Cramer's 'Mad Money' Recap: Best Use of Earnings News (Final)
When the retail sector began to come back into favor in 2009, Cramer recounted how he immediately gravitated toward the discounters and the dollar stores in particular. Why? Because he knew that stocks like Dollar Tree (DLTR) and Dollar General (DG) already had earnings momentum, so when money began returning to the retail group, the dollar stores would shine.
Sector is even more important when it comes to technology stocks, said Cramer. This is in part because technology makes up a whopping 15% of the S&P 500, but also because technology encompasses a host of sub-sectors, everything from semiconductors to disk drive makers, software companies to cloud computing and infrastructure players. Cramer said that each of these sub-sectors is unique, with its own set of growth rates and expectations.
When investing in tech stocks, Cramer said investors must pay very close attention to a company's sub-sector and how it relates to its peers. "There is no room for error," he explained, for when a company in this group misses earnings, its shares get pancaked immediately.
Gross Margins MatterAnother key to figuring out a company's earnings trajectory: Its gross margins, Cramer told viewers. That's the difference between what it costs to make an item versus what they can sell it for.
Cramer said there are a lot of factors that go into a company's gross margins. In the case of a restaurant like Chipotle Mexican Grill (CMG) , Cramer said the key metrics are its food costs, the price it pays for beef, chicken and guacamole, and its labor costs.
For other industries, like semiconductors, gross margins are often influenced by inventory levels. When demand is high, a company can produce as many chips as possible and sell every one at full price. But when demand slows and inventory builds, these same companies must discount their chips to keep them moving, thus lowering gross margins. For still other companies, like the oil and gas sector, determining gross margins may be almost impossible. For these giants, there are multiple costs for drilling and getting the oil out of the ground, versus transporting and storing it, versus refining it into finished products. Cramer said that's why so many big oil firms are breaking themselves up into separate companies with single functions. It's simply easier for Wall Street to determine what they do and how much money they'll be able to make.