In his new book Get Rich Carefully, CNBC's Mad Money host, Jim Cramer, gives readers his advice on how to find value in the stock market even during times of severe volatility. For investors looking for long-term growth, his 10 commandments on stock picking can help investors assess the key fundamentals necessary to gauge growth potential.
When I make my highest-growth stock selections, I like to go through an exercise that illuminates the strengths and weaknesses of these kinds of companies. I think I have it down to a system, and I want to share my methods with you so you can use the same methods to measure uber-growth stocks. It's my ten-point test that I use every day to isolate my favorite stocks for my favorite themes. Grade your stocks on a scale of 1 to 10-—10 being the best—and then add them up to see which wins. In a diversified ten-stock portfolio you must limit how many of these super-growth stocks you can own because they do tend to trade together as if they are in their own cohort, even though they might originate from different sectors. Just go for the one or two that trump the others.
First test: Is there potential for multiyear growth that we can put a value on, a clear growth path that provides long-term visibility with multiple revenue streams?
Second test: Is the total addressable market big enough for the companies to sustain their growth?
Third test: Does the company have the ability to stay competitive?
Fourth test: Is there a possibility for the company to return capital over time, through either dividends or well-timed buybacks? Or does the company have such a well-defined growth plan that it can just continue to pile money into the business to get consistent or accelerated revenue growth?
Fifth test: Can the company expand internationally?
Sixth test: Can the balance sheet support strong growth?
Seventh test: Is the stock expensive on the out years?
Eighth test: Does the company have the right management?
Ninth test: Does the company need macro growth to meet the numbers?
Tenth test: Can the company maintain or grow its margins?
I know that answering these ten questions before you pull the trigger on a stock is laborious, but as I point out, this is not an exercise in getting rich quick, it is about getting rich over time, and when I say you have to do the homework before you buy a stock, and you have to continue to do it even after you have bought it, you know which questions you have to ask when you do that homework. There are no shortcuts to great wealth. I sure didn't take any. You shouldn't either.
—CNBC's Jim Cramer. Follow him on Twitter @jimcramer.
Text copyright © 2013 by J.J. Cramer & Co. From JIM CRAMER'S GET RICH CAREFULLY, reprinted with permission from Blue Rider Press, a member of Penguin Group (USA) LLC.
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