♪ we are we are family i'm jim cramer and welcome to my world. >> you need to get in the game! >> firms are going to go out of business, and he's nuts! they're nuts! they know nothing! >> i always like to say there's a bull market somewhere. >> "mad money." you can't afford to miss it. hey, i'm cramer. welcome to "mad money." welcome to kramer ka. other people want to make friends. i'm just trying to make a little money. my job is not only to entertain you but i'm doing some teaching tonight. call me at 1-800-743-cnbc. earnings season. i dread earnings season. why? because it is overwhelming with so many companies reporting at once and so much data being thrown at you. because it's hard to keep track of the expectations and to really know what is better than
expected. what the whisper, the real benchmark that must be beaten is? no. it's because i have a really bad back and i can't stand carrying all those printed out versions of the conference call as i shlep from downtown to my office here in englewood cliffs. tonight i want to do something different. i want to help you this earnings season. a new way to use earning season to put it in perspective because most of you watching the show are not these day traders that are hijacking a lot of the thinking. you're not trying to game a given quarter. it's become so difficult to predict and often the initial moves aren't even accurate because of the press coverage or because something nasty just occurred in the overall market because of europe or something involved in the election. in other words, other than for those who are shorting or going long stocks ahead of the quarter, these earnings reports need a context to make you money. they can't be relied upon anymore because they aren't as predictive of future behavior as they once were. they are a piece of the puzzle.
a part of the mosaic. but they are only one of many important parts that predicts where a stock will go over the interyacht term. that tends to be the focus that i teach on the show. and it is a teaching show. because i want you to know the metrics i'm using to pick stocks i talk about and recommend here. and pick for my charitable trust, actionalertsplus.com. i want to teach how you to listen to these calls and read the transcripts. i'm hoping this show will once and for all, because this is what i see at jim cramer on twitter constantly tell you how to evaluate your portfolio, figure out what you need to trim, what you need more of. let it help your stock selection hone your wave thinking. not mine. yours. earnings season is important for what it tells you about a host of issues. big report cards. it's not just the trajectory of the estimates. we've got to flesh all that out. i'm getting tired of the
estimates are bumped a penny or two. that's not making anybody any money. look, we can't dismiss earnings season. that would be totally wrong. we've just got to put it in context. here's how i use these reports that we constantly refer to. first, i assess them for their predictive value for the year. to do that i try to discern where analysts go with their estimates after the company's reports. do they raise them, lower them, do they keep them the same? let's say apple issues a report that is better than not only the posted numbers that you can find on a lot of websites but also beats what is known as the high man. some call it the whisper. i think that's wrong. the high man. the analyst who has the most aggressively high estimates on the street. that beat will always cause a raising of numbers for the rest of the year by everyone. or if it is the end of the year for the numbers in the year after it. i use that increase in earnings per share, the ones they bump, okay? to figure out several things. first i try to figure out the increases from real business, okay? actual sales. did they do better? and not just accounting changes and share account changes. the latter fools a lot of
people. to do what i like to do, i look more at the revenues than the actual earnings themselves. why is that important? because a company can't change the sales line except by increasing demand, producing more, gaining more customers, either at the expense of others or through better salesmanship, execution, and customer acquisitions. they're making a better job. they're doing a better -- they're working harder. they're working it better. but a company can easily change the earpings by buying back a ton of stock. not the sales line but the earnings. simply changes the nominator, the number of shares, while keeping the number of shares static. the holy grail accelerated revenue growth, argh, both quarter to quarter and year over year, drive my thinking. they allow me to figure out future revenue and earnings growth. it's what i really talk about on the show. that allows me to figure out what to pay for the stock if the future. lots of people examine the price to earnings multiple. the stock can make a determination of the stock's worth and what i call the p/e
vacuum, price to erin agz vacuum. the stock sells at 20 to 30 times earnings when the average stock sells at 11 times the s&p, they say that's too expensive, it sells at much more than the average stock. lazy thinking. what you need to do is figure out what that growth rate is using the revenue and earnings prism i just laid out for you. figure out how fast the company's growing. both linked quarter, that's the previous quarter, and the current one and the year over year quarter and calculate that trajectory versus the growth rate. put it simply. if it's 20% and the price to earnings multiple is 20 or less, hey you know what? you probably have a big bargain on your hands. we call that using the peg ratio. again, fundament of the show. the price to earnings growth ratio is much more important than the price to earnings multiple. it puts the multiple in context. as a rule of thumb i'm willing to pay a price toern agz multiple that may be up to twice the growth rate of the company, especially if there are very few other companies growing that fast.
