Thoughts on Jim Cramers Stock Picking Tips

Now this is an interesting article on how Jim Cramer picks his stocks. This is what he does when the stock market is down:

Usually when a stock gets upgraded, it jumps higher immediately, he
said. But not when that upgrade comes out on a bad day for the market. "On those days, a stock that gets upgraded isn't going higher. In fact, there's a good
chance it will go lower depending on how awful the action is," Cramer
said.

His other rule of thumb is:

"If a stock has a price-to-earnings multiple -- remember E (the
earnings) times M (the multiple) equals P (the price) -- that's lower than its
growth rate, then that stock is cheap," Cramer said.

This is one rule of thumb that I already use to vet a stock. You first look at why the P/E is low compared to its growth rate. If it is because the company has crappy earnings that need to be revised lower and lower but lots of potential (but unrealized) growth then you should avoid the stock. However if the potential is finally met (like Amazon) then the stock takes off if there is more earnings growth possible.

A lot of times the P/E is artificially lower because the stock is in a "cyclical industry" that "deserves" a lower P/E. You can look at many agricultural stocks like Deere (P/E 22 to 52% growth,) Bunge (P/E 18 to 107% growth,) and Terra Nitrogen (P/E 17 to 232% growth)falling into this category. Those stocks will grow very well in the coming years as the ethanol boom consumes more and more corn and thus needs more farming equipment, seeds, and fertilizer too keep things moving. The ethanol stocks on the other hand have the potential growth but the fundamentals just don't add up yet. That realized growth may be there in the future but it is hard to hold those stocks to that period.

Cramers final tip has to do with buying with wide scales:

With wide scales, people buy larger and larger positions as the stock goes
lower, and "when it's so low you can hardly believe how poorly the stock is
trading, you double down," he said.

This one is hard to do for the small investor since this stock ends up as a large portion of your portfolio. It is just psychologically difficult to keep buying a stock over and over as it goes down without much upside hoping for a bottom so you can double up. It works but you have to be very careful with the stock you pick.

If you are certain that the stock is undervalued and it has great prospects in the future then it is a sound strategy. I think many financial stocks are starting to fit the bill as this sub-prime mess spools out. I think a company like Goldman or Citigroup can start making big money again once they write off all of that bad debt and get back to what they do best.