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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.
Three examples of stocks that look good, but are full of bells and whistles are
, 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.
Realistic, Strong Growth
"When the market gets bad you need to cling to companies with high-quality earnings," said Cramer. "They are your life vest."
Unlike companies with low-quality growth, you can compare high-quality companies to realist paintings, as they provide a true picture of the health of the company. Their earnings should be sustainable in a tougher market, which is coming, Cramer said.
Before revealing three stocks that he believes to have high-quality growth, Cramer explained to his viewers that they should avoid stocks that have made too many acquisitions.
"You're looking for core organic growth," he said. "Organic growth doesn't come from M&A; it is growth in the core business."
The company's dividends are also something to look for, he said.
"Like hips, dividends don't lie," Cramer said. "Every company that has had consistently increasing dividends is good."
Buybacks are also good, he said. They provide a cushion. Simple financials, steady cash and growth potential are what you want in stocks.
"You want management to be clear when they talk to you," Cramer said. You don't need to be an expert to understand a press release or a conference call. Avoid stocks that are too complicated. They should be transparent."
Cramer's three picks for companies with high-quality-growth earnings were
, which he owns for his
Action Alerts PLUS charitable trust, and
He gave Pepsi three thumbs up, and said that although United Technologies got hammered Tuesday, he's willing to take the heat and recommends staying with it.
All three of these companies have transparent earnings and consistent, increasing dividends. Their cash flows are significantly higher than their earnings, and they have organic growth, he said.
"If you want to survive, get out of your impressionist stocks," Cramer said.
Even though gold is down $14 today, Cramer hailed it as the king.
Gold is not low-risk, he said. But with risk there is reward, and in the case of gold, Cramer believes the reward outweighs its risk.
"Nothing destroys wealth like hyperinflation," Cramer said. But gold is the ultimate source of value, and it has come back to a good entry point, he said.
is off the table, Cramer said. And you can't make money off of
right now either, he said.
Cramer said he likes
as a speculative play.
But the more solid choice is
, Cramer said.
"It's time to go hunting for gold in Brazil," Cramer said. "This thing
Yamana Gold holds up better than a Brazilian supermodel."
Yamana is the cheapest producer of gold, expects to produce 400,000 ounces of gold by 2007 and has a market cap of $1.87 billion, Cramer said.
"AUY is the ultimate gold-growth play," he said. "While the rest of the world is running out of gold, they're increasing production."
The bottom line: "AUY is down today, but it's the best play on gold I've got," Cramer said.
Cramer was bullish on
Palomar Medical Technologies
Cramer was bearish on
American Oriental Bioengineering
China Yuchai International
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 United Technologies.
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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