Jim Cramer: How recognize a stock bottom

Just in time for year’s end, Jim Cramer decided to do a little homework to prep for 2015. Out with the old, in with the new.

So he did some research to analyze the trades and see what worked—and what did not—in the past. After all, what better way to gain insight on the future than to evaluate your success and failures from the past?

While digging through years of research, the “Mad Money” host discovered a very strange trend: Sometimes, the best time to buy a stock is when the analysts cut the company’s earnings estimates.

At first glance, the thesis may seem misguided, if not backward. After all, lower estimates are a sign that a company’s profits may not be as robust as previously expected. But that’s not the case, in Cramer’s eyes.

Yes, that’s right, sometimes when a stock hits bottom—that is a great investing opportunity.

For instance, in March of 2009 Cramer made one of his personal best investments with Caterpillar. The stock had been crashing fast for weeks, and the analysts cut their estimates ahead of what they thought would be a bad quarter.

Sure enough, when Caterpillar finally reported, the quarter was uglier than the analysts predicted. Yikes!

But the stock didn’t react. In fact, it barely twitched at the bad news. It fell slightly and then stabilized back to where it was before the hideous earnings were announced. Investors who may have shorted the stock in anticipation that it would tank further were in the red.

Cramer considered this a classic stock bottom signal, when the stock doesn’t even bat an eyelash at bad news.

“Calling bottoms yourself can be a dangerous activity, fraught with peril if you come in too early, as so often happens. But sometimes the market will pretty much call the bottom for you,” Cramer added.

To get the most reliable sign that a stock is hitting bottom, just wait for a moment when the estimates are so low that they can finally be beaten.

Cramer is convinced the phenomenon will play out again. “I know it seems counterintuitive,” he admitted, “but when the Street gets extremely negative on an otherwise solid company, a shrewd investor may be looking at opportunity.”

 Varchev Traders

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