>> colbie you're making a mistake. you really should stick around. ♪ i don't trust you ♪ hmm earning season. i dread earning season. why? so much data being thrown at you because it's hard to keep track of the expectations and to know what's better than expected. what the whispers of the real

bench mark must be beaten is. no? it's because i had a bad back and can't stand carrying out printed versions of conference calls as i schlepped from downtown manhattan to my studio but tonight i want to do something different. i got to help you this earnings season. put it in perspective. most of you watching are not these day traders that hijack a lot of the thinking. you're not trying to gain in quarters. it's become so difficult to predict and often the initial moves aren't even accurate because of the press coverage or because something nasty occurred in the market because of europe or something involving the election. in other words, other for those shorting or going long stocks ahead of the quarter, these reports need a context to make you money. they aren't as predictive of

future behavior. they are a piece of the puzzle, the mosaic but only one of many important parts that predict where a stock will go over the intermediate term. it is a teaching show. i want you to know the metrics i'm using to pick stocks and recommend here and with my travel trust. 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 and how i let them factor into my thinking of picking stocks and hoping this will for once and for all because this is what i see constantly tell you how to use it to evaluate your portfolio. figure out what you need to trim, what you need more of. let it help your stock selection. hone your way of thinking, not mine but yours. earning season is incredibly important for what it tells you about a host of issues. big report cards, not just the trajectory of the estimates. we'll flesh that out. so tired of the estimates are

bumped a penny or two. that's not making anybody money. we can't dismiss earnings season. we have to put it in context. here's how i use the reports. first, i assess them for the predictive value for the year. to do that i try to discern where analysts go after the company's reports, do they raise them, lower them? do they keep them the same. let's say apple is using a reports th that's not only bett than the posted numbers but beats the high man, some call it the whisper. aggressively high estimates on the street. that 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 they bump it to figure out several things, first, i try to figure them out from real increases, actual sales, do they do better and not

just accounting changes but the latter fools a lot of people. i look more at the revenues than actual earnings. why? because the company can't change the sales line except by increasing demand producing more, gaining more customers either at the expense of others or through better salesmanship. they're making a better job, doing a better -- 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 sale one but the earnings. simply changes the denominator. revenue growth in the quarter particularly the holy grail accelerated revenue growth, arghhh, quarter to quarter and year over year drive my thinking and allow me to figure out what i really talk about on the show and lets me know what to pay for the stock. a lot examine it and make a determination of the stock's worth and what i call the p/e

value. price/earnings vacuum. when the average stock sells at 11 times the s&p and say, that's too expensive. it sells 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 just laid out for you, link quarter, the previous quarter and current one and year over year quarter and calculate that versus the growth rate. if a condition is at 20% and price earnings multiple is 20% or less, hey, you know what, you probably have a big bargain on your hands, using the peg ratio we call that, fundament of the show. it puts the multiple into context you can use versus other stocks. we're always comparing other stocks on the show. as a rule of thumb i'm willing to pay one that's up to twice the growth rate of the company. especially if there are very few

companies growing that fast. higher than that, 70 times earnings growing at 40% begins to get me nervous. even a 40% growth is hard to come by. that's nosebleed territory and too many things can go wrong with a stock when that happens. the commerce is true too. when i see it selling for less than one times it earnings per share rate, i begin to salivate. the factors will be covered in the rest of the special show. i'm drawn to that stock that i have to find other reasons not to buy. so my line i use the actual earnings per share reports to figure out the growth rates of the stock and if the growth rate is high and the price to earnings multiple based on future projections is equal to or less than otherwise enough to proceed with the rest of the work this special deal will detail. brad. >> caller: hey, jim, i want to give you a big south texas

