A Way to Invest in the Smart Phone Craze

Smart phoes are all the rage right now. Many people use them for surfing the web, texting, and of course, talking to others. In his latest book, "Getting Back to Even", Jim Cramer recommends investing in smart phone technology. Originally he recommended investing in Qualcomm (QCOM) but has recently said that Broadcomm is a better bet (BRCM). These companies produce chips that are used in smart phones. Smart phones are still not widely used in developing countries, and this is an industry that will see major growth over time. Here are some specifications regarding the 2 companies:

BRCM price: $36.38 52 week range: $27-$41 P/E: 19.9 Dividend: 0.40/1.10%
QCOM price: $63.93 52 week range: $45-$64 P?E: 21.8 Dividend: 0.86/1.35%

Cramer's website, thestreet.com, gives a "buy" rating for both.

Sector Rotation Utilizing Cyclical and Secular Investments

Jim Cramer's book "Real Money" discusses rotating one's portfolio through different investments based on multiple (price to earnings ratio) contraction and expansion. He also talks about secular stocks versus cyclical stocks. I would recommend that everyone reads the book for some great tips. He even includes a chart to show when to get in and out of certain investments to maximize the growth of your portfolio. He says that the economy follows specific patterns that can be tracked. Cyclical stocks go along with the economy. When the economy is good, people will buy discretionary items or luxuries. Cadillac will probably sell more cars when the economy is strong and people have money. Secular stocks on the other hand, do well no matter what the economy is doing. People will buy soap and detergent even if the economy is poor. You can rotate investments between cyclical and secular booms. We will pay a higher multiple to earnings for the growth of a secular company than for the growth of a cyclical company. One can’t be deferred, one can. Many people like to invest in secular stocks such as Procter and Gamble (PG), Johnson and Johnson (JNJ) and Kimberly Clark (KMB) since they pay a good dividend and they are companies that sell products that are widely used by the average consumer. Sector rotations: Depending on the state of the economy, you should buy or sell certain stocks at certain times. These will be either cyclical or secular investments. You want to buy based on multiple expansion and sell based on multiple contraction. This is tied into E x M = P. Earnings x multiple (P/E ratio) = price per share

In a recession the stocks with the biggest multiple expansions are the secular investments, such as P&G. When P&G peaks, get into a cyclical stock. When the fed cuts interest rates, get into something discretionary. Purchase cyclicals when the M is highest. Sell non-cyclicals when the M is highest.

PG was $44 when market bottomed out in March 2009. 9 months later it was $62. Low price times higher multiple will equal same earnings.

When times are bad, buy something like PG which is non-cyclical. The earnings will be good even in bad times. The E will be good and the M will contract. As things turn around, the M will expand, making it more expensive. A higher multiple will be paid for secular or non-cyclical stocks.

Before times get good, get into something cyclical like MYG (Maytag) or Dow (DOW) (smokestack stocks), since lowering interest rates will raise their earnings and the multiple will expand since people will pay more for it. On the low end of the cycle, the cyclicals will be cheaper since the earnings will be smaller.

The above information is a summary of principles from Jim Cramer's "Real Money". Investing can be risky, so do your homework or hire a professional before trading securities.

"Cheap" Stocks Versus "Expensive" Stocks

When I first started learning about stocks, I thought that a stock that sells for $50 per share was too expensive and I wanted to find a stock that sells for $25 per share. I learned that this view of stocks is overly simplistic and just plain wrong. Google (GOOG) is $623 per share. Jim Cramer has talked about how the movement of stock prices is tied generally to the basic economic theory of supply and demand. $623 is a lot of money for one share, but with a price to earnings ratio, or multiple, of 21, some would see it as a bargain. For comparison sake, Amazon (AMZN)sells for $179 per share, with a P/E ratio of 94. Google is in high demand since it is a company that has proven to be innovative and well managed. Apple is in the same category. In 2008, Google dropped as low as $260 dollars per share. Now it is over twice that amount. Smart investors would have bought Google in 2008 and sold it recently, turning a handsome profit. People will pay a premium for Google since the balance sheet shows that its total assets have almost doubled from the end of 2008 to the end of 2010, going from $31 billion to $57 billion. Total liabilities have gone from $3 billion to $11 billion over the same period. So, at the end of 2010, the total liabilities were only about 20% of the total assets, which is impressive in this day and age where many companies (and individuals) are carrying so much debt. The ratio of assets to liabilities for Amazon is over 50%. There are other valuation criteria for evaluating stocks other than P/E and the balance sheet analysis, but these are a couple of things to consider when picking investments. It makes sense to compare stocks in the same sector. So, if you want to buy a tech stock, you can compare Google to Apple, Microsoft, Amazon, E-Bay and others. Do your homework such as listening to conference calls, examining the balance sheet, following news about the company, analyzing the annual report, and other tasks. You can monitor trading of insiders who own large quantities of the stock, and look up historical prices/dividend yields by using sites like Yahoo Finance or MSN Money. Look at the 52 week high and 52 week low. Search for bargains, just like when you buy anything else. Buy low, sell high is the cardinal rule of investing. Past performance gives you an idea of the stock's track record and volatility, but future performance is more important. Look at the figures for revenue, earnings per share and growth rate. Google went public on August 19, 2004, selling for $100 per share. How many of us would like to take a time machine back to that day and load up on shares of Google? Ten shares bought for $1000 back then would be worth $6230 now.

