Jim Cramer: Don’t Bet Against Comebacks in This Second Chance Market

Just like you have to know how to read a room, you have to know how to read a tape and this tape screams ‘I’m not done yet.’

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Wait, don’t sell me, I promise I will make it up to you.

If stocks could talk you might actually hear them say something like that because we are in one of the greatest second chance markets I have ever seen.

Take the drug stocks. Two weeks ago they walked into an abyss that some thought they would never get out of. Merck (MRK) , Bristol-Myers (BMY) and Eli Lilly (LLY) all reported some of the worst quarters versus expectations that I can recall. Heck, these are drug stocks, they are supposed to report exactly what the analysts say they are and one penny more. Everyone knows that’s what they do.

Which is why these numbers were so shockingly bad. Making it worse, the weakness stemmed from bell cow drugs, the ones that are supposed to do well if we are in the depths of a depression.

The only drug company that was able to put up decent numbers? AbbVie (ABBV) . The savior for AbbVie? None other than Botox. I knew there had to be a reason AbbVie paid all that money for Allergan. I guess people can only stay away from wrinkle-free skin for so long before they decide that it’s more important than risking COVID.

But a funny thing happened after the first-class fiasco that occurred after these earnings reports. We started realizing that many other drugs weren’t taken nearly as much as you would expected because of the pandemic, drugs that were taken in the first quarter of last year. The comparisons were ugly and the behavior of the patients inexplicable — would people really rather brave COVID to look good with Botox than to live longer with oncological miracle drugs?

It seems so as the explanation is holding and the defenders are out in full force.

It doesn’t hurt that the companies do tend to have good dividends and lots of fire power. Consider the case of Eli Lilly, a particularly egregious performer that has been one of the worst stocks I can recall in the era. I know when I had the company on not that long ago, the stock, then in the $200s, seemed attractive, especially given the prospects for its Alzheimer’s drug. Then the company revealed data that Wall Street didn’t like and that sent the stock plummeting to the low $180s. Somehow the stock fought its way back to the high $180s and then got crushed by that miserable quarter.

Sure enough, though, old reliable Lilly announced a $5 billion buyback on top of a billion that’s already been authorized and I think a real base has been created. Not only that, I genuinely believe that the Alzheimer’s drug will have efficacy if taken long-term and can be a winner, not a loser, maybe a big winner but it sure hasn’t been presented right, no more right than its therapeutic, at least versus the more powerful version from Regeneron (RGEN) .

But let’s go back to the concept of second chance. I think that the stock of Lilly, which my charitable trust, Action Alerts PLUS, owns, represents a real value now versus the market because of the nature of the stock market, not the nature of Lilly, which, sadly doesn’t seem to realize how it has bungled things. Lilly makes fortunes and when its stock gets crushed in this kind of tape, this buoyant, wacky tape, you buy it, you don’t run from it.

We have seen this happen countless times yet no one seems to realize it and the desire to dump at the bottom is way too palpable. Check out the stock of the once-disappointing Waste Management (WM) . It reported a so-so quarter two quarters ago and Wall Street gave up on it in the one-teens. It’s been a straight line to $140. Same with the sad-sack United Parcel (UPS) . Despised in the 160s. Loved in the $210s. L Brands (LB) , given up for dead at $36, loved at $67. PepsiCo (PEP) , disgusting in the $120s, devoured in the $140s. Watch to see if Clorox (CLX) isn’t next to come back, especially after that double-downgrade from buy to sell Monday. Thanks for nothing.

Why does this keep happening? Simple: analysts are powerful. When they downgrade they can crush a stock. Even a price-target cut can bash a stock. But just like you have to know how to read a room you have to know how to read a tape and this tape screams “I’m not done yet.” Remember, companies aren’t oblivious and managements have firepower in their own right. Comebacks are almost certainties in this tape. I mean if AMC (AMC) and GameStop (GME) can come back you want to bet against Lilly? Remember that next time you sell something. You may be creating your own bottom all by yourself.

(Bristol-Myers, Lilly, AbbVie and UPS are holdings in Jim Cramer’s Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)

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