Cramer's 'Mad Money' Recap: Protecting Your Profits
So why should you invest in stocks with single-digit price tags rather than the so-called "blue chip" companies? Well, some of those blue-chips including General Motors (GM) , American International Group (AIG) and Citigroup (C) have proven there really is no such thing as "too big to fail."
Cramer said there are two types of companies that fall into the single-digit territory, and knowing the difference makes all the difference.The first type are broken companies, those little stocks that no one has ever heard of. Those are the stocks that will likely never amount to anything, noted Cramer, adding that no stock has ever fallen into the single digits because things are going well.
But the second type of low-priced stocks are those of good companies going through hard times, companies like Ford Motor (F) or Sprint Nextel (S) or Skyworks Solutions (SWKS) . Cramer said when these companies fall on hard times and their shares fall below $10, money managers are no longer allowed to own them, which only sends prices plummeting further.
But when the fundamentals turn, these stocks can rocket back to the upside, making the speculator look like the smartest guy in the room! These are the speculative stocks for which every investor should be on the lookout, Cramer said.
Cramer said the next type of stock that must be part of every portfolio is a growth company. Strong secular growers can overcome even the weakest of economies because they want what Wall Street craves -- growth and tons of it.
Cramer said as a general rule he's willing to pay a multiple up to twice a company's growth rate. So for a company growing earnings by 20% a year, he's willing to pay up to a 40 multiple for the stock. He said growth stocks won't typically trade below one time their growth rate unless something is seriously wrong, which make the growth/multiple metric an easy one to gauge.