CNBC’s Jim Cramer told investors to avoid some cohorts that typically don’t include stocks designed for long-term gains in any market condition, and said that filtering out those that aren’t worth owning makes the stock selection process easier.
“The only real defense in the stock market is consistent growth,” Kramer said. “So when you’re building a long-term portfolio, you want to avoid companies that can be derailed by inconsistency. And let’s be honest, that’s most of the market.”
Kramer suggested that cyclical companies are not ideal for sustained success because they are largely hostage to the overall economy and their earnings can fluctuate widely. These organizations include full-price retailers, building materials suppliers, and discretionary entertainment companies. Cramer said these stocks are worth buying when the economy is weak and worth selling when the economy is strong. But even the best cyclical stocks are “hostages” to macroeconomic forces, so “those are not what we want in the long term,” he continued.
Cramer said the financial industry, including banks, insurance companies and lenders, can be very lucrative but “can be beaten down by sudden changes in interest rates or Fed policy.” Because these stocks are exposed to credit risk, they are often the first to fall sharply during a recession, and they are also hit when inflation rises and the Federal Reserve raises interest rates.
Mr. Kramer pointed to highly speculative companies, companies that are “not making strictly notional profits.” He continued that this group only works in bull markets, as stock prices tend to plummet when markets deteriorate. Kramer also suggested investors avoid companies with low single-digit growth rates, such as consumer packaged goods companies.
Clothing, which has high fixed costs, such as department store chains, car manufacturers and airlines, can also be difficult, Kramer continued. Kramer said that while these stocks can perform well under certain circumstances, “we always find that they only work temporarily and the cash registers have to ring completely before peak performance is reached.”
“When you take those groups off the table, it’s much easier to find something that can last for years,” he said.
