Cliff Mason
Senior Writer
Mad Money

The 10-point scale we've bee using all week to evaluate companies does not, I repeat, does not necessarily tell you which company is a better buy. Why? 

As you may have seen when we stacked Procter & Gamble

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[PG  Loading...      ()   ] up against Unilever

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[UN  Loading...      ()   ], the one thing the 10-point scale does NOT consider is price. The 10-point scale is for grading companies against each other, but the final tally does not alone tell you what stock is the better buy. It tells you which company is better. Every time we've run one of these comparisons using the 10-point scale, we've followed up by seeing how the market valued the stocks. Did their valuations reflect the conclusions we came to about the companies? If not, then the better company was the better buy. But usually, as was the case with Procter & Gamble versus Unilever, the market's already priced in most of what we considered using the 10-point scale. PG had a substantially higher price-to-earnings multiple than UN.

The 10-point scale gives you a great reference for where the companies deserve to trade, but it doesn't tell you which stock to buy because we only look at their valuations after we grade the companies. To know what we'd consider the better buy, you have to compare the final score you give each company to the score the market's giving them--their price-to-earnings multiples. Sometimes, as with PG and UN, which stock is the better buy can depend on a shift in price of only a few points.

The best way we think you can use the 10-point scale when comparing companies head to head is to first learn which company deserves the higher valuation, whichever one has the highest score, and then bring price into the picture. Then, as the prices change, which they always do, you can reassess the new situation, using the rankings from the 10-point scale and the stock prices to tell when it's time to swap out of one and into the other.

One note of caution: Sometimes a company is so bad, you don't want to swap into its stock and out of its competitor's, even if the competitor's valuation goes sky-high and the loser company's stock is dirt cheap. How will you know when? If there's a big disparity in points, say one company leads the other eight to three, you probably don't want to touch a company that only gets a three out of 10 under any circumstances.




Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Rich and Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like. 

Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.

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