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It is wrong to think that oil is going to be the next bubble, Jim Cramer said on TV's Wall Street Confidential

Web video Friday.

"A bubble is defined by a stretch in valuation of remarkable proportions," he explained. People have to understand that there's not going to be a bubble with stocks that are selling at eight, nine or 10 times earnings, because these companies are the ones that can buy back a lot of stock and can increase the dividend.

To argue against his thesis, Cramer said someone could point out that

Toll Brothers

(TOL) - Get Free Report



(LEN) - Get Free Report


KB Home

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are all selling at eight times earnings. However, those companies cannot buy back stock, he said, because they are running out of money, and they can't raise their dividends because they would be violating covenants.

"You have to distinguish between various companies," Cramer said. "Companies that sell at eight, nine, 10 times earnings may be selling at that low vs. the

S&P 500

because either earnings are going to fall off dramatically or because they are misvalued by the market."

Oil, he said, is misvalued and has been the whole way. Oil stocks trade off where the big brokerage firms think that oil is going, and all of them, with the exception of

Goldman Sachs

(GS) - Get Free Report

, which he owns for his charitable trust,

Action Alerts PLUS, are still "way too low" with their estimate of crude, Cramer said.

"As long as their estimate of crude is at $60 to $70, then the numbers are going to be blown away, and the valuations are going to be very cheap," he said. "That's why oil still works." Cramer said his estimation of crude is $75 to $85.

People have to remember how these companies make money, he said. They make it in three ways: through derivatives of oil, at gasoline stations and by being able to take oil that they have in the ground for a very low cost and sell it for a very high cost, Cramer said. Plus, reserves allow companies to take further advantage.

Cramer said he's been emphasizing

XTO Energy


, which he owns for Action Alerts PLUS, and the company's CEO Bob Simpson because he's adding reserves.

He also called

Exxon Mobil

(XOM) - Get Free Report

"a great company." The company, Cramer said, has $2 to $3 oil in the ground. It sells it for $50 to $70 and then takes the proceeds and pours them back to shareholders. Further, he believes Exxon can continue to be a great stock because it has the largest reserves of any company. However, it is not the way he likes to invest at this point in the cycle, Cramer said.

"I will always recommend Exxon," he said. "I would describe it as

Procter & Gamble

(PG) - Get Free Report

, but sometimes you want to pick the stock that will be the next Procter, and that's XTO, which is natural gas."

Market players must find the metric that the market is using for every single stock, Cramer advised. Once they know the metric, they can make decisions on which of the oils to buy or which of any group to buy, he said. "The metrics are different for every industry, and without knowing what the metric is, you're just going to get it wrong."

At the time of publication, Cramer was long Goldman Sachs and XTO Energy.

Jim Cramer is a director and co-founder of He contributes daily market commentary for's sites and serves as an adviser to the company's CEO. Outside contributing columnists for and, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for

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