We like stocks with these four characteristics. Here's our Tuesday shopping list

Published Mon, Apr 25 20224:07 PM EDTUpdated Mon, Apr 25 20224:40 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

It's been a rough few weeks for the stock market, Monday's turnaround aside. The Dow has fallen for four weeks in a row. The S & P 500 and Nasdaq have fallen for three straight weeks. Earnings season is picking up. There's a steady stream of Federal Reserve and inflation headlines. There's just a lot going on for investors to consider — and a lot of it has been overwhelming negativity recently. But we're not going let that dominate our thinking because there are a lot of high-quality companies with great long-term fundamentals being put on sale right now and we have plenty of dry powder, our cash position, to take advantage of such declines. While adding to our portfolio throughout the session Monday, expect us to communicate another round of buys Tuesday and possibly in the morning should we see a down open. We'll run down our shopping list later. With that mind, we want to first call attention to the four characteristics we think companies must have to be worthwhile investments in this environment. These have guided the Investing Club's decision-making process since late last year, when it became clear the Fed was getting serious about fighting inflation. "I believe you have to be in companies that make things or do stuff at a profit, return capital, that are not expensive," Jim Cramer said Monday morning on CNBC. 1. 'Make things or do stuff' We're looking for companies that currently have goods and/or services for sale, not companies that are trying to bring their offering to market in five or 10 years. It could be producing and selling physical products such as toothpaste, just like recent addition to the Charitable Trust of Procter & Gamble , behind Crest and tons of other must-have consumer brands. Or it could be developing and selling software, just like Club stock Salesforce does with its customer management applications. The idea of "making things" and/or "doing stuff" applies to both physical and digital goods. The company just needs to be selling it to customers or clients now, so they are generating revenue and earnings now, unlike some startups that went public through special purpose acquisition companies, or SPACs, with lofty sales goals down the road. 2. 'At a profit' The Federal Reserve is reducing its fixed-income asset purchases and hiking interest rates, in what's known as a tightening cycle. After pumping all sorts of easy money into the financial system in response to the Covid pandemic, the central bank is starting to remove it, in the face of spiking inflation. We do not want to be invested in money-losing companies during a Fed tightening cycle. We want firms that are profitable, that have real earnings right now. Obviously, speculative stocks that trade based on long-term narratives had their day in the sun during parts of 2020 and 2021. Witness the flood of initial public offerings and SPACs that came to market. The party is over now, though, and broadly speaking the returns for those stocks have been dismal as of late. When the Fed raises rates, it is effectively raising the price of money. Growth stocks — many of which are concentrated in the technology sector — tend to be the most vulnerable to selling pressure in times of rising rates. That's because increased debt costs can weigh on their growth, and their future earnings can look less attractive. This is related to the idea of avoiding expensive stocks, which we'll talk about later. 3. 'Return capital' One reason it's important to invest in profitable companies right now is because profitable companies can return a piece of those earnings back to shareholders through dividends. Dividend-paying stocks can offer some defense in times of uncertainty and volatility. Companies can also return capital to shareholders in a second way — stock buybacks. That's another characteristic we're looking for in stocks to own right now. A number of companies our portfolio are doing this, such as Advanced Micro Devices (AMD), which in February authorized a new $8 billion share repurchase program on top of its existing $4 billion buyback program. Morgan Stanley (MS) has been buying back nearly $3 billion of stock per quarter. It has a 70 cent quarterly dividend, too. 4. 'Not expensive' We're looking for companies that trade at reasonable valuations. A key reason we're looking to avoid expensive stocks is because long-term rates are rising, in addition to the short end of yield curve influenced by Fed action. This can cause investors to rethink what they're willing to pay for future earnings, which can translate to lower stock prices as multiples compress. A stock multiple typically refers to its price-to-earnings ratio or, often in the case of unprofitable companies, its price-to-sales ratio. For example, a stock that trades at 30 times earnings is more expensive than a rival company that trades at 15 times earnings. In this hypothetical, 30 and 15 are the "multiples" of those stocks. Earlier this month, we published an in-depth look at how to value stocks using a multiples approach . But for the purposes of this particular story, it's important to understand that expensive stocks are more vulnerable to seeing their multiples contract in this current environment. That's why we want to look to buying inexpensive stocks. What's on our shopping list for Tuesday? We'll continue to look to add to our 1-rated oil positions — Coterra Energy (CTRA), Devon Energy (DVN), and Halliburton (HAL) — on weakness because of their large dividend yields (CTRA, DVN) and strength of the cycle (HAL). Disney 's (DIS) capital-return program may be on pause, but we still want to add to our position on this latest slide because the parks business is more profitable than it has ever been, and the stock price reflects a lot of negativity at 25 times next 12 months earnings. Morgan Stanley just reported a resilient quarter and still looks cheap at 11x earnings with a 3.3% dividend yield. We like Wells Fargo (WFC) on this pullback too, but we already have a big position in it. We think the post-earnings selloff in Danaher (DHR) is unjust for a company of this quality. The forward multiple at 25x hasn't been this low in years and management is always looking for ways to create value through strategic actions. If Procter & Gamble ever falls back below where it traded before reporting that awesome quarter last week, expect us to buy more shares of this dividend aristocrat. We are watching our semiconductor positions, and we will promptly let the Club know when we believe the timing and prices are right to upgrade any of them back to a 1 rating. (Jim Cramer's Charitable Trust is long PG, CRM, AMD, MS, CTRA, DVN, DIS and DHR. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Jim Cramer

Scott Mlyn | CNBC