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Moving With the Momentum

Earlier in the show, he explained how a stock with a price-to-earnings multiple that’s equal to or less than its growth rate is inexpensive. If the PE is double the growth rate, the price is too high. So growth does play a part in setting the price.



That’s especially true when it comes to accelerating versus decelerating growth. Accelerating growth means that next year’s growth will be better than this year. The opposite is true for decelerating. Wall Street loves the former and is willing to pay more for accelerating growth. If revenue growth is accelerating – A.R.G., an acronym you’ll want to remember – the Street loves it even more.

A growth stock that’s losing its momentum needs to be sold, Cramer said. And it needs to happen before the big growth funds start to sell their positions, otherwise investors can end up taking a big hit.

Even if there’s a good chance that a stock will regain its losses down the line, Cramer still recommends selling high, sidestepping the pain, and then buying back in once price has bottomed out.

Bottom Line: Pay attention to whether the stocks you own have accelerating growth or decelerating growth. When they switch from acceleration to deceleration, you probably want to sell.

Questions? Comments? madcap@cnbc.com

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