Stocks discussed in the in-depth session of Cramer's Mad Money TV Program, Friday January 16.
There’s no use denying it – 2008 was the worst year for stocks since the Great Depression. So why keep money in the stock market? In spite of losses, solid stocks which pay good dividends are still the best-performing asset class with the most upside potential. While yesterday’s corrections are today’s crashes, they are part of the agony and the ecstasy of owning stocks. Cramer says there are two kinds of investors: those who have lost money and those who have yet to lose money. So investors should expect corrections and to view them as opportunities to buy good stocks at lower prices.
Cramer stressed the importance of preparing for retirement and urged viewers to have an IRA, a 401(k) and other means of building a nest egg. Extra cash can be used for buying stocks. A good, basic portfolio should consist of at least 5 but no more than 10 stocks, none of which comprises more than 20% of available funds, each from different sectors. It is important to do at least one hour of homework per stock per week. The portfolio should include:
1. Local Company: You can find out a lot more about a company close to home than The Street can, especially if you know someone employed at the local company. You also have access to a local newspaper and can keep closer tabs on your investments as well as spotting potential catalysts or problems.
2. Defensive Stock: These stocks are recession-proof and perform well (or even better) in a downturn. Some examples include: Procter&Gamble, Kellogg and Coca-Cola.
3. Cyclical Stock: Cyclicals include industrials that often see dividend hikes when the stock price is beaten down. Cyclicals rarely offer great dividends because they are particularly vulnerable to downturns, but there are always a few good companies to choose from.
4. Dividend Stock: While dividends are an important criterion for looking at any stock, it is a good idea to have a dividend stock in your portfolio. In the current climate, 4% is a respectable yield. Cramer’s choice dividend stock is Verizon, followed by AT&T.
5. Bank Stock: A local bank is a good idea, but the main criteria are banks that are free of debt and can make acquisitions.
6. Speculative Stock: It is important to add a little risk to your portfolio. A small-cap which has great potential is a good choice.
7. Retail stock: Which retailer you own depends on the economic climate. In slow times, Wal-Mart is a good bet, but if the economy is strong, Coach and Tiffany are worth looking at.
8. Tech Stock: It pays to be extra-careful with homework on tech stocks to ensure that the company is really working at that time.
9. Energy Stock: These often depend on the price of oil and natural gas.
10. Gold Stock: Gold is a good hedge against a volatile market and inflation.
Fifty-percent of a stock’s price is determined by which sector it is in, partly because The Street tends to trade sectors as a whole. During recession, secular stocks, including food companies and the healthcare sector do well because people don’t stop buying meds and food when the economy is bad. When the economy is booming, cyclical stocks such as rails, autos and industrials give a strong performance, but are the first to be hit by a slowdown. When the economy is at its height, Cramer would buy secular stocks in anticipation of a downturn, and when the economy is bad, he would buy cyclicals before a recovery. Cyclicals may look too expensive when times are tough because earnings are so low, but when things pick up, and earnings are strong again, buying cyclicals early will pay off.
A stock’s multiple is its price divided by earnings and the multiple indicates what investors are willing to pay for a certain level of earnings per share. Stocks with a very high multiple are likely to face a multiple contraction; 30 is in the danger zone and 40 is asking for it. Cramer would start selling high-multiple stocks at the beginning of a downturn, when multiple contraction usually occurs.
Market orders just aren’t worth it, and are a convenient way for brokers to make money off of their clients. With market orders, you are at the mercy of a broker who will probably not do the extra work to find a decent deal. Your order may be combined with another order to get a double commission, which means your order will not get personal attention. However, limit orders are the way to go, because you can set your buying and selling prices, and can be in complete control over the transaction.
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