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Cramer's 'Mad Money' Recap: Metrics Matter

TheStreet.com Staff

If you want to pick stocks, you have to be able to compare stocks, Jim Cramer told viewers of his "Mad Money" TV show Friday.

"If you don't know key metrics, you don't know stocks," he said.

Cramer then went on to compare Nike(NKE Quote) with K-Swiss(KSWS Quote). You have to measure stocks by the metrics, not by the price-to-earnings ratio, said Cramer. The key metrics are inventories and what's called futures.

Domestically for K-Swiss, futures, or the advanced orders retailers have placed with the company, were down 32% last quarter. Last quarter, the company's total inventory was up 21%, which management blamed on slowing brand momentum.

Cramer doesn't like the big decline in futures and the big increase in inventory.

Nike and K-Swiss were valued the same for earnings. However, Nike's futures were up 7%. Nike is moving excess inventory to outlets.

Contributing to K-Swiss' downfall is its refusal to cut prices. No shoe company can afford to stand on principle, inventory will increase, and the company will ultimately be forced to cut prices, Cramer said.

K-Swiss was not responsive to needs of investors, and because it has two classes of stock, it is less accountable to its shareholders, Cramer said.

You don't need to be a madman to understand what makes stocks tick, he said. You just need to know the metrics. That's why Cramer said he likes Nike as a best of breed, and is making K-Swiss a triple sell.

On Spec

A great speculative story is MRV Communications(MRVC Quote), Cramer said.

MRVC is made up of three different businesses. The division Cramer likes the least is the network integration business, which accounts for 45% of the company's sales, is a slow grower, and has only 20% margins. It is just a cash generator, said Cramer.

The second division is the network equipment division. It has the highest gross margins (50%) at the company. These don't intrigue one bit, said Cramer.

Luminent, which makes up a quarter of MRVC's revenue, is the most appealing division and might be worth as much as the whole company combined.

Luminent will be spun off, said Cramer. Once that happens, MRVC will be making you money, Cramer said.

Game Plan

Even though the company might have a good quarter, the future is cloudy because of its price war with AMD(AMD Quote).

Intel tries to solve the problems by cutting prices, which hurts both companies.

Two controversial stocks are Capital One(COF Quote) and United Health Group(UNH Quote), the latter of which Cramer owns for his charitable trust, Action Alerts PLUS.

Cramer said to hold off on UnitedHealth, which has been a terrific performer but still hasn't worked out its kinks with management.

Capital One is looking like a bear's dream. Because it has reported a rise in loan delinquencies, Cramer said to stay away until after reports earnings on Thursday.

A bright light on the horizon is Continental(CAL Quote), which "has more momentum than any stock I know," said Cramer. He also recommended Merrill Lynch(MER Quote).

CarMax Talk

The business of buying and selling used cars is probably one of the most misunderstood, said Cramer.

The company that excels and does best in the group is CarMax(KMX Quote), he said.

Cramer welcomed CarMax CEO Tom Folliard and asked him why the used-car business is so good and why Wall Street doesn't get it.

Folliard said the difference between the way his company operates compared with traditional car dealers is far more dramatic than most people realize. "We have a huge selection of cars, no haggle price, guaranteed quality, a money-back guarantee and great employees," he said.

CarMax just opened in Hartford, Conn., and is opening a second showroom in New Haven to create visibility among Wall Street analysts.

Additionally, the CEO said he was driving advertisers toward the Web. The company is not selling cars on the Internet; the Web is being used to get people acclimated to the concept and convince them to show up at the showrooms, he said.

Lightning Round

Cramer was bullish on RPM (RPM Quote), Wachovia (WB Quote), BioMarin (BMRN Quote), Diageo (DEO Quote), Apple (AAPL Quote), Nice(NICE Quote), Savient(SVNT Quote), Flir Systems (FLIR Quote) and Johnson & Johnson (JNJ Quote).

Cramer was bearish on Fuel Tech (FTEK Quote), Teva Pharmaceutical (TEVA Quote), Nordstrom (JWM Quote), Cnooc(CEO Quote) and Research In Motion (RIMM Quote).

For more of Cramer's insights during the Lightning Round, click here.

Want more Cramer? Check out Jim's rules and commandments for investing from his popular book by clicking here.