How should investors gauge these red-hot stocks with seemingly unbridled share prices? Cramer said he's always willing to pay a multiple that's up to twice a company's growth rate. So for a company growing its earnings at 20% a year, Cramer said he's willing to pay up to 40 times earnings for it.
Investors must pay close attention to which way a growth company's earnings are headed, however. These high fliers can seem to soar endlessly if earnings are accelerating and analysts are scrambling to raise their estimates to fit that growth. But as soon as earnings slip and those estimates are not met, the downward gravitational pull can cause shares to take a pounding.
This was certainly the case with Apple throughout much of 2012 and 2013, said Cramer, and the same can be said for Chipotle, Blackberry (BBRY), Nokia (NOK) and Chipotle. When you see multiples compress, be prepared for a bumpy ride, Cramer concluded.
Unsexy Dividend Stocks
Cramer's next class of stock for a properly diversified portfolio is one that offers a high dividend yield. He said that while dividend stocks may not be as sexy as a high-growth name or a speculative stock, buying a high-yielding stock and reinvesting those dividends remains one of the best ways to make money, period. Since 1926, nearly 40% of the return from the S&P 500 has come from dividends, Cramer noted, so investors who ignore dividends ignore a huge chunk of earnings potential.Why are dividend stocks such a good investment? Cramer said it's because a big dividend offers a cushion that helps prevent stocks in a big decline. As share prices fall, yields rise, eventually to a level where investors simply cannot say no. This trend prevents stocks with long histories of steady dividends and dividend raises from falling much below where their yields reach 4%. At that level, there always seems to be hoards of investors buying in. Beware of stocks that have yields that are too high, however, Cramer cautioned. He said that in addition to a solid track record of paying and raising their dividends, investors need to see earnings that are at least twice the dividend payout to deem it a "safe" dividend. This rule can be broken for companies that have large capital investments and, therefore, large depreciation expenses, Cramer noted, as depreciation is not an expense that directly affects a company's cash flow. Cramer's final word about dividend stocks is nomenclature. He said dividend stocks have a lot of dates, but the only date investors should be concerned with is what he dubs the "must own" date, which is the day before the ex-date, or ex-dividend date. The must-own date is the date that investors must own shares in order to receive the next dividend payment.