Cramer's Stock-Valuing Strategy Explained

All week, Jim's been using a new system we came up with here at Mad Money to grade stocks. It's really unfortunate that the Olympics happen to be going on right now and you can only catch the show at 11PM ET, because this is probably the single most ambitious and useful series we've ever done.

If you're up on what we've been doing, you know we're using a scale of one to 10 to rank stocks. And we're not doing it with individual stocks in a vacuum. Instead we're comparing stocks from the same sectors head to head: Burger King versus McDonald's, Coach versus Tiffany, Coke versus Pepsi, Cadbury versus Hershey and Procter & Gamble versus Unilever.

We're doing it this way for one simple reason: This is how money managers evaluate stocks (according to Jim, who knows a lot more money managers than I do). You need to know how to think like them so you can beat them. Why? They do so much trading, manage so much money, and think so similarly that when people talk about what the market thinks or what the market's saying about a stock, they're really talking about these guys who run so much big money that they might as well be the market.

Ranking stocks from one to 10 may seem crude, but we're trying to approximate what the guys and gals on the Street do in a way that's easier to understand. The point system's simple, but the thought behind it so sophisticated that every day we have to trim down the scripts mercilessly because there's just so much to be said and not enough time for Jim to say it.

The point I want to make about our new ranking system here, is that yes, it works across sectors. We've been doing head-to-head comparisons within sectors, because after a money manager is sold on a given sector, the next question is always, "Why is this one better than that other one?" But because we include a stock's sector in its score, you can compare, say, Coach, which we gave a 6.5, with Pepsi, which got an 8, and we don't think the numbers will lead you astray. We think Pepsi's definitely the better buy in this environment.

Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Richand Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.

Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.

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