i'm jim cramer and welcome to my world. >> you need to get in the game. >> firms are going to go out of business and he's nuts! they're nuts! they know nothing. i always like to say there's a bull market somewhere. >> "mad money," you can't afford to miss it. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends, i'm trying to make money. my job is to educate, teach and coach, so call me at 1-800-743-cnbc. earnings season. i dread earnings season. why? because it is overwhelming with so many companies reporting at once, so much data being thrown at you.

because it's hard to keep track of expectations and to know what is better-than-expected. the whisper, what the real benchmark must be beaten is. no, it's because i have a really bad back and i can't stand carrying out those printed out versions of conference calls in downtown manhattan to my studio here where i do "mad money." but tonight i want to do something different. i want to offer you a new way to use earnings season to put it in perspective, because most of you watching the show are not these day traders that really hijack a lot of the thinking. you're not trying to game a quarter because it has become so difficult to predict and often the initial moves aren't even accurate because of the press coverage or because something is accurate because of europe or something involved in the election. in other words, other than for those who are shorting or going long stocks ahead of the quarter, these earnings reports need a context to make you money.

they can't be relied upon anymore because they aren't as predictive of future behavior as they once were. they are a piece of the puzzle, a part of the mosaic but they are only one of many of the important parts that predicts where a stock will go over the intermediate term. that tends to be the focus i teach in the show. it is a teaching show. because i want you to know the metrics i use to pick stocks i recommend here. i also want to teach you how to listen to these conference calls or read them in the transcripts, at least give you my opinion of what matters on these calls and how i let them factor into picking stocks. i am hoping this show will once and for all, this is what i see on @jimcramer on twitter, how to figure out what you need to trip, what you need more of. let it help your stock selection, hone your way of thinking. earnings season is incredibly important, where times of the

year, big report cards, hey, not just the trajectory of the estimates, we have to flush that all out. i'm so tired of the estimates are bumped a penny or two. that's not making anybody any money. we can't dismiss earnings season. that would be totally wrong. we've just got to put it in context. here's how i use these reports that we constantly refer to. first, i assess them for the predictive value for the year. to do that, i troo i to discern where -- i try to discern where analysts go, do they raise them, lower them, do they keep them the same? all right, let's say apple's report is better than the posted numbers on a lot of websites but also beats what is the high man, some call at this time whisper, the high man, the analyst with the high estimates on the street. that, people, will always cause a raising of numbers for the rest of the year by everyone, or if it is the end of the year for the numbers in the year after it. i use that increase in earnings per share, the ones that they bump it, okay, to figure out several things.

first, i try to figure out the increases from real business, actual sales, do they do better? not just accounting changes and share count changes. the latter fools a lot of people. to do what i like to do, i look at the revenue shares. why is that important? because they can produce more, gain more customers either at the expense of others, execution, they're making a better job. they're doing a better company. they're working harder. they're working it better. but a company can easily change the earnings by buying back a ton of stock, not the sales line, but the earnings, simply changes the denominator, the number of shares, revenue growth, particularly the holy grail, accelerated revenue growth, arg, quarter to quarter, year over year, drive my thinking. they allow me to figure out future revenue, which is what i talk about on the show. that allows me to figure out what to pay for the stock in the future. lots of people make a

determination of the stock's worth in what i call the p.e. vacuum. when the average stock sells at 11 times the s&p. they say, ah, that's too expensive, it sells much more than the average stock. lazy thinking. what you need to do is figure out what that growth rate is using the revenue and earnings prism i laid out for you. think of the previous quarter and the current one and the year over year quarter. then calculate that trajectory versus the growth rate. it's simple, if the earnings are 20 or less you probably have a big bargain on your hands. we call that a peg ratio. again, the price to earnings growth ratio, a must more important ratio, it puts it into context you can use versus other stocks. we are always comparing other stocks on the show.