boo-yah to you. >> that's aggressive. i'll take that. >> caller: jim, i'm just wondering how do best prepare for the earnings season in terms of online research. give me the scoop as you stay on top of all the market updates. >> okay, what i like to do -- well, first of all, i watch cnbc. it covers earnings season better than anyone. the websites are so, so good that literally they will have the analyst reports and a lot of projections then i like to look at the news stories and then i look at the analyst reports the day after and all that has to be done if you're going to sink your teeth in and feel confident. start with the website of the stock. to darryl in california, please. >> caller: yes, boo-yah, jim cramer. >> boo-yah. >> caller: i have a question. what is meant by a reverse split stock? okay, that means if there's a

million shares, you know, say they do 3-1, they make it to 300,000 shares, citigroup did one of these, if you have like, you know, 300 billion shares, divide it by 3, you get 100 billion, it does raise the price but it's a loser. let's go to tyler in florida, please >> caller: jim, a south florida boo-yah. >> i'll take that. i need to go there now. sunshine? >> caller: no, it's overcast. when you talk about the economy booting off, you talk about it in terms of consuming and not producing, it seems like. 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. >> i do because in order to be able to raise prices, you need demand. if there is a shortage of

supply, sure, that can mean something but not if there's no demand. if you have a product nobody likes, you warrant i raise the price, it doesn't mean anything. a company has their earnings stars before you buy it. use the eps to figure out a company's growth rate and then take it from there. "mad money" will be right back. >> don't miss a second of "mad money." follow @jimcramer at twitter. # madtweets. send an e-mail at madmone madmoney@cnbc.com. miss something, head to madmoney.cnbc.com. people have doubts about taking aspirin for pain. but they haven't experienced

extra strength bayer advanced aspirin. in fact, in a recent survey, 95% of people who tried it agreed that it relieved their headache fast. what's different? it has micro-particles. enters the bloodstream fast and rushes relief to the site of pain. visit fastreliefchallenge.com today for a special trial offer. visit fastreliefchallenge.com i played a round of golf.id in the last five hours? then i read a book while teaching myself how to play guitar; ran ten miles while knitting myself a sweater; jumped out of a plane. finally, i became a ping pong master while recording my debut album. how you ask? with 5-hour energy. i get hours of energy now -- no crash later. wait to see the next five hours.

excuse me, sir i'm gonna have to ask you to power down your little word game. i think your friends will understand. oh no, it's actually my geico app...see? ...i just uh paid my bill. did you really? from the plane? yeah, i can manage my policy, get roadside assistance, pretty much access geico 24/7. sounds a little too good to be true sir. i'll believe that when pigs fly. ok, did she seriously just say that? geico. just click away with our free mobile app.

from ours to yours happy holidays from "mad money." welcome back to "mad money" special earnings season companion show. how not to be overwhelmed by earnings reports so you can profit from them in an informed and confident way, make money at home. we went over how i like to use the earnings reports to figure out the growth rate and stock price to figure out whether it's too expensive or cheap against its sector and the rest of the market. the next way is important to. the etsization of the market even more important of the growth rate. i measure the stock's earnings growth and its quality versus

its cohort and figure out whether -- here it is -- the whole cohort is worth earning or forgetting about it. for most of my investing i have accepted the fact that the sector's important when you're picking a stock. it matters. historically the stock sector counted as much as 50% but because so many trade through etfs and because they've become so popular through individuals and hedge funds to make decisions about stocks, take quick action, the sector is superseded earnings at times. i got to tell you, often it's made earnings all but an afterthought. the way banks traded, it didn't matter for the most part whether a bank had strong or weak earnings, if a bank was in the financial etf that encompasses it people want to own it, it didn't matter how good a bank did. wells fargo, domestic banks with little exposure to weakened

europe, translated into that. jpmorgan and others, at times i've had to dismiss the gains if the cohort was radically outfavored. but i never just forgot them. instead i try to choose -- figure out which ones can at times break the tug of the sector, the gravitational pull and which ones can really shine because if the sector falls back into favor i have to be ready. since its gigantic bottom, the march bottom, general rational we've seen many sectors of retail in individual stocks within those sectors outperform. i like to listen to the earni s ings calls of all retailers. but i'm wrapped by the groups doing the best, the top performers during this period have been the discount stores, particularly the dollar stores, dollar general, dg and dollar tree. when i see the markets tired of money go to retail i go back to my earnings report memory and reach for these two. i know they have the most

