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Jim Cramer Says Investors Should Consider 3 Things Before Buying a Stock

Adam Jeffery | CNBC
  • CNBC's Jim Cramer on Wednesday told investors they should buy stocks based on the company's financial performance, not on whether they like its products.
  • "If you don't know how the companies you own shares in will survive an economic hurricane, or even a [Federal Reserve] tightening or two, then just use the product," the "Mad Money" host said.

CNBC's Jim Cramer on Wednesday told investors they should buy stocks based on the company's financial performance, rather than on whether they like its products.

Better yet, investors should also make sure the stocks they purchase can withstand the currently turbulent economy, he said.

"Doing the homework about the underlying company and knowing how the economy might impact it — that's often more important than whether you like the product," the "Mad Money" host said.

"If you don't know how the companies you own shares in will survive an economic hurricane, or even a [Federal Reserve] tightening or two, then just use the product but don't own [the company]," he added.

Cramer outlined these three main points to consider when determining whether a company is investable:

  1. Check the company's financial performance. "How the company's doing: Is it losing gobs of money, does it have enough capital to last, does it have a path to profitability? If you don't ask these questions, you're asking for trouble," he said.
  2. How crowded is the industry landscape? Cramer noted that if a company operates in an industry that includes a plethora of competitors, it makes it hard to stand out and the stock may not be a great addition to a portfolio.
  3. Can the company withstand a "hurricane" inflation fix from the Fed? "I want you to imagine a hurricane hitting a coastal area. What house do you want to be in? One that's shielded by a big profit stream with a fortress balance sheet, not to mention a dividend or a buyback? Or one that's just an idea, or an unprofitable product that happens to have a stock connected to it?" he said.

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