as a rule of thumb, i am willing to pay up to twice the amount of the company. especially if there are many companies growing that fast. other than that, paying 70 times earnings for company growing 40%? it gets me nervous. even if 40% growth is very hard to come by. that's nose bleed territory and there are too many things that can go wrong with the stock when that happens. the converse is true, too, when i see a stock that sells for less than its earnings growth, i begin to salivate, unless there are factors we cover in the rest of the show, i am drawn to that stock i have to find other reasons not to buy. so the bottom line, i use the actual growth per share reports to figure out the growth rate of the stocks and if the growth rate is high and the price to earnings in the future projections is equal to or less than twice the growth i am interested in enough to proceed with the rest of the work this

special show will detail. i need to go to brad in south carolina. brad. >> caller: jim, i want to give you a ron paul boo-yah to you. >> wow, that's aggressive. i'll take that. go ahead. >> caller: jim, i'm wondering how to best prepare for this earnings season. give me the inside scoop of what your browser tabs would like as you stay on top of the market updates. >> what i like to do, first of all, i watch cnbc. i actually go to the websites. the websites are now so, so good that literally they will have the reports. they will have a lot of projections. then i like to look at the news stories to get a consensus. then i look at the analyst reports the day after. all that has to be done if you are going to really sink your teeth in and feel very confident. start with the website of the stock. let's go to darryl in california. please, darryl. >> booyah jim cramer. >> boo-yah. >> caller: i have a question

there, what is meant by a reverse split stock? >> okay. that means there is a million shares. let's say they do a 3:1. citigroup did one of these, okay. what it does is if you have like 300 billion shares, you divide it by three. you get 100 billion. it does raise the price. you have more shares. let's go to tyler in florida, hey, please, tyler. >> caller: i want no give you a south florida boo-yah. >> i need go there now. what's up? >> caller: sunshine, no, it's overcast, a quick question for you, when you talk about the economy booting off again, it seems like you talk about it in terms of consuming, not producing. i'm thinking from the way i think about it, you need something to be produced before it's consumed, so i'm wondering why in terms of a growing economy, you talk about consumption instead of production. that's what it seems like to me. >> well, i do, because in order

to be able to raise price, you need demand. if there is a shortage of supply, sure, that can mean something, but not if there is no demand, if you have some product nobody likes, you can't raise the price, it doesn't mean anything. that's why we focus on demand. a company has to earn its stars before you buy it. use the eps to figure out the company's growth rate and take it from there. "mad money" will be right back.

>> welcome back to "mad money" special earnings season companion show. earnings reports and put them in perspective so you can profit in a warm and confident way, make money at home. we went over how i like to use the reports themselves and went over to figure out whether it's too expensive or too cheap against its sector and the rest of the market. the next way i use the earnings report is equally important because i call it the etfization of the market.

i measure the stock's earnings growth against its cohort. then i figure out whether -- here it is -- the whole cohort is worth owning or forgetting about. wow! that's right. for most of my three decades of investing, i accept that the sector is important when you pick a stock that matters, the stock sector counts maybe as much as 50% of the stock's performance. you know what, now, because so many trade through etfs, and they have become so popular for individuals and, more importantly, for hedge funds to take quick action, the sector supersedes earnings sometimes, i got to tell you, often it's made earnings an afterthought. take the way the banks traded, it didn't matter whether the bank did a good job or a bad job. people didn't want to own the xlf. it didn't matter how well a bank did. a bank like wells fargo, very

strong management, traded similarly to j.p. morgan, morgan stanley, they had tremendous exposure to the continent. that's why at times i had to dismiss it entirely at the moment if the cohort was radically out of favor. i never forgot them. instead, i figure out which ones at times can break the tug of the sector, the gravitational pull, and which ones can shine, because if the sector falls back into favor, i got to be ready. for example, remember the march bottom, generational. we see many sectors within those sectors outperform. i like to listen to the earnings calls of all the retailers. given times, i am wrapped by the groups doing the best. by far, the best have been the discount stores, particularly the dollar stores, dollar general and dollar tree.