meaning there's a scarcity value of fast growing companies. higher than that, say a 70 times earnings for a company that's growing at 40% begins to get me nervous. even 40% growth is hard to come by. that's nose bleed territory and there are too many things that can go wrong with a stock when that happens. the converse is true, too. when i see a stock that sells for less than one times its earnings per share growth, i begin to salivate because unless there are other factors going against it the factors that will be covered in the rest of this special show, i'm drawn enough to that stock that i have to find other reasons not to buy. so bottom line, i use the actual earnings per share reports to figure out the growth rates of the stock, and if the growth rate is high and the price to earnings multiple based on the future projections is equal to or less than the growth rate i'm interested, enough to proceed with the rest of the work that this special show will detail. i need to go to brad in south carolina. brad. >> caller: hey, jim, i want to pick you a big south
tack-a-lackey boo-yah to you. >> wow. that's aggressive. i'll take that. go ahead. >> caller: hey, jim, i'm just woshding h ing wondering how to best prepare for this earnings season in terms of online researching resources. give me an update on what your browser will say as you stay on top of all the market updates. >> what i like to do -- first of all, i like to watch cnbc. i'm not kidding. cnbc covers earnings season better than anyone. i like to go to the websites. the websites are now so, so good that literally they will have the analyst reports, they will have a lot of projections. and then i like to look at news stories just to get a sense of what the consensus is. and then i look at the analyst reports the day after. and all that has to be done if you're going to really sink your teeth in and feel very confident. start with the web site of the stock. let's go to darrell in california, please. darrell. >> caller: yes. boo-yah, jim cramer. >> boo-yah! >> caller: i have a question here. what is meant by a reverse split stock? >> okay, that means if there's a
million shares, you know, let's say they do a 3 to 1, they make it to 300,000 shares, i mean, citigroup did one of these. okay? what it does is if you have like 300 billion shares, you divide it by three, you get 100 billion. it does raise the price. but it's illusory. you just have fewer shares. let's go to tyler in florida, please. tyler. >> caller: hey, jim, i'm going to give you a south florida boo-yah. >> oh, i'll take that. i need to go there now. what's up? >> caller: sun is shining -- no, actually it's overcast. when you talk about the economy, you know, really booting off again, it seems like you talk about it in terms of consuming and not producing. and i'm thinking from the way i think about it, you need something to be produced before it's consumed. so i'm wondering why in terms of a growing economy you talk about consumption instead of production. that's what it seems like to me. >> well, i do because in order to be able to raise price you need demand. if there's a shortage of supply,
sure that, can mean something but not if there's no demand, right? if you have a shortage of a supply of some product that nobody likes, you can't raise price and that doesn't mean anything. that's why we focus on demand on the show. a company has got to earn its stars before you buy it. use the e.p.s. to figure out a company's growth rate and then take it from there. "mad money" will be right back. >> announcer: don't miss a second of "mad money." follow @jimcramer on twitter. have a question? tweet cramer. #madtweets. send jim an e-mail to firstname.lastname@example.org. or give us a call at 1-800-743-cnbc. miss something? head to madmoney.cnbc.com. [ woman #1 ] i can't believe it's finally here! [ woman #2 ] it's the real deal! [ man #1 ] turn it around! turn it around! [ woman #1 ] over here! over here! [ woman #2 ] turn around! turn around! [ woman #1 ] i love you! i can't believe it's not butter!
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>> announcer: from our family to yours. happy holidays, cramerica. peace and prosperity from all of us here at "mad money." welcome back to "mad money" special earnings season companion show. how not to be overwhelmed by earnings reports and put them into perspective so you can profit from them in an informed and confident way, make money at home. we just went over how i like to use the earnings reports themselves to figure out the growth rate and relate it to the earnings report to figure out whether it's too expensive or too cheap against its sector and the rest of the market. the next way i use the earnings report is equally as important in some ways because of what i call the etf-ization of the market even more than the growth rate versus the price of the stock and earnings per share. i measure the stock's earnings growth against its cohort and
figure out whether, here it is, the whole cohort is worth owning or forgetting about. wow. that's right. for most of my more than three decades of investing i've accepted the fact that the sector's important when you're picking a stock. it matters. historically a stock sector is counted as much as 50% of the stock's performance. but you know what? now because so many people trade through etfs and because they have become so popular as ways for both individuals and, more importantly, hedge funds to make decisions about stocks, take quick action, the sector has superseded earnings at times. and i've got to tell you, often it's made earnings all but an afterthought for individual companies. take for example the way the banks traded in the last few years. it didn't matter for the most part whether a bank had strong earnings or weak earnings, did a bad job or good job. the bank was in the xlf, the etf that encompasses so many banks. and people didn't want to own the xlf it didn't matter how well a bank did. bank of america, domestic banks with little exposure to europe.
