Trade Down Play - Cramer's Mad Money (10/15/08)

by: Joan Wickham

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Wednesday, October 15.

No Need to Fear

After a day in which Dow Jones Industrial Average plunged 733 points for the second biggest drop in the index's history, Jim Cramer told viewers that they don’t need to be "as fearful this time around." Cramer said the markets are "ever-so-slightly" better off now than they were just a week ago. He said the markets last week thought the entire banking system was going under, but they know that's not the case this week with the Treasury's rescue plan in place. This fact alone, he assured, should make today's retesting of last week's lows a little less scary.

Forget Earnings

Cramer told viewers to forget about earnings estimates, which he said can no longer be trusted, and stick with high dividend-paying stocks. "Investing in non-dividend paying stocks is just a leap of faith," he said, noting that only the size and safety of a company's dividend matters in this volatile market. Cramer also advised viewers not to purchase their stocks all at once. Instead he said they should follow the strategies in his book Real Money and scale into positions over time, buying on weakness. "A good dividend pays you to wait," said Cramer, adding that is exactly what investors need to do in a scary market where the selling isn't likely to be over. Don’t buy it if you can’t “eat it, drink it, smoke it or medicate with it.”

Trade Down - Family Dollar (NYSE:FDO), Dollar Tree (NASDAQ:DLTR)

In tough economic times, Cramer said the smart money is on the "trade-down" plays. These are companies people turn to in order to save money. But he noted in the battle of the dollar-store chains, only one can emerge victorious. Cramer said by all accounts, Dollar Tree, with its better metrics, should be the obvious choice, but there's a problem: The company is just too loved by Wall Street. “The good news is baked into Dollar Tree.” That's why Cramer is recommending Family Dollar as the dollar store chain to own. Cramer believes Family Dollar, while not the better company, is the better value and the better stock. He said Family Dollar outperformed rival Dollar Tree handsomely in the last recession between 2000 and 2002. Family Dollar “kicked butt” the last time around. And since the company is not trumpeted on Wall Street, Cramer said there's a lot of room for analyst upgrades as the economy worsens. Cramer said Family Dollar is improving its product mix to include more items that people need, like food, as opposed to other items they merely want. Family Dollar also now accepts food stamps and is adding credit card payments to all of its 6,500 locations. A similar move at Dollar Tree saw an average ticket increase from $6 to $16. Cramer also noted that Family Dollar is acting responsibly by suspending its stock repurchase program to preserve cash and reducing its inventory. He said the company last reported its earnings on Oct. 3, beating estimates by 4 cents a share. Family Dollar is already bigger now it needs to be better.

Am I Diversified?

Portfolio One:

  1. Citigroup (NYSE:C)
  2. Flotek (NYSE:FTK)
  3. Dendreon (NASDAQ:DNDN)
  4. Chesapeake Energy (NYSE:CHK)
  5. Yamana Gold (NYSE:AUY)

Cramer said Flotek and Chesapeake are both in the oil patch, and one of them needs to be sold to be diversified.

Portfolio Two:

  1. Exxon Mobil (NYSE:XOM)
  2. General Electric (NYSE:GE)
  3. Dupont (DD)
  4. Altria (NYSE:MO)
  5. Clean Energy (NASDAQ:CLNE)

Cramer said he loved this portfolio. The caller has got it right.

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