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The ABCs of Recovery

Wednesday, 5 Aug 2009 | 6:22 PM ET

While there seems to be a consensus that a recovery is underway, Cramer said Wednesday, there’s still a debate as to what form it will take. Investors are pushing and pulling in the direction they think is right, and that’s why the Dow lost 39 points today despite positive closes on Monday and Tuesday.

Cramer's Spelling Bee
The word is diversification, with Mad Money host Jim Cramer.

Now, Cramer was willing to admit that he’s not sure how the recovery will pan out, but he does know what people are predicting. So he analyzed each scenario and offered what he thought were the best stocks to play the move.

Some investors anticipate an L-shaped recovery, which is a steep decline that flattens out but offers no upside. This is “not the perceived wisdom” for the most part, Cramer said. Almost everyone is more bullish than that. But if you count yourself among this camp, then consider buying Pepsico , whose stock took a hit today after disappointing earnings from Procter & Gamble . Cramer thinks the decline was unwarranted, and he likes the company’s prospects.

Other people see the turn higher coming in the shape of a U, which would indicate a “gentle, soft recovery,” Cramer said. If that’s the case, then we’re near the bottom but on the upswing. What stocks work then? Cramer likes the natural-gas names, specifically Schlumberger and Devon Energy .

Another possible outcome looks like a V. That means we’d bounce back as quickly as we’d collapsed. In this scenario, Cramer would expect 16 million autos to be built, 2 million homes to be sold and gross domestic product to grow 4%. Such a sudden boom in the economy would make cyclical plays the best stocks to own. Cramer recommended Emerson Electric , Nucor and even Ford – though only its preferred shares – for believers in a V recovery.

A bit more complicated than the V is the W-shaped rebound. This would mean a recovery would give way to a downturn only to see another recovery follow soon after. Picking a stock that works in this situation was too hard for Cramer. He recommended waiting to see if the V happened first and then deciding where to go from there.

Lastly, there’s the doom-and-gloom M, which would happen if a weak greenback, budget deficits and higher taxes ruined attempts to emerge from last year’s depression. Investors who fear the worst should buy gold, Cramer said, whether it’s the SPDR Gold Shares ETF or Agnico-Eagle Mines . Even Randgold Resources can be owned by those wanting overseas exposure. Also, international companies that don’t specifically deal in gold – Brazil’s CPLF Energia and Cemig , Canada’s TransCanada and Norway’s StatoilHydro – work, too.

Regardless of the final outcome, Cramer urged viewers to follow the strategy he advocates whether the market’s in boom or bust mode.

“I don’t pretend to know the letter that awaits us,” Cramer said, “but I do know what those letters truly spell. They spell diversification.”

Cramer’s charitable trust owns Devon Energy, Emerson Electric and Pepsico.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

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