jpmorgan, morgan stanley with tremendous exposure to the continent. that's why at times i've had to dismiss the earning pr share gains entirely at the moment if the cohort was radically out of favor. but i never just forgot them. instead i tried to choose -- figure out which ones can at times break the tug of the sector, the gravitational pull, and which ones can really shine because if the sector falls back into favor i've got to be ready. for example, ever since the market hit bottom in 2009, remember the march bottom, generational, we've seen many sectors of retail and individual stocks within those sectors outperform. i like to listen to the earnings calls of all the retailers, but at given times i am wrapped by the groups doing the best. by far the top performers during this period than the discount stores. particularly the dollar stores. notably dollar general, dg, and dollar tree. when i see the markets tired of money go to retail, i go back to my earnings report memory and i reach for these two because i know they have the most earnings
momentum. i only know that because i keep listening to the calls, even though the group may have been out of favor of late. so when everyone piles into the retail etf, which i use the rth, i am in there with the ones with the best momentum. similarly, ross stores, tjx and bed bath and beyond during these sectors, when they grab a sector because they have most inexpensive earnings momentum. there's another strategy for more sophisticated investors i want to let you in on too. when i know what's in the best of the best in terms of earnings because i focus on the calls and a huge amount of money was poured into a given sector, i like to hedge my bets, sell the etf, and buy the best performers in the etf according to my earnings per share work. that way if the move takes a turn for the worse we get a large macro number that hurts our market, one of those government numbers, or we get some weakness out of europe i can lose less than the people just playing the earnings momentum game because i own the best and i am short the rest. sector analysis is particularly important in technology. because people confuse this
gigantic group of stocks, which comprises more than 15% of the s&p 500, constantly. tech is actually the agglomeration of a whole group of sectors, semiconductors, disc drives, software, cloud, internet, personal computers, large scale enterprise hardware makers, tech, tech communications, infrastructure stock, assemblers. each has a separate growth rate. and here i like to look at the earnings per share growth rates of the companies i follow versus the individual slices of the sectors. because the sector growth rate doesn't work even though people keep trying to use it. cloud stocks, for example-r highly valued. meaning the price teernings and growth rates are extreme. that means there's no room for error, or hair as we call it, meaning something is wrong, some chink that could upset the growth rate. in 2011 one of my favorite cloud plays, salesforce.com, report aid magnificent quarter but its guidance for its billings was later than i was hoping. the stock immediately got pancaked and stayed ugly for a long time. why? because it underperformed its portion of the technology
sector, even as its growth rate would have been outstanding for, say, a personal computer-related stock or a disk drive, a semiconductor or a cell phone company. these days knowing what the sector is isn't enough. you need to know the subsector. you need to know how your company stacks up against the growth rate of that subsector. and you need to have a good handle on whether that larger sector is in favor or if it isn't. the bottom line, nothing's worse than owning a bad stock as defined by weak earnings and a bad sector neighborhood. nothing's better than owning a good stock in a great neighborhood. but if you done measure the stock's earnings against the sector's growth and do not determine first whether the sector is in favor versus out of favor, then the earnings report, better than expected or not, it won't mean a thing. when we return, i'm going to give you several more ways to use these earnings reports in the context of stock picking. not just trading. which i have come to see as pretty much of a zero-sum game. stay with cramer.
