On Wednesday, CNBC’s Jim Cramer told investors they should buy stocks based on the company’s financial performance, rather than whether they like its products.
Better yet, investors also need to make sure the stocks they buy can withstand the current turbulent economy, he said.
“Doing your homework on the underlying business and knowing how the economy might impact it — that’s often more important than whether you like the product,” the ‘Mad Money’ host said.
“If you don’t know how the companies you own will survive an economic hurricane, or even a [Federal Reserve] tightening or two, then just use the product but don’t own [the company],” he added.
Cramer outlined these three main points to consider when determining whether a company is investable:
- Check the financial performance of the company. “How is the business doing: is it losing tons of money, does it have enough capital to last, does it have a path to profitability? If you don’t ask these questions, you are asking yourself problems,” he said.
- How crowded is the industry landscape? Cramer noted that if a company operates in an industry that includes a plethora of competitors, it’s hard to stand out and the stock may not be a great addition to a portfolio.
- Can the company weather a “hurricane” inflation patch from the Fed? “I want you to imagine a hurricane hitting a coastal area. Which house do you want to be in? One that’s protected by a big profit stream with a fortress balance sheet, not to mention a dividend or a buyout? Or one that’s just an idea, or an unprofitable product that has a stock associated with it?” he said.