Cramer Picks His Fave Department Store

Already benefiting from robust holiday sales, Cramer thinks retail will see continued strength through the rest of the season. On Monday's "Mad Money," he explained how to analyze department-store stocks, so investors can have conviction to buy the best among them.

In looking at four names—Macy's, Nordstrom, Saks and J.C. Penney—Cramer said Macy's is "best of breed," but Nordstrom isn't far behind. Macy's stock is up 60 percent since Cramer recommended it on Dec. 7, 2009, and he thinks it has more room to run.

So what criteria seperates Macy's from the rest? When picking the best retail name, Cramer suggests looking at these three things:

First, examine the company's quarterly results. Macy's, for example, recently came out with better-than-expected sales, improved margins and a 3.9-percent increase in same-store sales. Like Macy's, Nordstrom did well and beat with higher same-store sales, along with higher margins and lots of full-priced selling.

By contrast, JCP delivered a "low-quality" earnings beat that was largely driven by pension expenses and a lower tax rate. JCP also missed on same-store sales, which only climbed 1.9 percent. Saks posted a 5.7-percent increase in same-store sales, but Cramer is worried that its margins are likely to come down next quarter.

Second, Cramer said retailers must have lean inventories, especially heading into the holiday season. This is important because you can't get financing to bring in new product until the old product has been sold. Macy's had clean inventories at the end of the third quarter, up just 1.9 percent year-over-year and below the 4.4-percent increase in sales.

Third, merchandising. This is what really set Macy's apart, Cramer noted. Through its "My Macy's" localization initiative, the company studies local populations to figure out which products and trends to emphasize in each region. In this regard, he thinks Macy's is "miles ahead of the competition," but said Nordstrom also offers "fabulous customer service."

In the end, Cramer not only thinks Macy's is a well-run company, but likes its stock, too. Of the aforementioned retailers, he thinks it has the most compelling valuation. It's trading at 11.6 times next year's earnings despite its 9-percent growth rate. Nordstrom is selling at 14.4 times earnings, but is also growing faster than Macy's. Still, Cramer is always willing to pay up for growth and would look at JWN, as well.

Call Cramer: 1-800-743-CNBC

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