Cramer's 'Mad Money' Recap: Protecting Your Profits
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.
Once investors have a growth name in their portfolio, Cramer said to pay close attention to the direction of the earnings estimates and whether earnings are increasing or decreasing. While growth stocks will soar as earnings are on the rise, they will come crashing down at the first change in momentum or stumble. Just look at Apple (AAPL) or Google (GOOG) as recent examples of growth stocks gone awry.
More Is Better
The next must-have for every portfolio is at least one high-yielding dividend stock, said Cramer. Unlike all of the other rules about diversification, this is one rule where more is actually better.
Dividend-paying stocks may not be as sexy as growth stocks or speculative stocks but, given how a full 40% of the total return of the S&P 500 has come from dividends over the past few decades, the power of dividends and compounding dividends simply cannot be ignored. Dividends are another stock safe haven, said Cramer, as yields rise when share prices fall.
That's why Cramer has coined the term "accidental high-yielder" to describe companies that yield over 4% after their stocks have taken big hits. A 4% yield seems to be the magic number that brings in new investors, noted Cramer, creating a floor for most dividend stocks.
How can investors determine if their dividends are safe? Cramer said he looks for earnings to be at least twice the dividend payout. For capital-intensive companies, cash flow can be substituted for earnings.
As for all the lingo surrounding dividend stocks, Cramer said there's only one date that matters for individual investors and that's the day before the ex-dividend date, a day he calls the "must own" date -- investors must own the stock on that day in order to receive the dividend.