Cramer's Mad Money Daily Recap 8/11/05 - Spotting Moves

[Thierry Martin]

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Cramer's Mad Money Daily Recap 8/11/05

(This show was pre-recorded, and did not include a lightning round.)
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Spotting Moves Before They Happen

Wall Street is an "unsophisticated" place where money is made by investors who predict the tastes of crowds, Jim Cramer said on CNBC's "Mad Money" program.

"You need stupid, unthinking greed of everyone to drive stocks up, stocks that you were in early," Cramer warned viewers.

Beating the market involves finding stocks that will later find favor with the masses.

"If you only buy and hold, then you're too lazy to be in this game," Cramer said. "To beat the market you have to know where it's going before it gets there."

Cramer said he's earned the anger of many investors for riding the dot-com bubble to the top "before getting my butt out of there." "No stock is overvalued if it's going up," Cramer observed.

You won't find momentum names in analyst reports, the S&P 500 or the financial press, Cramer said. Message boards, Investor's Business Daily and the Nasdaq percentage gainer list will yield better results.

As an example, Cramer described an investor trying to game nanotech. "You're not going to find a good nanotech company. You're going to find the least bad one. Science that sounds just legitimate enough to get the whole crowd behind it."

"If you're right, the soon-to-be-hot sector will start getting coverage," he said. "Brokers will promote this garbage, then it will soar."

Since knowing when to sell is as important as when to buy, Cramer gave a list of signals to look for in stocks that are topping out. Creeping competition, accounting problems, overexpansion and government interference were among the biggest signs that the top had been reached.

Cramer warned not to rely on Wall Street analysts to know when to get out of a stock. "Downgrades happen most often after the train has left the track," he said. "Once it's burned, it's finished, gone, destroyed."

Competition is responsible for 70% of stock "tops," Cramer said, with one example being U.S. Surgical in the 1990s. The Street insisted that you had to own the stock because of its dominance in surgical staples.

"When Johnson & Johnson (JNJ) announced it was getting into the business. USS went from $120 to $30 and I shorted every share I could get."

Investors should bail out at the first sign of accounting shenanigans, Cramer said. "Shoot first, and don't even bother asking questions." Cramer admitted to ignoring his own advice and losing money on Nortel (NT).

Overexpansion wastes management's time and money, while any reference to "integration problems" like those at Enron and Time Warner (TWX) are reasons to "run for the exits."

"Look out when a retailer has too many stores near each other," Cramer said. "When the retailer has stores in every state and has no new areas to expand in, that's the ultimate top."

Cramer also mentioned other rules for successful investing, such as proper diversification and understanding how different businesses perform during economic cycles.

"Fifty-percent of how a stock moves depends on the performance of the sector it's in," Cramer said. "If you call the sector, you can call half the gains or losses in a stock."

There are two categories of stocks, cyclicals, which do well when the economy is doing well, and secular growth, which aren't sensitive to the underlying strength of the economy. The first category includes airlines, autos, raw materials and heavy equipment, and the second one includes consumer staples. "We don't stop buying Band-Aids just because we're short of cash."

One counterintuitive investment strategy consists of buying cyclicals when their price-to-earnings ratios are at their highest. Wide P/Es reflect a frantic effort of analysts to lower earnings estimates, but that happens once the stocks have stopped going down.

"When these companies are at their most expensive at the bottom of the cycle, that's when you have to buy."