when i see the market's tide of money go to retail, i go to reach for these two. because i know they have the most earnings momentum. i only know that because i keep listening to the calls, even though the group may have been out of favor of late. so when everyone calls into the retail etf, i use the rth, i am in there with the ones with the best momentum. certainly, i use the ross store etf when they grab a sector, because they have the most inexpensive earnings momentum. there's another strategy. when i know which are the best of the best in terms of earnings, because i focused on the calls and a huge amount of money was given to the sector, i hedge my bets, sell the etf and buy the best performers in the etf. that way, if the move takes a turn for the worst, we get one of those government numbers or we get weakness out of europe, i can lose less, because i own the best and i am short the rest. sector analysis is particularly

important with technology because people confuse this group of stocks, which comprises 15% of the s&p 500, constantly. tech is a whole group of sectors, semi conductors, software, cloud, internet, hardware makers, cell phones, tech, telecommunications tech, infrastructure stocks, assemblers, each has a separate growth rate. here i like to look at the growth rates of the companies i follow versus the individual sectors. the growth rate doesn't work. cloud stock, for example, are highly valued, meaning the high values to growth rates are extreme. that means there is no room for error or hair as we call it. in 2011, one of my favorite cloud plays reported a magnificent quarter. the guidance was lighter than i was hoping.

the stock immediately got pancaked and stayed ugly for a long time. why? because it underperformed its portion of the technology sector even as the growth rate would have been outstanding for a personal computer-related stock or a disk drive, semiconductor or cellphone company. these days knowing what the sector is isn't enough. you need to know the subsector. you need to know how your company stacks up against the growth rate of that subsector. you need to have a good handle whether that larger is in favor or isn't. the bottom line, nothing is worse than a bad stock in a bad sector neighborhood. nothing is better than owning a good stock in a great neighborhood. if you do not measure against the sector growth and do not determine whether the sector is in favor versus out of favor, then the earnings report better than expected or not, it won't mean a thing. when we return, i will give you several more ways to use these earnings reports in the context of stock picking, not just trading, which i have come to see is pretty much a zero sum game. stay with cramer.

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but my airline miles take it worldwide. [ male announcer ] it shouldn't be this hard. with creditcards.com, it's easy to search hundreds of cards and apply online. creditcards.com. it's lots of things. all waking up. connecting to the global phenomenon we call the internet of everything. ♪ it's going to be amazing. and exciting. and maybe, most remarkably, not that far away. we're going to wake the world up. and watch, with eyes wide, as it gets to work. cisco. tomorrow starts here. >> nobody is more passionate about the market, nobody in this country. >> i want to thank you.

you have saved my retirement. >> you are why i come out here and do this show. thank you so much. >> the stuff that you are doing for all of us is so important. i just want to say thank you. >> my husband and i watch every day. we count on your help for small investors like us. >> put cramer's 30 years of experience to work for you "mad money" week nights on cnbc. >> tonight we are talking not about who just reported better-than-expected quarter, getting all excited about that, something we get caught up in during every earnings season, but how to use these reports to put together the ideal portfolio for the long term. we've established the importance for what they tell us for a stock and where it fits inside the sector as well as the sector's gravitational pull. now we got to dig further to discern what else on the conference call or in reaction to the call can help us make some money. we don't stop with just the call. what else is important to listen

to on these? the wall street analysts would tell you the most important predictor of future earnings is the gross margin, what is left after the cost of sales are subtracted. i like to put it the way any kid can understand, the lemonade stand. you have to understand the lemons, yeah, you add sugar, you figure out what those cost, you take away your ingredients, the number of people that sat behind the stand ,the labor, the equipment, the time you paid someone else to stay behind the stand. we try to figure out the cost of the goods sold, when they are going up or down. the inflation/deflation component, how much the labor costs, how much leverage there is, me, if you have all the labor accounted for, how much business can you do? there is not a lemonade stand, it is pretty well known, it's chipotle. they have posted fabulous gross margins.

