As Dow components 3M and Caterpillar brought the average to a record high on Tuesday, CNBC’s Jim Cramer explained why investors had no choice but to trust the rotation into the industrial names.

“When a company like Caterpillar or 3M reports a magnificent earnings quarter, this market takes what they say as gospel and assumes that the global economy has gotten stronger,” the “Mad Money” host said. “If economies around the world are in better shape, investors have no use for steady-eddie drug stocks like Johnson & Johnson or Eli Lilly, no matter how good they are.”

Caterpillar shares closed up nearly 5 percent on Tuesday, while 3M shares boasted a nearly 6 percent gain. Conversely, Johnson & Johnson’s stock closed down almost 1.4 percent and Eli Lilly shed more than 2 percent.

To explain the seemingly rash action, Cramer ticked down the four factors that caused money to flock to the industrial stocks.

First, a strengthening worldwide economy lends itself to overall strength in industrial stocks like Honeywell, Cummins and Caterpillar.

“These companies have cut costs to the bone,” Cramer said. “Their managements have been waiting for this moment, right now, when things get better. Here it is.”

As more infrastructure projects get underway, Cramer said the major industrial players are seeing better sales growth, not just earnings growth.

“Strong top line, not just bottom line. That’s why it’s like catching lightning in a bottle,” he said. “Hence why CAT and 3M are on fire after their blowout numbers.”

Second, industrial companies tend to be fond of share buyback programs, which limit the amount of stock they have for sale.

Stock shortages may sound bad, but in reality, they increase demand so that big institutional investors have to buy a lot of stock, which ultimately sends shares soaring.

“Trust me when I say that a large portfolio manager, someone who runs, say, $5 billion, needs to buy a lot of 3M to make it matter,” Cramer said. “When you add another couple of managers trying to do the exact same thing to the exact same stock, there’s simply not a lot of supply around, and that’s how some company as big as 3M could rally $13 bucks in one session.”

When the economy starts to speed up, portfolio managers also start to look at the size of earnings beats, Cramer said.

The size of the “upside surprise” is important for a few reasons. Consumer goods companies like PepsiCo may consistently deliver better-than-expected reports, but it’s difficult for them to truly surprise the market.

For most money managers, the shocking, unexpected results, like Stanley Black & Decker’s “unheard-of” 9 percent organic growth in tools, matter much more, Cramer said.

“If you’re 3M or Caterpillar and you run lean with new products and low inventories, you can raise prices and have spare capacity to meet demand, then you can report a relative beat that’s so huge it will turn your stock into a magnet for money,” the “Mad Money” host said.

Having a good outlook for future earnings reports is also an important driver for these stocks, Cramer said.

“When you see the first good quarter, you know things aren’t about to turn down,” he said. “A worldwide expansion means these companies could have several more beats just like this one, versus the anemic numbers they had the year before.”

So far, construction and road building are in their early innings, even as Cramer expects little help from Washington to move infrastructure projects along.

Cramer wanted investors to understand that the market hasn’t seen global moves this powerful since the 1990s.

“What you’re seeing is, indeed, historic,” the “Mad Money” host said. “Our international industrials, fueled by a weak dollar, by cut-to-the-bone staffing and by fantastic managements are finally in the sweet spot, so shareholders like you are making a killing. And because we’re still in the early innings, I think the move may not be over. We should salute those who got it right and thank them for all the wealth they’ve created on still one more record day.”

Source: Investment Cnbc
Cramer tracks the rotation into new 'money magnet' stocks 3M and Caterpillar