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Cramer's 'Mad Money' Recap: Making Sense of Earnings Season

Look at the banks, for example, said Cramer. Since the financial crisis began, it didn't matter whether a bank was doing well or not. If it was a bank, its stock was headed lower regardless. Cramer said the key is figuring out which stocks in a sector, if any, can buck that trend.

When the retail sector began to come back into favor in 2009, Cramer said he immediately gravitated towards the discounters and the dollar stores in particular. Why? Because he knew that stocks like Dollar Tree (DLTR) and Dollar General (DG) already had earnings momentum, so when money began returning to the retail group the dollar stores would shine.

Sector is even more important when it comes to technology stocks. This is, in part, because technology makes up a whopping 15% of the S&P 500, but also because technology encompasses a host of sub-sectors -- everything from semiconductors to disk drive makers, software companies to cloud computing and infrastructure players. Cramer said that each of these sub-sectors is unique, with its own set of growth rates and expectations.

When investing in tech stocks, Cramer said investors must pay very close attention to a company's sub-sector and how it relates to its peers. "There is no room for error," he explained, for when a company in this group misses earnings, its shares get pancaked immediately.

Gross Margins Matter

Another key to figuring out a company's earnings trajectory is its gross margins, or the difference between what it costs to make an item versus what it can sell it for.

Cramer said there are a lot of factors that go into a company's gross margins. In the case of a restaurant like Chipotle Mexican Grill (CMG), the key metrics are its food costs, the price it pays for beef, chicken and guacamole, and its labor costs.

For other industries, like semiconductors, gross margins are often influenced by inventory levels. When demand is high, a company can produce as many chips as possible and sell every one at full price. But when demand slows and inventory builds, these same companies must discount their chips to keep them moving, thus lowering gross margins.
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