On the flip side, it's also worth speculating on great companies that have been left for dead by the markets, companies like the regional banks at the end of 2011. Cramer said he had disliked banks including US Bancorp (USB) and Wells Fargo (WFC) for much of 2011, but with share prices so low and employment on the rebound these stocks became attractive once again.
It's not often a great company sees its shares misvalued by the markets, said Cramer, but it does happen, if investors know what to look for. He noted that secondary offerings of stock is one such case. Back in May 2009 Ford Motor (F) did a secondary offering of stock at a 5% discount to the market and at a 24% discount to where it had traded just a week earlier. Offerings like this, said Cramer, are diamonds in the rough and investors need to get attuned to them.
But Cramer also cautioned that companies whose fundamentals are bad or have horrible balance sheets need to be avoided at all costs.
Cramer's third rule: Never take your cues from an inferior company. He said when a worst-of-breed company says things are bad for the entire industry, don't believe it.Cramer said you'll never hear a company say, "We're doing poorly because our competitors are eating our lunch." That company will almost always pin the blame on weakness in the entire industry or some macro-economic factor, or even the weather. Investors need to recognize an excuse when they hear one. Cramer said that sometimes bad news is just bad news for that company and no one else. This pattern emerges frequently in technology, he said, with serial underperformers such as Dell (DELL) or Intel (INTC) declaring that PC sales are weak across the board. Yet, companies including Apple (AAPL) seem to chug right along without missing a beat. Sometimes bad news from Hewlett-Packard (HPQ) is only bad for Hewlett-Packard. Cramer said the same pattern can be seen over and over. Avon Products (AVP) has been another serial underperformer, yet other direct sellers such as Tupperware (TUP) and Herbalife (HLF) have both flourished under the exact same conditions.