Cramer's 'Mad Money' Recap: The Quality Defense

Click here for an archive of Cramer's "Mad Money" recaps.

---

We have to put up our maximum defense now, Jim Cramer told viewers of his "Mad Money" TV show Tuesday. We're in a bad market, so it's time to be extra careful and stick to high-quality growth names, he said.

But what's the difference between high-quality growth and low-quality growth?" Cramer asked. "Isn't all growth good?"

That's where people get it wrong, Cramer said. Earnings are not just quantitative, they are also qualitative.

There are some stocks that look good, but might be really ugly on the inside, he said. These stocks with low-quality growth are like impressionist paintings, he said. They look good from afar, but on closer examination are fuzzy and abstract.

Weak-Growth Impressions

Three examples of stocks that look good, but are full of bells and whistles are Lucent Technologies(LU Quote), H&R Block(HRB Quote) and Imax (IMAX Quote), Cramer said.

"All of these bears have very low-quality earnings," he said.

"I used to like Lucent, but I was wrong," Cramer said. The company boosted its net income from phantom credits because it could hide behind confusing pension accounting rules. But after the truth came out, everybody could see how ugly its earnings were, he said.

This is a big lesson. You always need to know where the earnings are coming from, Cramer said.

Imax had a similar problem in 2004-05. It was hitting its earnings estimates, but not because of organic growth, he said. It was selling used equipment, it was getting cash from lease settlements, said Cramer, making Imax an example of subpar earnings.

The third example Cramer gave of a low-quality-growth company was H&R Block. "They're a tax preparation company, but in 2004-2005, they screwed up their own taxes," he said. "That can't be a good thing. You're better off with the mafia preparing your taxes than HRB."

Cramer also mentioned that if the company's press releases seem esoteric, or if there seems to be too much M&A activity, you shouldn't buy the stock. Both can be signs of low-quality growth.

The bottom line: Dump stocks with low-quality earnings and load up on high-quality names.