they have labor, food, customers. the more customers they can serve per hour the more leverage they have. the cost of the guac, the beef, the chicken, the tortillas, the cost of the labor, most importantly the number of customers they can push through in a given day. their dozen inputs, advertise and lease of the stores, they need to have little turnover as possible because the cost of training employees is tremendous, it's a huge obstacle of making money. that's what the former president of costco made clear to us. they treat them with the best of benefits because it's so important to keep them happy so the firm doesn't constantly have to train new people. they like to see the same old hopefully smiling faces, new people cost too much money. same goes for chipotle where the most talented people are given promotions and opportunities to run more stores. mcdonald's, similarly, often praised for its gross margin improvements.

it can get low cost goods, it has good leases, also because it has the technology innovate on a scale. they got huge leverage per hour. gross margin comes into play in every industry, always in different ways. often the key to the gross margin has less to do with the cost structure and more to do with the inventory conditions of an industry or a given company. now, we're talking tech. semiconductor companies, for example, often produce flat out as many chips as they can, 24/7. at times in demand wanes and the supply chain gets overglutted. they have to cut price, which then lowers their gross margins and often makes their earnings too volatile to predict and, therefore, they would give them a high price to earnings multiple. that's when there is too much inventory. we like companies with

consistent growth. no one can handle all that inventory glut that keeps happening once or twice a year. same goes for companies like steel and aluminum. at times they produce too much. prices get slashed, the future earnings per share get crushed. i listen closely on these commodity calls to get a sense of whether inventory is built in anywhere in the system. if it is, i got to get you out of those stocks quicker than i do. aluminum, steel, copper, i got to work faster. don't you believe for one moment it's just the commodity producers that are affected by these issues. i listen to every single pharmaceutical call. i hear about generic competition. a drug company with a patent cliff, meaning a drug coming off a patent that will plummet in price is one that scares me. i tell you to get out. i think it will trade at a low multiple to future earnings. until the stock discounts that,

i got to keep you out of it. very few drug companies are immune from this gross margin compression. i steer clear of them as best as i can until everybody knows about the patent cliff. then i can go back. finally there are the oil and service companies. these are the hardest. they're difficult. you often have to figure out several numbers for the gross margins, how much it cost to drill to get it in and out of the ground, the shipment to refine it. many companies in this industry are trying to break it up to make it easier for guys like me, instead of having to be a blend that i got to unwrap. i care chiefly about finding costs and about end market prices, that's why the natural gas companies traded at discount to natural gas companies. the end market has been so low for so long and the end market price of crude has been so high so long. that's what draws me to a company like eog or continental. both with cheap refining costs for oil. they got expensive prices when they get it out of the ground. bottom line, the key component

after figuring out the earnings per share trajectory and its growth related to the cohort is to figure out the future gross margins, something that is uniquely calculated only by listening to the conference calls. you can't get that in the headlines or any of the reports, if you don't know that, you won't know the direction your stocks are about to take in your portfolio. it is an integral part of the homework. be sure to read from the analysts who do. let's go to brad in ohio, please, brad. >> caller: a boo-yah from girard, ohio, jim. >> i got to get there. i haven't been there yet, i'll get there, i promise myself. >> caller: thanks for taking my call. the question is, as an investor interested in specialty retail, i understand the fourth quarter is the definitely the quarter with the most significant earnings, but how should one evaluate the first quarter companies? >> i used to go back to the rules at my hedge fund, i frankly don't care about the first quarter for retail. the first quarter is not meaningful enough.

you only have valentine's day during this quarter. i know this, because my dad sells gift wrap, it's one of those things that valentine's day doesn't move the needle like christmas. i'll say i make my judgments on the fourth quarter. that's all that matters, i wait the hear those quarters, then i make my judgment for what the next year is going to bring. mike in illinois. mike. >> caller: cramer, this is mike in the windy city. i give you a chicago bears bbbb boo-yah. cramer, if i'm short a stock, how long do i have to cover that short? >> forever. forever. that's one of the great things about shorting. stay short for as long as you want. remember, if the stock goes up they may ask you to put a lot of money out, though, that's where people get squeezed. okay. you got to dig deep, gross margins will guide you in figuring out the direction of a stock. some things you only find on the conference calls, not the

headlines. gross margins, that's on the call. stay with cramer. you hurt my feelings, todd.