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tonight we're talking not about who just reported better than expected quarter. getting all excited about that. something we get caught up in during every earnings season. but how to use these reports to put together the ideal portfolio for the long term. not for tomorrow's trade. we've established the importance of those reports for what they tell us about the growth of a stock and where it fits inside a sector as well as the sector's gravitational pull that can overwhelm even the best earnings reports. best house, bad neighborhood, neighborhood wins. but now we've got to dig further than the headlines to discern what else on a conference calling or in reaction to the call that can help us make some money. we don't stop with just a call. what else is important to listen to in these? the wall street analysts would tell you that the most important concept, most important predictor of future earnings is the growth margin. what's left after the cost of
sales are subtracted. i like to explain gross margins in a simple way, in a way any kid can understand, a lemonade stand. the cost of goods there are pretty simple to understand. the lemons and yeah, some sugar. figure out what the costs are, subtract it from what you charge you've got gross margin. of course we have a lot of other issues that go into it. cost of the table, time to make the sign, number of people that sat 07bd stand, the labor the time you paid someone besides yourself to man the stand. same thing goes for publicly traded businesses, we try to figure out the cost of goods soles, whether they go up or down, that's the inflation/deflation component. how much the labor costs are, very important in a rising salary environment. how much leverage there is, meaning if you have all the labor and costs accounted for how much business can you do. the one i always like to think of is not a lemonade stand but it's pretty well known. it's chipotle. chipotle has legendarily fabulous gross margins at each of its stores. they have labor and they have food and they have customers. the more customers they can serve per hour the more leverage they have. the keys to the gross margins at chipotle are the cost of the
guac, the beef, the chicken, the tortillas, the cost of the labor and most importantly number of customers they can push through in a given day. of course there are oz of other inputs, advertisements and leases of the stores, as little turnover as possible because the cost of training employees is tremendous. tats a huge obstacle to making a lot of money. that's something former ceo of costco jim sinegal made clear to us on many occasions on it show. sinegal was legendary for paying his employees the most and treating them with the best of benefits because it's so important to keep them happy so the firm doesn't have to constantly train new people. new people are not known to the regular customers, who like to see the same hold nopefully smiling faces. new people cost too much money. same goes for chipotle. the most talented people are quickly given promotions and opportunities to run more stores. mcdonald's similarly often praised for its gross margin improvements. by the way, because that's the best market muscle it can get low cost goods and it's got good leases but also because it has the technology to innovate on a quick scale.
it does not bebefuddle its lesser skilled employees. they've gotten huge leverage per hour. gross margin comes into play in every industry i follow, always in i have did ways. often the key to gross margin has less to do with the cost structure of the company and more to do with the inventory conditions of an industry or a given company. now we're talking tech. semiconductor companies for example often produce flat out, making as many as they can. 24/7. but at times end demand wanes and the supply chain gets overwhelmed, it gets gutted. in order to move more inventory the chip companies have to cut price, which then lowers their gross margins and often makes their earnings too volatile to predict and therefore too volatile given a high price to erin agz multiple. that's when you see preanounlts, when there's too much inventory. we like companies with consistent growth and he with may high multiples for them and we don't like the inconsistent growth tech gives us and we pay low multiples for them. used to pay high multiples but no one can happen the inventory glut that happens once or twice a year. same thing with steel or
aluminum. they can be lumped in with tech. at times producing too much. at times koufrnts like china cause a glut in the system. future earnings per share get crushed. i listen closely on these commodity calls to get a sense whether inventory's building anywhere in the system because if it is i can tell if the gross margins are coming down and i've got to get you out of those stocks quicker than i do. aluminum, steel, copper. i've got to work faster. don't you believe for one moment that it's just the commodity producers that are affected by these gross margins issues. i listen to every major pharmaceutical call for you and i hear about generic competition and what it might mean for future earnings. a drug company with a patent cliff meaning its drugs are coming off pat sxent it will plummet in prees is one that scares me and i tell you to go out because i think it's going to trade as a very low multiple to future earnings even if it traded at a high one in the past. nail stock gets out of that i've got to keep you out of it. very few are immune from this. i steer clear of them as best as i can until everyone knows about the patent cliff, and then i can go back.
finally there are gross margins of the oil service companies. these are the hardest. okay? they're difficult because you've got to often figure out several numbers for the gross margins, how much it costs to drill to get in and out of the ground, to ship it, to refine it. these are complicated companies. many companies in this industry have tried to break themselves up to make it easier for guys like me to figure out their gross margins instead of having to be a blend that i've got to unwrap. i care chiefly about finding costs and about end market prices. that's why the natural gas companies, for example, trade at a discount to the pure oil companies, because the end market price of natural hass has been so low for so long and the end market price of crude has been so high for so long. that's grawhat draws me tie company like eog or continental, both with cheap finding costs for oil, and they've got expensive prices when they get it out of the ground. the bottom line, the key component after figuring out the earnings per share trajectory and its growth related to the cohort is to figure out the future gross margins.