Jim Cramer's Buy and Homework Strategy

CNBC stock market guru Jim Cramer is not a proponent of buy and hold. His strategy involves buy and homework. This method involves buying a stock and then doing your homework to track your investment, to determine when to sell it, buy more, or hold on to it. Homework involves many tactics which include following news stories about the stock, looking at analyst's recommendations, looking at the balance sheet and cash flow statement, listening to conference calls, keeping an eye on competitors, monitoring any changes in management, and seeing if management is buying or selling the stock, and other tasks. Homework takes some time, and Cramer recommends that those who cannot do the homework, should invest in something diversified, like a mutual fund. He recommends taking one hour per week for each stock owned. Mutual funds can be great, but they cannot offer the returns of individual stocks. So, one must determine their tolerance for risk (losing money). Younger investors can afford to take more chances than older investors, since money lost can be gained back over time. If you are in your 20s, take risks. If you are in your 60s, take risks at your own peril. Jim Cramer says to use limit orders, not market orders. That way you lock in a specific buying point for your investment. With a market order, the stock can be bought by the broker at any time during the market day. You might want to buy a stock at 18 and sell it when it goes to 24. A stop loss order can lock in a price where the stock will be sold if it goes too low. You might buy something at 10 and have a stop loss at 8. The only issue with this is, you may miss out on the gain if a stock goes down, then back up. What is you have a stop loss at 8 and then it goes to 12? You have missed out on the gain.

An important formula that Jim Cramer discusses in his books is E x M = P, where E is earning per share, M is the multiple, or price to earnings ratio, and P is the price per share. He talks about evaluating investments based on multiple contraction or expansion. If you know the multiple will go up or down, you can predict the fluctuation in price. His book, Jim Cramer's Real Money talks about rotating investments through different sectors based on anticipating the contraction or expansion of the multiple.

If you want to see the investments in Jim Cramer's charitable trust portfolio, check it out here:

http://www.jim-cramer-charitable-trust-stocks.com/

There are some large cap, blue chip stocks here such as American Express and Coca Cola, which are also owned by investing maven Warren Buffett. The buy and hold tactic is practiced by Buffett, and he has done OK for himself. He recommends buying stocks which pay a good dividend, such as Procter and Gamble, Kraft and Johnson and Johnson. View his portfolio here:

http://warren-buffett-portfolio.com/


The dividend component of stocks can add up to a significant amount of money over time. Especially in tough economic times like we have right now, many play it safe investment wise, turning to dividend paying stocks. Cramer is knowledgeable, but just like with any investment advice, take it with a grain of salt. He is not perfect. Any investor who is perfect is probably that way due to using inside information. I like him since he takes a subject that could be boring (stock picking) and he makes it interesting.

CNBC's Mad Money Maven

Weeknights at 6 and 11pm, CNBC has the show Mad Money with Jim Cramer. It teaches you about investing in the stock market. He gives recommendations to buy or sell specific stocks. You might think that this sounds like a boring show, but not with the animated, crazy, but intelligent host Jim Cramer. He is a graduate of Harvard law school and he worked as a journalist before working as a trader for Goldman Sachs on Wall Street. He made millions for his clients when he ran his own hedge fund, Cramer, Berkowitz & Co. I have learned a lot from his TV show, his radio show and his books. Learning about the stock market is not rocket science, it just takes some time and patience to learn the basics. Cramer also owns a website, www.thestreet.com. His books include:

You Got Screwed! Why Wall Street Tanked and How You Can Prosper
Confessions of a Street Addict
Jim Cramer's Getting Back to Even
Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer)
Jim Cramer's Mad Money: Watch TV, Get Rich
Jim Cramer's Real Money: Sane Investing in an Insane World

* Some information from en.wikipedia.org