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>> you're hearing tonight for the first time, not how to figure out what's a better or worse expected earnings report, trade seems to be a dominant way of thinking, but how to put these reports to work for you, select the best stocks, prune those that need to go. we figured out the growth rate of a company and whether it's

too expensive, something @jimcramer on twitter i keep getting that question, now it's answered. we explained the sector analysis as a part of the earnings report. and the gross earnings, now we must address two more pieces of the earnings puzzle, these are really important. dividend growth and home run potential. from pretty much from the time i first bought stocks in the late 1980s until fairly recently dividends were an afterthought, ever since i had my hedge funds. companies find it as a way to return money to shareholders. to me it's oxymoronic. the executives who get paid for hitting certain earnings based targets. they do that by shrinking the float through buying back just enough stock to make it so when the share count is divided into the earnings per share, well, it beats the compensation benchmark that they were supposed to hit.

only a very handful of buybacks do what they are really supposed to do. that is make it so there are far fewer shares out there, suddenly, the earnings are excellent. but the buyback that accomplishes that goal, i got to tell you, i count them on one hand, most buybacks are a waste of money. companies spend a gigantic amount of cash buying stock when they were appreciably higher, they only know about stocks, not business. they should stop trying to time the market. what are good companies doing now? they are offering more and more bountiful dividends. buybacks are indefinite, it's reigned in, dividends are an out loud declaration of long-term confidence. now that low rates seem to be upon us for some time, courtesy of the fed on the smoldering economic embers, dividends can provide a rate of return for the deposits. you keep trying to make money but can't.

they make more money than cds. they can go down. they can also go higher. that's the case of companies that boost their dividends year over year. if you reinvest those dividends, you can augment your return to the point where you are far exceeding a return on bonds. dividends are responsible for almost 40% of the s&p they are concerned for the dow jones average, far outperformed the s&p 500 in 2011. 5.5% return for capital appreciation. how about if you reinvest the dividend, the only thing you should be thinking about is reinvesting dividends, cash in your pocket. a safety net during bad times and a trampoline to the good. so what do the earnings have so often we seek on "mad money?" you listen for calls that tip management's hand on dividend. you tell us there is enough excess cash available, perhaps several times in a short period of time, hey, that's what we

heard from general electric in 2011. it was on every conference call. conversely, if a company's desire is to buy back more stocks and the buyback is ineffective in reducing the share cap, you got to look at how many shares it had in the year before, the year before, you should presume it's about management to the less proven innocent. they're seeking to contain the shares offered to management. a lot of tech companies do this as i regard it as disgraceful. i know what i see. these days if management doesn't indicate it will boost the dividends, unless the company has such ferocious earnings power, ala apple. we also need to listen to a breakout, something new the company is going to do differently or announce soon that can be an upcoming catalyst. i talk about catalysts. i scrutinize calls not so much for what has happened, that doesn't interest me, but something that will happen. if i hear something that can

propel the stock in the future, i am anxious to buy it. if there is a sell-off, buy enough or didn't guide high enough to please the momentum funds in the stock, i got my opportunity. so what are the examples i look for? pharmaceutical companies often telegraph what might be going into stage three, okay, meaning what drugs might be near file approval. they often tell you about expanding usage on the labels. allergan, one company has told you more about if future on its call than just about any other, it has been a terrific buy. every time it sells off after earnings because of this upcoming catalyst, celgene, same thing. they give you a call. tech companies tip their hands about upcoming product cycles, product initiations can make a huge difference in future earnings. pipeline companies, key creators, they tell you about upcoming expansions.

the exploration production companies almost always tell you what prospects they're looking for. you might hear some good news on these calls. i file those comments away and wait for oil futures to go down. i started out last year, they gave you a bountiful chance to get in before they raised new finds at the end of the year. they are talking about how the storms kept the drilling down. nobody cared. and then the stock took off when they told you that business is big and booming. the bottom line. we look for signals about the future of these calls, particular about upcoming catalysts, making them solid buys on a short-term decline. rising dividends are the best source of wealth that stocks can give us. remember, dividends pay us to wait for things to get better. and there is no better way to find out about the prospects for increased dividends and to listen in on the earnings calls. stick with cramer.