something that is uniquely calculated only by listening to the conference calls. can't get that in the headlines or any of the press reports. if you don't know the direction of the gross margins, believe me, you won't know the direction your stocks are about to take in your portfolio. it is an integral part of the homework. and if you don't calculate it yourself, you've got to get it from somebody. be sure to read from the analysts who do. let's go to brad in ohio, please. brad. >> caller: boo-yah from gerrard, ohio, jim. >> got to get there. i haven't been there yet. i'll get there. i promise myself. >> caller: thanks for taking my call. >> sure. >> caller: the question is as an investor interested in specialty retail i understand the fourth quarter is the quarter with the most significant earnings. >> right. >> caller: but how should one evaluate these companies' first quarter earnings? >> you know what? go back to the rules at my hedge fund. i frankly don't care about the first quarter for retail. it's only the fourth quarter i care about. first quarter's just not meaningful enough, doesn't move the needle enough. you only have valentine's day in that quarter. my dad sells gift wrap. gift wrap is one of those things
where you realize what the seasons are. and valentine's doesn't move the needle like christmas. like the holiday season, hanukkah. i try to make my judgments on retail in the fourth quarter. i don't make any in the first quarter. it's all that matters. i wait to hear those quarters and then i make my judgment on what the next year's going to bring. mike in illinois. mike. >> caller: cramer, this is mike in the windy city giving you a chicago bears ba-ba-ba-boo-yah. >> that's a constant. bears ray constant. what's up? >> caller: cramer, if i short a stock, how long do i have to cover that short? >> forever. forever. that's one of the great things about shorting. stay short for as long as you want. remember, if the stock goes up, they may ask you to put more money up, though, and that's where people get squeezed. okay. you've got to dig deep if you want deep profits. gross margins will guide you in figuring out the direction of a stock. and some things you'll only find on the conference call, not the headlines. gross margins, that's on the call. stay with cramer. nobody is more passionate about the markets than i am.
nobody in this whole country! >> i wanted to thank you. you have saved my retirement. >> you are why i come out here and do this show. thank you so much. >> the stuff that you're doing for all of us is so important. i just want to say thank you. >> my husband and i watch every day, and we count on your help for small investors like us. >> announcer: put cramer's 30-plus years of experience to work for you. "mad money." weeknights on cnbc.
>> announcer: taking control of your financial destiny is smart. but why would you go it alone? >> something that has a much larger bearing on you and the stock market as a whole. >> announcer: let cramer be your guide. your sounding board. >> i'm having a hard time with my favorite stock. >> i know you can beat these professionals. >> announcer: and your coach on the road to financial independence. "mad money." weeknights on cnbc. you're hearing tonight for the first time not how to figure out what's a better or worse expected earnings report, a good trade, seems to be a dominant way of thinking, but how to put these reports to work for you, select the best stocks and prune those that need to go. taking a longer-term perspective. we figured out how to compute the growth rate of a company and whether it's too expensive based on that growth rate. something at jim cramer on twitter i keep getting at the question and i've answered. we've explained the importance
of sector analysis a part of the earnings report and focus gross margins, something that can only come out of the conference call. now we must address two more pieces of the earnings puzzle. these are really important. dividend growth and home run potential. from pretty much the time i first bought stocks in the late 1980s until fairly recently dividends were an afterthought. ever since i had my hedge fund p companies make enamored of buybacks as i away to return money to existing shareholders. to me it's oxymoronic as you're only returning money to departing shareholders, making it easier for them to exit. the only rare winners with shareholder buy backs except in extreme cases, auto zone works, novella. are the executives who get paid for hitting certain earnings based targets they do that by shrinking the float, through buying back just enough stock to make it so when the share count is divided into the earnings per share, well, it beats the compensation benchmark that they were supposed to hit. only a very handful of buybacks do what they're really supposed to do. tass make it so there are far
