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Booyah Breakdown: Back to School

Tracy Byrnes

Editor's note: Welcome to "Booyah Breakdown," an explanation of certain terms and topics Jim Cramer discusses on his "Mad Money" TV show. Feel free to ask a question if you're confused about something Cramer talks about, but please keep in mind that we do not provide advice on specific stocks.

As the summer flies by, parents start counting the days until school starts. Kids, on the flipside, dread the thought that the summer is ending and that they'll soon have to get up early, sit at a classroom desk for five hours a day and spend the remainder of their afternoons doing -- gulp -- homework.

Granted, no one likes homework, but if you ever want to get out of high school, you've got no choice.

And if want your stock portfolio to perform at Harvard-quality levels, Cramer insists you do your stock homework as well. That means understanding all the nuances of the companies you choose to invest in. Just like you wouldn't just give your hard-earned money to a financial adviser without scrutinizing his track record, you shouldn't give your money to a company's management team without doing the same due diligence.

But while we all realize portfolio homework is a requirement, many of you just don't know how to do it.

So get out your assignment pads and write this down. We're giving out homework assignments!

Cramer suggests you do an hour of homework a week on each stock. So first ask yourself if you have that kind of time. If you don't, stop reading and go hire an adviser.

If you're up for the challenge, let's go.

We've divided your homework into two parts: the assignments that must be completed before you buy a stock and the weekly assignments once you own it.

Four Assignments Before You Buy

Before you buy a stock, you must do these things.

1. Go to the Securities and Exchange Commission's Web site and pull up the company's quarterly or annual reports. Dissect them. We've written stories on how to analyze the 10-Q, balance sheet, income statement and cash flow statement. Learn how to navigate through the financial statements and use them to assess your company.

Don't avoid the text. The company has a story, so read it. Understand exactly how the company makes its money. If it's in broadband, then you should be able to define "broadband" to anyone. If it makes children's clothes, then go buy some, let your kids wear them and then send them through a wash cycle. Get involved with the product.

2. Understand the metrics -- or ratios -- that pertain to your company's biz. This requires some number-crunching, but you need to be aware that certain metrics are more relevant in certain industries.

And understanding those metrics allow you to better judge that company, Cramer noted in a June episode of "Mad Money." He then detailed some important metrics:

Once you know the key industry metric, compare it with the company's peers. The retailer with the best same-store sales, for example, is the one you want to own, Cramer says. So while all the numbers are important, some clearly hold more weight.

3. Listen to previous conference calls and read past analyst reports. The calls are generally available on your company's Web site. You can either listen to them or read the transcripts. And while the analyst reports are a bit harder to come by because you may have to pay for them, a recent Booyah Breakdown column tackled some of the best ways to find good research.

4. Enter the company's name in a search engine and read all of the latest news and stories that have been written on it.

Once you complete those four assignments, you should be armed with enough information to decide if the stock's worth buying.

Four Assignments for the Stocks You Own

The markets are far from stagnant, so the reasons you bought the stock could change on a dime. That's why Cramer says you need to commit at least one hour a week to monitoring your stocks.

Here are your weekly stock assignments:

1. Take a look at the news that was written about your company during the week to stay on top of any changes.

2. Analyst reports get updated all the time. Read the latest versions to get an idea of analysts' thoughts on the stock.

3. Evaluate recent developments outside the stock market and how they may affect your company. Will your stock get hurt because of the U.K. terrorist plot? If we have a harsh winter, is your company affected? Determine how the economy and outside factors play into the future of your stock.

4. Decide if it's still a keeper. At the end of your hour-long research session, you should have a definite answer on whether you need to buy more, hold, or sell.

If you can't come up with an answer, go do more homework.

Keep in mind that earnings season is like exam time -- you have to beef up your studying. You've got quarterly conference calls and earnings reports to dissect. Cramer says "the "holy grail" of homework is the earnings conference call held in conjunction with the company's release of its quarterly earnings report. So be sure to allot extra time for all that. And for more help navigating through earnings season, check out this recent column.

Now get busy and do your homework!