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>> earnings season doesn't have to be an unfathomable number, this is for the hedge funds to attempt profits. tonight we have showed you how you can look for signs of what to do with your portfolio over the long run because the earnings reports and subsequent conference calls, the crucial thing. here's the deal. they don't have to be shoot first, ask questions later experiences. actually the opposite. conference calls are ask questions, ask questions, then ask some more questions, and only then maybe take action. we are asking specifically about what the growth of the earnings per share might be and how expensive that would make the stock versus other stocks in the

sector and other stocks in the market as a whole, usually regarded as being the s&p 500. we want to know if they are going to be increasing, we want to know if earnings estimates may be beaten in the future. we are looking for signs of dividends, these days the most important things that might be boosted. we are looking for catalysts that could propel a stock higher after earnings season is over. that's so important at a time when many stocks sell off in knee-jerk fashion, simply because some company didn't beat somebody's estimate. there are two more items to be gleaned from these earnings reports and conference calls. they are new ones i had to add to the equation because of structural changes in the stock market over if last few years. first is a geopolitical rick. we never thought about it. a geopolitical risk, linked exposure, not just to the rising price of oil. that can be jostled by the middle east. that is always an issue. linked exposure to the sovereign debt of say europe.

plus, we need the chinese economy. for example, for most of 2011, banks were perceived as tremendous linkage to the troubled euro and its accoutrements. we got our heads handed to us. similarly, when tech is often to be considered heavily dependent upon europe. hey, as much as 25% of the earnings for tech has been deadly. we know this because the businesses don't dodge it. that's how you learn about it, people, the analysts won't let them get away with it. all you have to do is listen to q & a, you will hear one out of every two or three questions about europe. asia, one out of every two questions. that's too hard a steeple-chase to go through. you want preventative earnings season medicine, go through the companies.

if a plurality of the questions are about europe, you know you will be in for a bruising next time. that's what the analysts are forcing the companies to talk about. as correlated with europe as many bank and tech stocks are, it's china that controlls so many cyclical earnings of the company. join global, cummins, check out freeport, peabody or vale, rio tinto. owning these stocks is like owning a piece of the great wall of china. you don't want to be in them when the great wall is crumbling. i have seen yum, it has a huge business through kfc and coach, which has been expanding aggressively in china. similarly, owning a steel company not paying attention to what the chinese are dumping in our markets is like taking your financial life in our own hands, how do you find out all these issues? companies as diverse as corning,

3m, ppg, also march to the beat of the drums these days. it's all in the pestering by the analysts. so it's pretty simple. listen to the call. don't hang up until you have heard the last questions. you can read the transcript so you can tell how worried the analysts are about the market that didn't move the needle a few years ago. one piece of the puzzle, this is incredible the earnings season, i never talked about before. we got to do this before we are done tonight. one that's become obvious to anyone that has watched this show regularly. you have to know the chart of the stock ahead of the quarter. so often we have chartists on our off the chart segment who trace out what a pattern might be and where stock can break down or break out if it hits a certain level. why is it so important? you got to recognize the chart is the expectation game. when you hear they are too high going into the quarter. you have to recognize that if chart was the gauge of the expectation. you look at the chart.

