Why Inventory Matters So Much

If you want a good read on a company’s prospects, Cramer said Wednesday, then check the storeroom. Businesses of all kinds – retail, technology, housing, autos – live and die by their inventory.

Inventory is so important, in fact, that it can predict a turnaround in an industry. Because while a glut of product indicates a slowing business, empty shelves often point to one that’s ready to take off. It means that a company has eliminated its excess inventory and is ready to start ordering again. And that ripples out to its customers and vendors.

A good example of this is Best Buy . When this retailer says that its inventories are low, that helps everyone in the tech food chain. BBY places orders with suppliers to refill its shelves, its suppliers place orders for the components needed to build their products, and so on and so on. Tight supply at Best Buy can cause a bottom in everything from Corning , which makes the glass for televisions, to Apple and Texas Instruments , a component maker for cell phones.

Of course, as important as inventory is, there are other factors that play a part as well, such as a business’ ability to obtain credit. During the credit crisis, banks were reluctant to lend, and this halted any potential turnaround in other industries, even those where inventories were low. As a result, companies were unable to get the money needed to finance the next cycle. This doesn’t happen often, Cramer admitted, but it illustrates how important the banks are to the whole process.

Still, “Inventory matters in a huge way,” Cramer said, because it could be sign of a turn.

Cramer's charitable trust owns Apple.

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