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Cramer: Invest in Easy-to-Understand Businesses

U.S. stocks fell in the final hour of trading Tuesday to finish lower after a transcript from the Greek meeting showed deposits leaving the nation's banking system and after the Greece's leaders failed to agree on a coalition government.

Jim Cramer
Jim Cramer

The S&P 500 closed at 3-month lows, while the Dow logged its ninth loss in the last 10 sessions. Major averages are on pace for their biggest monthly losses since last September.

“At a difficult moment like this one, I want to invest in businesses that I can understand, not in businesses that even the CEOs find unfathomable,” said Jim Cramer on CNBC’s “Mad Money.” “One gives you confidence to buy on dips while the other is just a total horror mystery.”

To illustrate his point, Cramer referenced his list of Ultimate Growth Stocks. All of these companies have easy-to-understand business models, as well as sharp executives who consistently deliver on earnings. Whether it’s Whole Foods or Chipotle, it’s no mystery what these companies do.

Investors should consider other companies with easy-to-understand business models, Cramer said. Walt Disney, for example, can be understood by just looking at its annual report. With the success of the motion picture “The Avengers,” Disney will have the power to extend a billion dollar franchise into a multi-year, multi-billion dollar earnings stream by way of merchandise, sequels, amusement park rides and more. Whether it’s a dividend boost, stock buyback program or capital improvements, CEO Bob Iger must decide on how to allocate capital. To Cramer, that’s a compelling reason to buy the stock.

Costco and Home Depot present similar opportunities, Cramer said. These stocks may struggle from time to time, but Cramer said management has developed a concept that works. So he doesn’t think their “long-term dominance” will be affected by a few bumps along the road.

It’s another story all together for companies that are hard to fathom, Cramer said. Take JPMorgan Chase, for example. CEO Jamie Dimon often argued that his company isn’t much different from a fish store or a restaurant. JPMorgan has a simple business model that he has total control over, Dimon often said. But Dimon didn’t have control over the collateralized mortgage obligations his firm bundled and sold to clients that led to $2 billion in losses, Cramer said. Then again, Cramer wonders if anyone could have understood that business.

“The stuff is just too complex, too dense, and just plain beyond the ken of just about everyone,” Cramer said. “That “X” factor, meaning that even the CEO can’t get his arms around a $2 billion problem, makes a stock like JPMorgan almost too hard to invest in.”

Yahoo is another example of a company that’s difficult to understand, Cramer said. The Palo Alto, Calif.-based company had been a play on search and display advertising, but Facebook and Google have since crushed it. It also lacks a mobile strategy. So the company has become a break-up story, Cramer said. But he doesn’t want a break-up story where others need to come in and buy a declining asset. Instead, he wants a proprietary business with a strong and steady culture — something Yahoo is not.

So what’s the bottom line? Stick with companies with easy-to-understand business models, Cramer said, because they will give you the confidence to buy on dips.

Read on for Cramer’s 4 Earnings to Watch Wednesday

When this story was published, Cramer’s charitable trust owned JPMorgan Chase.

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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