CNBC’s Jim Cramer told investors to avoid several cohorts that don’t usually include stocks set up for long-term gains in any market condition, saying the stock picking process can be made easier by filtering out what’s not worth owning.
“The only real defense in the stock market is consistent growth,” Cramer said. “So when you’re building a portfolio for the long-haul, you want to steer clear of companies that can be derailed by inconsistency. And, honestly, that is most of the market.”
Cyclical companies aren’t ideal for lasting success, Cramer suggested, because they’re largely hostage to the broader economy, so their earnings can fluctuate dramatically. These outfits include full-priced retailers, suppliers of building materials and discretionary entertainment companies. These stocks are worth buying when the economy is weak and worth selling when it’s strong, Cramer said. But even the best of the cyclical stocks are “hostage” to macroeconomic forces, he continued, so “they’re not what we’re looking for long-term.”
Financials – like banks, insurance companies and lenders – can be very lucrative, but might “be overcome by sudden churns in interest rates or Fed policy,” Cramer said. These stocks are often the first ones to plummet during a downturn because they have exposure to credit risk, and they also get hit when inflation flares up and the Federal Reserve raises interest rates.
Cramer pointed to highly speculative companies, ones “with no earnings that are strictly conceptual.” This group only works well in a bull market, he continued, as shares are liable to plumet when the market takes a turn for the worse. Cramer also suggested investors steer clear of companies with low single-digit growth rates, such as consumer packaged goods companies.
Outfits with high fixed costs can also be tricky, Cramer continued, like department store chains, automakers or airlines. These stocks can do well in some circumstances, Cramer said, but they “only work temporarily and you always know that you’ll have to completely ring the register before the business peaks.”
“You take those groups off the table, and it’s much easier to find something that you can stick with for years and years,” he said.