fewer shares out there, something that can drive the stock higher if the earnings are really excellent. but the buyback that actually accomplishes that goal, i've got to tell you, count them on one hand. all right? most buybacks that turn out to be a huge waste of money as companies are spending a gigantic amount of karn buying their stock when prices may have been appreciably higher because they don't know anything about stock, they only know their own business, which is fine, they should st. paul trying to time the market. what are more companies doing now? offering dividends. something that's a much better sign the management believes in the future than a buyback. buyback are indefinite. they'll be reined in sub rosa. dividends are an out loud declaration of long-term confidence. now that low rates seem to be upon us for some time courtesy of the fed anxious to throw some gasoline on the smoldering economic embers, dividends can provide a rate of return that certificates of deposit you keep trying to make money with can't. stocks provide movre risk. then go down. but they can also go higher. and if you reinvest those
dividends you can augment your return to the point where you are far exceeding a return on bonds. dividends are so important, they've been responsible for almost 40% of the s&p 500's return in the last ten years. they're also the reason the dow jones average with its above average dividend yield far outperform the s&p 500 in 2011. 5.5% return for capital appreciation. how about making a total of 8% if you reinvested the average dividend and the only thing you should be thinking of when you talk about benchmarks is reinvested dividends. cash in your pocket, safety net during the bad times and a trampoline in the good. what do the earnings have to do with the dividend component we so often seek on "mad money"? simple. we listen for calls that tip management's hand on the dividend. that tell us there is enough xet excess cash available to boost that dividend. perhaps several times in a short period of time. that's what we heard from general electric in 2011. that was a signal -- well, it was on every conference call they mentioned it. conversely if a company signals
a desire to buy back even more stock and the buyback's ineffective, looking at the share count, looking at the number of shares it had year before, year before, year before, you should present the buyback as all about management in richmond. they're thinking they can kabt the shares offered to management. a lot of tech companies do it. i regard it as disgrateful. no one else thinks that. i don't care. i know what i see. these days if management doesn't indicate it might boost a dividend on an earnings call you can count me out. unless the company has such ferocious earnings power, a la apple that i'm willing to overlook such an indiscretion. we also need to listen to something breakout, something new on the conference call, something the company's going to do differently or announce soon that can serve as an upcoming catalyst. i always talk about catalysts in the show. you need a catalyst to buy a stock. i scrutinize calls not only for what's happened, that doesn't interest me, but something that will happen. i am anxious to buy it. and if there's a sell-off because someone's disappointed company didn't beat the estimates by enough or didn't
guide high enough to please momentum funds in the stock i've got my opportunity. what are examples i look for? pharmaceutical companies often telegraph what might be going into stage 3. okay? meaning what drugs might be near final approval. they often tell you about expanded usage on their labels for drugs. one of the best performing drug companies over the multiple years has toiled more about the future on its call than just about any other, and it has been a terrific buy. every time it sells off after earnings because of this upcoming catalyst it's constantly -- by the way, celgene, same thing. they give you a call that tells you what's coming up. tech companies tip their hands about upcoming product cycles, product initiations that can make a huge difference in future earnings. is pipeline companies, key creators of dividend wealth we talk about all the time, tell you about upcoming expansion that's can be additive to earnings. the exploration companies almost always tell what you prospects they're looking for. when you might hear some really good news on these calls.
i file the comments away and wait for the oil futures to go down and i can start buying the oils. it happened last year with clr. bountiful chance after they had raised guidance later in the year when they had gone out to the bocken, they were fwatalkin about how the storms kept their drilling down. after the storm ended. nobody cared. and then the stock took off when they told you that business is big and booming. the bottom line, we look for signals about the future in these calls, particularly about upcoming catalyst that's will move the stock later on making them solid buys on any short-term decline because it wasn't better than expected. we try to measure confidence about cash flow that can trigger rising dividends. the best source of wealth that stocks can give us. remember, dividends pay to us wait for things to get better, and there is no better way to find out about the prospect of increased dividends than to listen in on the earnings call. stick with cramer. >> announcer: from our family to yours, happy holidays, cramerica. peace and prosperity from all of us here at "mad money."
