Jim Cramer, host of CNBC’s “Mad Money” and Investing Club, says it’s always possible to find stocks with high growth potential — if you know how.
Sometimes, it can be as simple as liking a company and its products, then following up with research into whether the stock feels worth investing in, Cramer tells CNBC Make It.
That was the case for Cramer’s daughter when she decided to invest in electric car maker Tesla. In 2019, she was driving from Oregon to L.A. and decided to rent a Tesla. She wasn’t into cars before, Cramer says, but she was amazed by how much she liked driving an electric vehicle, and how easy it was to refuel.
“She said it was the most fun car in the world,” says Cramer.
His daughter was sold on Tesla, but Cramer himself was skeptical about the company and pointed out that the stock was expensive.
Still, Cramer’s daughter said she believed in Tesla’s CEO, Elon Musk. She also said that Cramer held a bias against the company because he was too old to see the potential in electric cars.
“I’m going to save up to own a Tesla and I want to buy the stock of Tesla,” Cramer recalls her saying.
Sure enough, she bought in and saw Tesla’s stock increase 10 times, says Cramer. “She had conviction. She did the work and bought it,” he says. When investing in a company’s stock, “the takeaway here is, do you like it?”
If the answer is yes, then you should “do the work” to decide if it’s a worthwhile investment, starting with checking out the company’s filings with the Securities and Exchange Commission. These reports provide information about key metrics like revenue, net income, debt-to-equity ratio and cash flow.
You’ll also want to learn as much as you can about the company and its competitors. You can do this by reading news stories, looking through the company’s website and listening to the company’s earnings calls, if they are available.
Whichever company you choose to research, picking one you like can be a great way to identify a stock that has growth potential. That’s why it’s important to understand your preferences as a consumer, says Cramer.
“When you want to invest in a great growth stock, you need to know yourself,” he says.
Plus, if a company creates an innovative product that you like, they’re more likely to keep making good products even as consumer demand shifts, says Cramer.
He points to Alphabet as an example: As Google, it started as a search engine company first, before dominating ad sales. Similarly, Netflix was a DVD mail-order business before it pivoted to streaming.
“We’re buying shares of companies here — not renting shares of speculation — and a lot of people get those confused,” says Cramer. When you believe in a company and its potential, you’re more likely to overlook short-term dips to its stock value and hold onto them for the long haul, he says.
“When the [stocks] go down and you don’t believe in them, you sell,” he says. “The equivalent of buy high and sell low — cardinal sin.”
To learn more about investing, you can join the CNBC Investing Club with Jim Cramer at a discounted rate.