CNBC’s Jim Cramer on Wednesday told investors they should buy stocks based on a company’s financial performance, not whether they like its products.
It’s even better, he says, for investors to also make sure the stocks they buy can withstand the current economic turmoil.
“Doing your homework about the underlying company and knowing how the economy can affect it is often more important than whether you like the product,” the Mad Money host said.
“If you don’t know how the companies you own shares in will survive an economic hurricane or even [Federal Reserve] puff or two and then just use the product but don’t own [the company],” he added.
Cramer identified three main points to consider when determining whether a company is an investment company:
- Check the financial performance of the company. “How is the company doing: is it losing a lot of money, does it have enough capital to last, is it on track to be profitable? If you don’t ask these questions, you’re asking for trouble,” he said.
- How crowded is the industry? Cramer noted that if a company is in an industry that has a lot of competition, it’s hard to stand out and stocks might not be a great addition to a portfolio.
- Will the company be able to withstand the “hurricane” inflation from the Fed? “I want you to imagine a hurricane hitting a coastal area. What house do you want to be in? One that is backed by a large stream of profits with a strong balance sheet, not to mention dividends or buybacks? an idea or a money-losing product that the stock is linked to?” he said.