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. >> announcer: sitting on the sidelines because of all the uncertainty in the market? >> thanks for paring my portfolio from mean to green. >> that's what i want to hear. >> announcer: with over 25 years of experience in bull and bear markets, let coach cramer show you how to play to win. >> keeping up in the game. >> announcer: "mad money." weeknights on cnbc. earnings season doesn't have to be a gatling gun for unfathomable moments and just only something for hedge funds to attempt to profit from. tonight we've showed you how to
look for signs of what you can do with your portfolio over the long run because the earnings reports and the subsequent conference calls, the crucial thing, look, here's the deal. they don't have to be shoot first, ask questions later experiences. actually, the opposite. conference calls are ask questions, ask questions and then ask some more questions and only then maybe take action. we are asking specifically about what the growth of the earnings per share might be and how expensive that would make the stock versus other stocks in the sector and maybe other stocks in the market as a whole, usually regarded as being the s&p 500. we want questions answered about gross margins and whether they're going to be increasing. whether earnings estimates may be beaten in the future. we're looking for signs of dividends, these days the most important indicator of a company's health will be boosted. and catalyst that's can propel a stock higher after earnings season is over, data point, something big that's going to happen. that's important when many
stocks sell off in a knee-jerk fashion. there are two more items to be gleaned from these earnings reports and conference calls and they are new ones i've had to add to the equation because of structural changes in the stock market over the last few years. the first is geopolitical risk. never really cared that much about it because following american companies, america was king. geopolitical risk link exposure, not to just the rising price of oil that can be jostled by the middle east. that's always been an issue. but linked exposure to the sovereign debt and banking debt issues today of europe. we need to ask ourselves about how much exposure there might be of a given company to the chinese economy. for example, for most of 2011 it was impossible to own banks, right? they were perceived to have tremendous linkage to the troubled euro and its accouterments. we tried to analyze these banks in a vacuum away from europe, french and spanish counterparts. well, we got our heads handed to us. similarly owning tech when tech is often considered heavily dependent upon europe?
as much as 20%, 25% of the earnings for tech are derived from the continent. it's been deadly. we know this because the business don't dodge it on the conference call. that's how you learn about it. the analysts won't let them get away with it. listen to a q & a at the end of the call. if you're in a company that has european exposure, you'll hear one out of every two or three questions about europe. asia one out of every two questions about china. you want some preventative earning medicine? go through the previous calls of your companies. if the plurality of questions say are about europe you know you're going to be in for a bruising next time. what's what the analysts are focusing on, forcing the companies to talk about. it's china that can fool so many of the cyclicals, smoke stack companies. go into the earnings calls of caterpillar, joy global, cummins. check out the calls of freeport mcmoran, peabody, or vail. rio tinto.
owning pieces of these stocks is like owning a piece of the great wall. china. you want to be in them when the great wall's crumbling. i have seen downgrades of stocks like yum because it's got a huge chinese business through kfc, and coach which has been expanding agrefsly in china. imagine kfc. similarly a steel company without paying attention to what the chinese are dumping on our markets slyke taking your financial life in your own hands. how are we finding out? companies as diverse as corning, ppg all march to the beat of the asian drummer these days. you're not going see it in the release. it's all in the pestering frt analysts. pretty simple. listen to the call and don't hang up until you've read the questioners. read the transcript. one piece of the earnings puzing which is incredible, this is the earnings season that you have to weather something that i've never talked about before. and we've got to do this before we're done for the night. one that's become obvious to anyone who watches this show
regularly. can't believe i have to do this but i'm going to say it. you have to know the chart of the stock head of the quarter. so often we have chartists on our off the chart segment who trace out what a passport can be and where a stock can break down or break out when if hits a certain level. why is this so important? because you've got to understand when you har that expectations were too high going into the quarter and that's why stocks sold off you have to recognize that the chart was the gauge of the expectation. you look at the chart that tells you where the xmexpectations ar high. often a chart rallies to a particular level in advance of the quarter. similarly to what we call resistance. if the quarter isn't youave to snuff, the chamers can get ham yefrd because of a chart failure. i don't want you to react to this kind of chartmanship. i want you to use it in your favor. which is why i saved this for last. you know what's an ideal stock to buy? one that has rising earnings per share growth with rising gross margins, a potential for dividend increase and something on the horizon that just got
repulsed because it busted through resistance, that gives you a chance tote. >> into i a trivgs plaerrific p that would not otherwise be able to get to because of a chart. so many hedge funds are reacting entirely to that chart and taking silly bax as you of it. remember i'm not a chartist but i play like whun i have to. the bottom line if the questions and answers on the conference call revolve heavily around their national chris risk or currencies or crisis in asia or europe or anywhere else be prerptd prepared for a hammering this current quarter. and if the stock goes down big when you expect it to be doeg up later it may be the chart coming and giving you a chance to get in cheaper than you otherwise ever had a chaps nce to do. now you are ready for the rest of earnings season. go get them and tell them cramer sent you. dean in california. dean. >> caller: hello, cramer. from beautiful marin county. >> man, is it gorgeous out there. how can i help?
