Jim Cramer receives a lot of questions from investors asking him what kind of homework he does when he picks stocks for CNBC's "Mad Money." So, to give investors the upper hand in how to properly assess a company, he decided to give a concrete example by examining Wednesday's quarter from Alcoa.
Cramer likes Alcoa because he believes in its long-term story, which is to transform itself away from being a commodity play on aluminum and into a producer of value-added materials.
He has always studied Alcoa closely by looking at the quarterly report, listening to its conference call and rewatching interviews with CEO Klaus Kleinfeld. He uses this information to spark new ideas about the macro picture of the economy, because many companies benefit from the trends that Alcoa highlights.
"My first takeaway, overall? The U.S. economy is doing better than expected. Kleinfeld hammered that home in every venue, and I believe it," the "Mad Money" host said.
How the heck did Cramer get all of that from Alcoa's fundamentals?
Because Alcoa breaks its business into many different end markets, and those businesses pretty much touch everything that is related to non-retail commerce. So it will provide a take on everything from aerospace, automotive, heavy duty truck and trailer, packaging, building and construction and industrial turbines—basically anything that requires metal.
The secret in Alcoa's reporting is that it will give investors an outlook on every one of these end markets. Thus, what Cramer heard was that every one of these markets in the U.S. is good or getting better.
For example, Kleinfeld forecast 8 to 9 percent global sales growth for aerospace. Cramer interpreted that to mean that there will be excellent business for companies such as Boeing, Honeywell and BE Aerospace.
Kleinfeld outlined that aerospace order books are filled with $125 billion in commitments, which gives the industry a nine-year backlog. That means these three stocks could become a buy on one of the many dips that the market seems to have on a regular basis these days.
How about autos? Cramer knows these stocks have been horrendous lately, but U.S. sales are still up 4.4 percent for the year with low inventories and relatively higher prices driven by light trucks.
"My read through? How about buying Snap-On Tools, which makes the clever diagnostics needed to examine these new cars. The more cars we sell here, the more business for Snap-On," Cramer said.
And while truck builders are all affected by the slowing in China, Cramer liked what Kleinfeld had to say about the U.S. economic health when he described trucks as a "fascinating story" because growth has ramped up to 9 to 11 percent, when only 6 to 8 percent was expected.
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Cramer also liked what he heard on packaging, along with the fact that building and construction remains in growth mode for Alcoa. Gas turbines used for natural gas power plants were also robust, up an amazing 19.5 percent year-to-date.
"I'm not saying just go buy the stocks the homework leads you to. I am saying that Alcoa's quarter is a fantastic place to start the homework you need, or to verify thoughts you may already have on various investments," Cramer added.
Because that is what homework is all about—making you a better investor.
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