As Mad Money’s Jim Cramer says, “There’s a bull market out there, somewhere. I’m here to help you find it.” He has firmly established himself as a bull in this market, and so he spent very little time talking about Tuesday’s sell-off, and instead imparted tips on how to find stocks that are a bargain. One strategy is to follow spending cycles through buying not the company’s that are selling so well, but instead buying their suppliers.
“This is time consuming but if you’re retired like I am go for it. If you don’t have time to sit in a store and watch the register, you can try to anticipate spending cycles. The airlines have an incredibly predictable spending cycle. When you see Boeing getting a lot of orders, you need to buy the suppliers. Honeywell, which makes the cockpit. People don’t see it.
As soon as the analysts start when semiconductors do do well, they like to raise money to buy equipment, so when you see them doing pretty strongly, but before they place their order, you load up on the suppliers. Here I’m thinking about Applied Materials, KLA-Tencor and Novellus.
Something happens when the telephone companies do well, they buy equipment. When you see them doing well, you’ve got to buy Nortel, maybe JDSU and Cisco before they start placing orders. You don’t sell when the analysts start to rub up against your picks. Don’t listen to the analysts. Don’t listen to your friends. Don’t listen to me if I’m contradicting this stuff. Watch the indicators. Stay disciplined. The rest of the market will, and that’s the situation you want to be in. The bottom line — the lead dog might be lonely, but it’s got the best view.” — CNBC’s Mad Money 9/1/2009
The strategy of turning to suppliers of a successful business is one way that investors can get a leg up on the rest of the market. Using his example of Boeing (BA), when orders are coming in strongly, Boeing stock will most likely reflect those anticipated sales figures (barring yet another Dreamliner delay). However, because its suppliers are not making headlines for these sales it may take the market longer to recognize their own sales performance, perhaps until earnings are released. That sort of situation is often an opportunity for investors to buy suppliers, such as Honeywell (HON) in this example.
This is the same idea that catapulted infrastructure stocks like Vulcan Materials (VMC) and Caterpillar (CAT) last year as the stimulus package was being debated. Investors were anticipating infrastructure projects would be the beneficiary of much of that spending. In this case, Vulcan has not benefited as much as was originally though and those that bought in on the hype may have gotten burned.
The trouble with this strategy is that many individual investors simply do not take the time to properly anticipate spending sales. Furthermore, as you can see with Vulcan, theories about spending cycles are subject to change and can be risky themselves. So, while this may help some people identify possible ideas, investors still must make sure that the price is attractive even if their theories falters.
The chart to the right shows each stock that was mentioned by Cramer on Tuesday’s Mad Money, and the context can be found on our Mad Money Recap page.
