Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Tuesday August 29. Click on a stock ticker for more analysis:
Tuesday's show was a re-broadcast of a "Mad Money" program which first aired on Oct. 4.
Cramer advises that it is very important for investors to research companies and to have a clear reason for buying and selling a particular stock. Honesty is essential; one should recognize a mistake quickly and should not be decieved by false hope. A diversified portfolio, according to Cramer, consists of at least 5 stocks, a maximum of 10, and no more than 20% from one sector. He suggests keeping a core position in a stock, selling a bit if it goes up and buying it back when it falls. Trades are worthwhile only if there is a clear entrance and exit strategy and a catalyst that will move the stock. Cramer repeated his mantra: bulls make money, bears make money, pigs get slaughtered, and added that, when a stock rallies, one should take some off of the top and not play with profits.
Debt usually means staying away from a company, according to Cramer, because stock will be used as collateral if the company cannot make its payments. However, not all debt is bad, and some companies need to borrow substantial amounts of money to stay in operation. For instance, retailers usually need a loan to buy merchandise for the holiday season, and can pay it off if business is good. Cable companies often require money to finance their networks, and airline companies borrow to purchase airplanes. Bankruptcy can be forgiven if the trustee's report is good and if the stock has value, but Cramer has rarely found success in this situation.
Do Your Homework
When it comes to researching companies, Cramer suggests at least one hour per week per stock. He recommends looking at SEC filings, available at www.sec.gov, and taking note of annual and quarterly reports. He says that good analysts usually know what they are talking about, and although there is usually a small fee to read their reports, it is usually worth it. Conference calls give the best information, according to Cramer, and can be accessed on the web. Regulation FD has made information available to all investors, even those without connections. Today, Cramer says, it is possible to know as much as an analyst, but those who do not have the time to research stocks should have a professional do the work for them.
When doing homework, Cramer suggests paying attention to revenue (or sales) growth, especially in the case of a younger company. A mature company should be turning a good portion of its profits into dividends, and a really mature company should have strong cash flow and return some of its earnings to the shareholder. Gross margins are also an important factor in sizing up a company, and indicate the amount of sales that are available to be turned into earnings. Companies with healthy gross margins are not burdened with competition, and see a high demand for their products. However, expensive raw materials can make gross margins go down. An investor should know the metric of individual stocks, such as seats for airlines and same-store sales for retailers, and should compare the metrics of various companies to get an idea of which one is thriving. Cramer adds that investor should always be aware of leading companies, since their performance can give clues about market trends.
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