that tells you where the expectations or not. open the chart rallies to a particular rally in advance of the quarter. simply we call it the level of resistance the stocks can get hammered because of a short failure. i don't want you to react to this kind of chartmanship. i want you to use it in your favor, which is why i save this chart list for last. you know a good stock to buy? one with rising growth margins, a potential for dividend increase and good news on the horizon that got repulsed because it couldn't bust through resistance, that gives you a chance to get in at a price, one you wouldn't otherwise be able to get because of the chart. why is this so important? because no journalist is ever going to attribute a decline in the stock to the chart. yet, so many hedge funds are reacting entirely to that chart and taking silly action. remember, i'm not a chartist, but i play like one when i have to. the bottom line, if the question and answer on the conference call passes through heavily national rick or currencies or crisis in europe or asia or anywhere else for that matter, be prepared for hammering this quarter. if a stock goes down big on a

quarter you think should go up, remember, it may very well be the chart talking. it gives you a chance to get in cheaper than you ever had a chance to do. now you are ready for the rest of the earnings season, go get 'em. tell them cramer sent you. dean in california, how are you? >> caller: i'm in beautiful marin county. >> how can i help? >> caller: i check my stocks at the end of the day, usually, you will see a little blurb on the news headlines that says, for instance, this particular stock has a close or a buy imbalance at the end of the day and they name the shares. >> right. >> caller: what i want to know is what do these close imbalances mean and do they have indications for the next day? >> i think it's more distractions. a lot of the buying may be etf related or a market on close program. it's confusing to people. we care about the fundamentals. maybe it affects the chart. maybe it doesn't.

i know many people do. we care about the fundamental stock. that would matter if you were a big broker trying to get people the best price at the end of the day. all right. it's all in the conference calls, everybody. a company's earnings release is much more than that. i need clues. clues that will signal where a company is going. and i like to look at the charts. well, call me, call cramer.

>> now, let's do some mad mail, and yes, some mad tweets @jimcramer on twitter. jim, do you often encourage gamers to do their homework. i don't recall you specifying exactly what you suggest should be involved in doing our homework.

my version is to listen to every word on "mad money" and checking price movements and charts. what else do you suggest we do? first of all, i wrote a book. that's the starter. you hear a stock you like, you go to the website. the websites these days have almost everything. you read about the last few quarters. i like to read the annual report. then i like to call up what the analysts are saying. i like to see what can be in the pipe. i like to see what the dividend is. these are all a part of the process long before i would think of pulling the trigger. and, by the way, i would like to think, what would make them sell it, if they missed certain things, if they did things that went up high. it all starts with the website. here is one from trace, no doubt the fantastic country singer. hi, jim, as we all know, the department of defense is planning to downsize the military over the next few years as we also conclude our business in afghanistan. do you believe the large amount of dod contractors and military

expert personnel will flood the job market and increase the demand for goods? no, trace, by the way the army and navy don't move that fast. there could be a peace dividend, where we cut the budget deficit, that happened in the '90s. i don't think you should look at this issue in a way to make money off it, though. it's really not a needle-mover. as a matter of fact, it can be negative for a lot of the defense companies, as we know. and they have been under a cloud because of these cuts. here's one from danny in new york. hi, jim, i have heard you say considering the downside of an equity that you would short a stock rather than buy a put. please elaborate. danny, i am so glad you sent me this. because if i have created any misperception that i favor shorting stocks, it is completely out of character with all my books and what i used to do with my hedge fund or trading for myself. i always do puts. i very rarely do shorts because as i write in "confessions of a

street addict," i was a victim of a lot of squeezes that lost me a ton of money. use puts. here's some tweets, from b kelly, 01 not @jim cramer. covered calls, why do you hate them so much? here's the answer. i got to tell you something, b kelly 019, i hate trapping my upside, i hate cutting off my upside. you can't make more money than when you write the call. not only that, let's say something goes wrong, you sell the stock, you are really vulnerable to a takeover then. you are still short the call. never, ever, ever, cap your upside. that's always been my rule. i would never sell a put. that i think and i've seen it in '87, i saw that put people out of business. i saw it again in 2009. put people out of business. trust me on this. i have been around for just more than three decades. trust me on this. okay. here's one from jeff. boo-yah, jim, what is your strategy in using stocks in

general? jeff, all i care about is government pay. okay. if the government is not in the mood to pay hospitals, if they're stingy towards hospitals, i don't want to touch them because there is not enough hospital mergers that can still be done without the government stepping in saying, you know what, we got to block that. with hospitals, if the government is on your side, i can be a buyer. if the government is against you, stay away but stick with cramer.

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