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"The market is full of people who are speculating," Jim Cramer told viewers of his "Mad Money" TV show Thursday. We've got fools speculating, and they don't know what they are doing, he said.
has been cut back by 25% because of speculation, Cramer said. You need to know what a company does and what it is levered to, otherwise you should not own its stock, he said.
"I love speculating, but you have to do it right," he said. "Speculating is not investing. When you confuse the two you get annihilated."
You should speculate only if you are comfortable with it, Cramer said. You have to separate it from investing. If you want to speculate right, this is the time to do it, he said.
Speculative stocks often don't have positive earnings yet, they move a lot when there is only little news about them, they are small, cheap stocks that are much riskier than regular stocks. In addition, there are usually one or two things that could make or break a speculative stock, so you must follow some ground rules, Cramer said.
First, never speculate with borrowed money, he said. These are risky investments, and there is a chance you could lose it all.
Second, only speculate with money you can afford to lose, Cramer said. As you get older, speculate less because then you have less time to make the money back if you end up losing it. He recommended 54 as the cut-off age for speculating.
Third, never put more than 20% of your portfolio in speculative stocks.
Speculative stocks usually trade in the $2 to $4 sweet spot, but you should ask yourself how they got there. Speculative stocks have checkered pasts. You have to make sure you do your homework before you speculate, Cramer said.
Fifth, don't speculate on debt-ridden companies. And finally, keep track of the financing that speculative stocks require.
"The bottom line: Know what you are doing so you don't speculate when you mean to invest," Cramer said. "And when you decide to speculate, do it the right way."
10 Specs to Watch
I want to do more than teach you how to speculate like a pro, Cramer said. I have put together 10 stocks with my team to create a Mad Money speculative-stock index, he said.
The stocks in this index are:
- Rentech (RTK)
- Crystallex International( KRY)
- Ivanhoe Energy (IVAN)
- Transmeridian Exploration( TMY)
- Northgate Minerals( NXG)
- EuroZinc Mining (EZM) - Get Report
- JDSU (JDSU)
- Conexant Systems (CNXT) - Get Report
- Ciena (CIEN) - Get Report
Rentech is not making money, and there is no guarantee its technology will ever be used; Crystallex is play on a gold mine that might never happen; Ivanhoe's prospects could be fictional for all we know, Cramer said.
Transmeridian is based on one project that could be confiscated tomorrow; Northgate Minerals relies mostly on gold and copper, and its main mine could have a short life span; EuroZinc Mining has one main copper mine in Portugal. If there's any disruption there, that project will go down the tubes, Cramer said.
JDSU has an optical market that is volatile, and it has very little insider ownership; Conexant's balance sheet should lose 7 cents per share in 2007, and it needs to refinance, he said.
Finisar has serious competition, and even after reporting a good quarter, the stock got pounded in the market today, Cramer said. And Ciena's future operating margins are questionable, he said
"Speculative stocks are a sector of their own," Cramer said. "They are radically underperforming. Since May 11, my speculative index is down more than 15%."
"When the speculative index is cheap, that is when we want to start to get in," Cramer said.
You should speculate, he said. It's where the big money comes from, but you have to do it carefully and methodically because it is a risky business. You should have a few speculative stocks, he added. You need to be diversified when speculating also. It should only take up a fifth of your portfolio, he said.
Location, Location, Location
Four speculative stocks that are ready to run wild are
( MAPS), Cramer said.
"These stocks are centered around hurricanes," he said. "People want new global positioning systems. They are going from being a toy of the rich, to a necessity of the almost rich."
Cramer said Garmin is a best-of-breed player in global positioning. It earned $322 million for in the first quarter of this year, a 67% increase from the same period a year ago.
Remember to approach these stocks only as a speculator, Cramer said. The story is too good for these stocks to stay down, he said.
CEO Bruce Williamson, who joined the show by phone.
Cramer asked Williamson what impact consolidation has on the power-plant industry.
Consolidation is inevitable and an opportunity, not a threat, Williamson said. It is an opportunity for Dynegy's investors over the longer term, as consolidation leads to stronger companies, he said.
Would you sell, not your company, but an individual plant? Cramer asked.
"We did that at a very good price down in the south," Williamson said. "We look at selling now and then, as long it's not a part of our core portfolio."
When Cramer talked about Dynegy's debt, due in 2012-13, Williamson noted the company has undertaken an aggressive deleveraging program.
Cramer gave Dynegy's stocks two thumbs up.
To view Cramer's interview with Williamson, click here.
Cramer was bullish on
Allscripts Healthcare Solutions
Cramer was bearish on
( BWNG) and
TD Ameritrade Holding
For more of Cramer's insights during the most recent Lightning Round, click here.
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At the time of publication, Cramer was long Sears Holdings and TD Ameritrade.
Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for TheStreet.com, Inc., and CNBC, and a director and co-founder of TheStreet.com. All opinions expressed by Mr. Cramer on Mad Money are his own and do not reflect the opinions of TheStreet.com or its affiliates, or CNBC, NBC UNIVERSAL or their parent company or affiliates. Mr. Cramer's opinions are based upon information he considers to be reliable, but neither TheStreet.com, nor CNBC, nor either of their affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Cramer's statements are based on his opinions at the time statements are made, and are subject to change without notice. No part of Mr. Cramer's compensation from CNBC or TheStreet.com is related to the specific opinions expressed by him on "Mad Money."
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