When you see your stock trading down hard, you automatically believe it is because the company behind the stock has screwed up. Honestly, how many times have you said to yourself: "the sellers are wrong; it's a buy?"
I bet you can count them on one hand. You accept the judgment of the crowd, because it is unwavering. The scoreboard is saying down 10 points, so you tend not to doubt it. The drop seems objectively rigorous and 100% accurate. What happens if it's the stock of Domino's (DPZ) ? A bank stock's getting clobbered when the quarter was excellent. What happens if it is the stock of Action Alerts PLUS charity portfolio holding Citigroup (C) ?
I'll tell you what happens. You have to have the guts and the homework to say "that's stocks going down incorrectly. It shouldn't be down at all."
Take the bank stocks. Right now, they are in retreat. There's nothing that we see that can buttress the runs they have. They seem undeserved. Why do we make those assumption? Here's the reason: the action. The action tells us it's bad because Citigroup was down big and JP Morgan failed to rally.
However, have you ever thought of this? Perhaps the sellers are wrong. Sure, they are big, big enough to overwhelm the buyers, at least for now. But perhaps the sellers don't understand the subtleties of banking and all the important line items that really matter. Perhaps the sellers are momentum players who haven't analyzed how banks trade over the longer term.
The Great Recession has heavily colored our thinking on the banks because, at the low, they were almost nationalized to save them. What did them in? Loan losses. Therefore, the companies, heavily influenced by the Fed, have built reserves to the point where their hoardings were positively insane and doing nothing for the shareholder.
So, now some banks have gotten a little aggressive in making high-yield loans to consumers through credit cards. The banks have calculated what they can charge, typically usurious rates, versus the charge-offs. They are making a simple bet: they can do so much volume at high interest rates, that it is worth taking the losses. Yes, these two banks have generated acceptable losses versus interest gained.
But some investors, used to how banks have traded for the last eight years, are conditioned differently. They only know to cheer when loan losses go down and jeer when they go higher. Maybe they have forgotten that the credit card business is a trade-off: higher loan losses in return for much higher interest. These days, we would say it is simply algorithmic, which is why it was so painful to watch these stocks go down on such great quarters, for the reasons I just mentioned.
Not only that, but I expect that every bank made the same calculation on cards: send out more, expect defaults, with the expectation that with 4% unemployment, the net gains will be fabulous.
So, the uninformed will now sell these stocks despite credit card losses being both higher and acceptable. See where it gets them when numbers go higher when the Fed hikes in December. That's where the real gold is, and these summer soldiers are fleeing before it roars in.
It's not just banks.
We had the same thing happen -- the lack of wisdom of crowds -- with the stock of Domino's yesterday, despite it doing far better than expected. If you think back to the last quarter, which was very disappointing because of international growth, Patty Doyle, the CEO, came on Mad Money and pledged it would be fixed.
By golly, it was. Britain, a black hole, one thought to be filled with people switching from pizza to burgers, turned out to be a one-off downturn and sales came roaring back.
Somehow "investors" keyed on a slowdown in same store sales and a decline in franchise fees. I put quotes around that because I think the selling was short-sellers trying to make themselves right by painting the tape with aggressive selling pre-opening. It doesn't take much to send a stock down 12 in before-hours trade.
Last night on Mad Money, Doyle explained how incredible it was to have an 8% domestic comp number on top of a low teens number from last year, and if you go back just a few years, it adds up to 40%; 40% growth and they are selling? He's right. Better than expected, period. End of story.
Oh, and to be sure, Domino's will buy every share anyone sells in the low $190s. It did it before the quarter, it will do it again.
So back up for one second, there is a common theme: the banks did fine, the stocks not so hot; the pizza place did fabulously, the stock not so hot. I think these gaps get filled, and I think they get filled to the upside when cooler heads prevail.
It might take a week to happen, maybe even 10 days, but the truth's going to come out, and these stocks will be buys when the smoke finally clears.
Join Jim Cramer, CNBC's Jon Najarian and Other Experts Oct. 28 in New York
Jim Cramer will host CNBC's Jon Najarian, TD Ameritrade's JJ Kinahan, famed analytics expert Marc Chaikin and other market mavens on Oct. 28 in New York City to share successful strategies for active investors.
You can join them as they discuss how smart investors can make the most of options trading, futures contracts, fundamental and quantitative analysis and great ETFs to buy right now. Participants will also get a chance to meet Jim and other panelists and take photos.
When: Saturday, Oct. 28, 8 a.m.-3 p.m.
Where: The Harvard Club of New York, 35 West 44th St., New York, N.Y.
Cost: Special sale price: $150 per person. (Normal price: $250)
Click here for the full conference agenda or to reserve your seat now.