CNBC’s Jim Cramer stated that investors shouldn’t automatically sell a stock that falls due to conservative earnings guidance, especially when management has a history of underpromising and overdelivering.
He noted that Cisco’s post-earnings plunge is a buying opportunity, arguing that conservative guidance masks strong demand across AI, security, and data-center networking.
Cramer recommended that investors look for companies that "underpromise and overdeliver," indicating that management sets conservative forecasts that leave room to beat expectations later.
“When you see it ... don’t run from it,” the “Mad Money” host said, “you are likely to have an excellent start for a very good position.” He pointed to Cisco as the latest example.
The networking giant's stock initially rallied in extended trading Wednesday evening after reporting strong quarterly results, before quickly reversing course as investors zeroed in on its guidance. Cisco’s shares closed down 8.4% during Thursday’s regular session.
Cramer argued the sell-off masks the strength of the underlying business. “The stock’s decline is giving the wrong signal,” Cramer said. “Luckily, it’s giving you a great buying opportunity, and I think Cisco’s absolutely worth buying as a play on artificial intelligence via networking within and among data centers.”
Cramer noted that Cisco’s results showed strong demand from hyperscalers and strength in its traditional networking business. The problem, he argued, was the outlook. But he said CEO Chuck Robbins tends to set conservative expectations, particularly at the beginning of Cisco’s fiscal year.
This approach, Cramer said, is why investors shouldn’t automatically treat weak guidance — or a falling stock — as evidence that a company’s fundamentals are deteriorating.
“The vast majority of good CEOs simply don’t want to overpromise,” Cramer said. “They greatly prefer to underpromise — give weaker guidance — and then overdeliver — beating that guidance.”
Cramer said that distinction can help investors spot opportunities throughout earnings season, when a strong quarter is overshadowed by cautious guidance.
“Many times you will have a company report a terrific set of numbers but the stock still goes down,” Cramer said, “when the reality is that perhaps you should buy more.”
