top, Cramer said. To make money, you have to be able to believe the CEO, he said.
“Otherwise it’s all just blather,” he said.
With Micron, President and CEO Sanjay Mehrotra has been a straight shooter about both the good and bad facing the company, Cramer said.
So when Mehrotra says the current quarter is the “trough” for the business, you can believe him, Cramer said.
And if Micron is expecting a pickup in business, Cramer said, other companies related to it in the semiconductor space could present attractive investing opportunities.
Western Digital is a name to look at, Cramer said. Mehrotra mentioned tightness in the flash memory category, and Western Digital is a competitor there.
While not all aspects of its business are winners, such as disk drives, Cramer said he thinks it can continue marching higher; it’s up nearly 60% year to date.
“In the past, when the cycle’s turned … this $58 stock has rallied through $100 — it’s hit those lofty levels twice in the last five years,” he said. “I think Western Digital can do it again.”
Micron also indicated softness around PCs, attributing it to Intel having trouble making chips, Cramer said.
What does that mean for those doing a read-through? Look to AMD, Intel’s main competitor.
“Another reason to buy AMD,” Cramer said.
Cramer said executing a read-through on Darden follows the same process, starting with credibility of management and analyzing what was said on the conference call.
Darden pointed to Olive Garden as the main culprit for its revenue coming in slightly below estimates.
“The stock got slammed [and] looked like it would take the whole restaurant cohort with it, given the pervasive presence of the bargain Italian chain,” Cramer said.
It wouldn’t have been a far-fetched assumption to attribute it to the consumer reining in its spending, Cramer said. But on the conference call, Darden CEO Gene Lee pointed to poor execution and promotion of Olive Garden.
Lee is trustworthy, though, Cramer said, and his clear-eyed assessment of the situation was valuable insight. It meant the casual dining segment remained strong. And what to do with that information?
You should buy Chipotle, Cramer said.
Cramer emphasized that the read-through process is just a starting point, and “you never just buy any of these stocks.”
It’s easier for professional analysts to spend more time assessing stocks, he said, and “I know that’s hard for people at home.”
“But the bottom line? Now you know at least what a read-through means, and if you’ve got the time, you can do this same analysis yourself to identify overlooked ugly ducklings that, down the road, turn into beautiful swans,” he said.