3 Ingredients for Growth
Although the notion of investing in stocks may seem abhorrent, Cramer said it’s the best way to augment your paycheck with meaningful gains, unlike Treasury bonds or certificates of deposits.
It’s easy to understand how high-flying stocks, like Apple or Google , can make people money, Cramer said. But when it comes to these kinds of names, the difficult part is overcoming the skepticism and fear that you’ve missed the move, even though there’s still room to grow. Ultra-fast growers are easy to spot, but there usually aren’t many of them at any given time. Identify growth powerhouses by looking for these three ingredients:
First, understand that all big, multi-year winners are secular growth stories, meaning their earnings aren’t held hostage to a healthy economy. Even in a slowdown, earnings will continue to grow because they’re fueled by a trend that transcends economic conditions. Apple, for example, took advantage of the smartphone revolution.
Second, look for accelerating revenue growth, which is when a company’s sales increase at a faster and faster pace year after year, or even quarter after quarter. It means the business is snowballing. This growth is key to having and maintaining a high multiple and higher stock price, as well. Salesforce.com , for example, first reported ARG in November 2009. Since then, the technology company has continued to report ARG and the stock has shot up by 70 percent.
Rising earnings estimates are just as important as increasing earnings, Cramer said. When analysts covering a stock have to take up their forecasts, it’s like “rocket fuel” for a stock. This has been the case for Apple, he noted, where from end June 2009 to end June 2010, Wall Street’s earnings consensus for 2011 rose by 118 percent.
“As long as these components are in place, you can’t let yourself get scared off by a high share price or by ostensibly qualified prognosticators who will tell you the stock is too expensive at every turn,” Cramer said. “You can’t tell whether something’s expensive by looking at its share price.”
The only way to measure whether a stock is expensive, he explained, is by looking at the price-to-earnings multiple. High-flying stocks can sell for “extraordinarily” high multiples, where the ceiling is twice the company’s long-term growth rate and that could be as much as 60 times earnings.
“When you’re chasing growth stocks, growth is what matters, certainly not price,” Cramer said. “As long as the secular growth story is intact, with accelerating revenue growth and rising earnings estimates, the sky is pretty much the limit.”
When this post was published, Cramer's charitable trust owned Apple.
Call Cramer: 1-800-743-CNBC
Questions for Cramer? email@example.com
Questions, comments, suggestions for the Mad Money website? firstname.lastname@example.org