Beware These 6 Earnings Killers

It may seem hard to believe, but the “uniquely horrible” problems, as Cramer called them on Friday, that investors are dealing with right now will come to an end. Europe’s troubles will be resolved, financial regulation in the US will finally be signed into law, and the overall pessimism plaguing the markets will be replaced by optimism.

But investors still won’t be worry free after that.

Then we’ll go back to the typical risks that plague the markets when stocks trade in “normal” conditions. And they all in some way affect company earnings.

These earnings are “the North Star of investing,” Cramer said. Follow them, and you’re able to navigate your way through the market. Granted, any number of things can cloud over those earnings. Like anti-business governments, perhaps, or hedge funds that sell futures en masse, taking the entire market with them. These funds deal in such high volume that only vehicles like the S&P 500 futures can handle their cash load – individual stocks can’t. So when the negativity takes over, the hedgies dump their holdings and that brings down everything in the S&P.

Eventually the clouds will clear, though, and earnings will regain their prominence. At that point, you’ll want to keep your eye on six different kinds of risk that can cut into a company’s profits. Here they are:

Execution Risk: Execution problems can manifest is myriad ways: a merger gone bad, failed new products, bad cost controls. That’s why Cramer likes companies with proven managers, like J. Crew CEO Mickey Drexler. They’re less likely to make these errors.

End-Market Risk: You always have to keep a company’s customers, or end markets, in mind. If it sells to an industry in decline, then the business will probably take a hit. Case in point: Cramer finds it hard to like the drillers as oil prices continue to fall.

Consumer-Sentiment Risk: If people are worried about simply buying groceries, you can bet they’ll pass on high-end items from Tiffany or Coach . Even mid-level retailers like Gap could suffer, as people keep their wallets tucked firmly in their pockets. That’s a problem for any company that depends on the consumer for its sales.

Economic Risk: Does your stock depend on a strong economy to do well? Does it need low interest rates in order to make money? If so, you might want to rotate into less cyclical companies when the world’s economies start to slow down. Think of defensive food and drug stocks, or companies that make products people need regardless of the business environment. Clorox, which Cramer recommended on Thursday, is a good example.

Expectation Risk: It’s not enough for a company to beat last year’s earnings numbers, Cramer said. Now it has to trump the numbers expected by investors and analysts on Wall Street. This is a big reason looks for companies with a strong track record of UPOD: Under-Promise, Over-Deliver. The stocks of companies that deliver the opposite tend to sell off.

Obsolescence Risk: Sometimes a company’s product or a technology they offer that gives them a proprietary edge becomes obsolete. Tech stocks probably fall prey to this the most. Remember Burroughs? Control Data? Or Sperry Univac? All of them were big tech names in the 1980s, only to be supplanted by Intel .

Cramer’s charitable trust owns Intel.

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