>> caller: i check my stocks at the end of the day, and usually you'll see a little blurb on the news headlines that says, for instance, a particular stock has a close or a buy in balance at the end of the day. >> right. >> caller: and then they'll nape name the shares. what i want to know is exactly what exactly do these close in balance mean and do they have any implications for the following you day's trading? >> i don't think you have to worry about it. a lot of the buying may be etf related, a lot of buying may be some sort of market on close program. it's confusing to people. we care about the fundamentals. maybe it affects the chart. maybe it doesn't. i don't care about the chart that much but i know many people do but we care about the fundamentals. that would matter only if you were a broker trying to get people the best price at the end of the day. at all in the conference calls, everybody. a company's earnings release is much more than that. i need clues. clues that will signal where a company is going, and i like to look at the charts. and, well, call me.
call cramer. "mad money's" back after the break. i played a round of golf.id in the last five hours? then i read a book while teaching myself how to play guitar; ran ten miles while knitting myself a sweater; jumped out of a plane. finally, i became a ping pong master while recording my debut album. how you ask? with 5-hour energy. i get hours of energy now -- no crash later. wait to see the next five hours. as many tv episodes and movies as you want instantly. you watch on your tv through a game console or other devices connected to the internet. best of all, it's only 8 bucks a month.
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us here at "mad money." now let's do some mad mail and, yes, some mad twee tweets @jimcramer on twitter. hello, jim. writes bob in nevada. "you often encourage home gamers to do their homework. although i dvr every episode of "mad money" i don't recall specifying exactly what you suggest should be involved in doing our homework. my version is mostly libsing to every word on "mad money" and check price movement and arts charts. what else do you suggest we do?" here's what to do with "mad money." i wrote a whole book about how to do it with "mad money." that's the starter. you hear a stock that you like you decide you want to get to know it. you go to the website. the websites these days have almost everything. you read about the last three quarters. i like to read the annual report. then i like to call what the analysts are saying. i like to see what could be in the pipe. i like to see how the dividend is. these are all part of the process long before i would ever think of pulling the trigger. and by the way, i also like to
think what would make me sell it? if they miss certain things or did certain things and the stock went up so high. a lot of things for homework. it all starts with the website. here's one from trace. no doubt the -- well, the fantastic country singer. "hi, jim. as we all know the department of defense is plan og to downsize the military over the next few years as we also conclude our business in afghanistan. do you believe that the large amount of military personnel, d.o.d. contractors and other military support personnel will flood the job market and also increase the demand for goods?" no, trace, i don't think it will move the need middle. by the way, me don't move that fast. and if anything there could be a peace dividend if we ever got to that where we'd be able to cut the budget deficit a la what happened in the '90s. i don't think you should look at this issue in a way to be able to make money off it, though. it's really not a needle mover. as a matter of fact, it can be negative for a lot of the defense companies as we know. they've been under a cloud because of these cuts. here's one from danny in new york. hi, jim. i've heard you say when considering playing the down side of an equity that you would short the stock rather than buy
a put. please elaborate on your reasoning for this. i favor the high risk of a short position. i'm so glad you sent me this because if i've created any misperception that i favor shorting stocks, it is completely out of character with all my books and what i used to do at my hedge fund or before my hedge fund when i used to work for people at goldman sachs or when i was trading for myself. i always do puts, i rarely do shorts because as i write in "confessions of a street addict" i was the victim of a some bad short squeezes that lost me a ton of money. let's goat to some tweets. here's one from bkelly 019 @jim cramer, covered calls allowed my to print money out of large positions without having to sell. why do you hate them so much? here's the swr. i've got to tell you something, bkelly 019. i hate cutting my up side. you can't make more money than when you write the call. let's say something goes wrong. okay. you sell the stock. you're really vulnerable to a takeover then because you're
still short the call. never, ever, ever cap your upside. that's always been my rule. i would never sell a put. that i think and i've seen it in '87. i saw that put people out of business. i saw it again in 2009. put people out of business. trust me on this. i've been around for more than three decades. trust me on this. here's one from jeff. "boo-yah, jim. what is your strategy in looking at hospital stocks in general? how do you approach stocks like these in earnings season?" all i care about is government pay if the government's not in the mood to pay hospital, if they're stingy toward hospitals i don't want to touch them because there's not enough hospital mergers that can still be done without the government stepping and n. and saying i've got to block that. if the government's on your side i could be a buyer. if the government's against you stay away. but stick with cramer. >> announcer: keep up with cramer all day long. follow @jimcramer on twitter and tweet your questions questions, #madtweets.
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