Cramer's Mad Money - 6 Safety Rules for Investing in Stocks (5/17/10)

 |  Includes: AEM, BMO, DD, EGO, GLD
by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Monday May 17.

6 Ways to Stay Safe: Dupont (NYSE:DD)

"We cannot control the amount of pain the market throws our way… we can absolutely control, however, how we deal with it." Cramer introduced his education week with some tips for how to ease the pain of owning stocks.

1. Never buy stocks on the margin. "These are not houses you can live in, but are pieces of paper." Buying on the margin means you cannot take losses, and it is the "quickest method to wiping yourself out."

2. Use limit orders, not market orders. If you call your broker and tell him to buy a stock, but don't give limits on the price, it is like handing him a blank check to buy at any price. Investors should set boundaries on how high to buy or how low to sell with limit orders.

3. Do your homework. Cramer recommends an hour per week per stock of research. For those who cannot manage this workload, it is a good idea to cut the number of holdings.

4. Beware of dollar stocks. Keep this to an absolute minimum, because a dollar stock can drop to zero and wipe out the entire investment.

5. Stay diversified. "The biggest risk factor out there is sector risk," warned Cramer. Investors who lose big are usually the ones who "double down" on "hot" sectors and then get burned.

6. Look for dividend stocks. While these stocks might seem "boring" they are more interesting than Bingo and are not just for senior citizens. Cramer recommended accidental high-yielder Dupont (DD) as a solid dividend stock.

Bank of Montreal (NYSE:BMO)

While Europe's economy is in tatters, the Chinese bubble may soon pop and the bears are growling about domestic financial reform, at least one country in the world is still a safe place to invest; "There is no rioting in Ottawa, you are not constantly hearing about the weakness of the loonie or Canadian bond woes," because "Canada is the world's most stable financial system." Cramer says this is thanks to careful financial regulation and oversight that brought the Canadian banks out of the downturn and into an even stronger position than they were before the crisis; core products more profitable and less risky than they were two years ago.

The best Canadian banking play, according to Cramer, is the Bank of Montreal (BMO) the fourth largest bank in Canada by capital. The Bank of Montreal has more exposure to falling loan losses in the U.S than other Canadian banks, which means that BMO is likely to see greater earnings growth than its peers. Cramer would buy this stock ahead of its earnings report on May 26. Bank of Montreal beat its prior earnings by 10 cents per share and saw a 22% year over year decline in credit losses. Most of BMO's segments are "on fire" with consumer banking up 28%, a 68% increase in net income of its wealth management business, and a 40% rise in net income of its corporate banking business.

Gold: Agnico Eagle Mines (NYSE:AEM), Eldorado (NYSE:EGO), SPDR GoldShares ETF (NYSEARCA:GLD)

"Nobody really cares about anything good," said Cramer, with the headlines brimming with bad news from Europe, Asia and the U.S. While there are reasons to be bullish, it seems the public is tuned out. With such a widespread perception of instability, Cramer emphasized the importance of buying gold, because:

1. Gold is going to $2,000 an ounce

2. It is the ultimate safe haven in an unstable economy

3. Gold is the best inflation play

4. There is a low supply

In spite of the difficulty involved with locating gold, Cramer commented that Eldorado (EGO) "keeps finding it." While Agnico Eagle Mines (AEM) has had some production disappointments, its stock is still up 19%, and Cramer predicts a "breakout" quarter for AEM. He also recommends SPDR GoldShares ETF (GLD).


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