earnings momentum. i only know that because i listen to the calls even though they've been out of favor of late. i am in there with the ones with the best momentum. similarly i've been joined bed, bath & beyond during these sectors when they grab a sector because they have the most inexpend i have earnings momentum. another strategy for more physicality indicated investors, when i know the best of the best in terms of earnings because i focus on the calls and a huge am was poured in, i like to hedge my bets, sell the etf and buy the best performers in the etf according to my earnings per share work. that way if the move takes a turn for the worse we get a large macro number that hurts our market or some weakness out of europe i can lose less than the people playing the game because i own the best and i am short the rest. sector analysis is important.

beam confuse this gigantic group of stock which comprises more than 15% of the s&p 500 constantly. tech is a conglomeration of a whole group, semiconductors, software, cloud, internet, large scale enterprise, tech, telecommunications tech, infrastructure stocks, assemblers, i like to look at them, the companies i follow versus the individual sectors because it doesn't work. cloud stocks are highly valued. meaning the price earnings to growth rates are extreme. that means there is no room for error or hair as we call it meaning something is wrong. something that could upset the growth rate. in 2011 one of my favorites reported a magnificent quarter but guidance was lighter than i expected and it pancaked. why? it underperformed even as growth

rate would have been outstands for a personal computer related stock, a semiconductor or a cell phone company. knowing what the sector is isn't enough. you need to know the subsector, how your company stacks up against the growth rate of that subsector and have a good handle on whether that larger sector is in favor or if it isn't. nothing is worse than owning a bad stock defined by weak earnings. nothing is better than owning a good stock in a great neighborhood. if you do not measure the earnings against the sector's growth and do not determine first whether the sector is in favor versus out of favor, then the earnings report better than expected or not won't mean a thing. when we return i'll give you several more ways to use them in the context of stock picking, not just trading which i have come to see as pretty much of a zero some gain. stay with cramer.

[♪...] >> i've been training all year for the big race in chicago, but i can only afford one trip. and i just found out my best friend is getting married in l.a. there's no way i'm missing that. then i heard about hotwire and i realized i could actually afford both trips. see, when really nice hotels have unsold rooms, they use hotwire to fill them. so i got my four-star hotels for half-price! >> men: ♪ h-o-t-w-i-r-e ♪ hotwire.com >> announcer: save big on car rentals too, from $12.95 a day. asional have constipation, diarrhea, gas, bloating? yes! one phillips' colon health probiotic cap each day

helps defend against these digestive issues... with three strains of good bacteria. [ phillips' lady ] live the regular life. phillips'. but may not realize what they can do for your health. we know what it takes to look good on the outside but with 70% of our immune system located in our gut, the core of our health is truly on the inside. that's why i take new trubiotics. it's a daily probiotic that helps in two ways. one helps support digestive health, the other immune health. stay true to your health. new trubiotics. from the makers of one-a-day.

keep up with cramer all day

long. follow on twitter and tweet your questions, #madtweets. tonight we're talking not about who just reported better than expected quarter, getting excited about, something we get caught up in every earnings season but how to use the reports to put together the ideal portfolio for the long-term, not for tomorrow's trade. we established the importance of those reports for that they tell us about the growth of a stock and where it fits inside a sector as well as the sector's gravitational pull that could overwhelm even the best earnings reports, best house, bad neighborhood, neighborhood wins. now we have to dig further than the headlines and determine what else on the conference call or in reaction to the call that can help us make some money. we don't stop with just a call. what else is important to listen to on these? the wall street analysts tell you the most important concept and the most important predictor of future earnings is the gross margin.

what's left after the cost of sales are subtracted. i like to explain it as a lemonade stand. the cost of goods sold easy to understand. the lemons and, yeah, you add some sugar. you figure out how much those cost, subtract from what you charge, you have your gross margin. there are plenty of other things that go into it. we can't have the cost of the table, time to make the sign, number of people behind the stand, the labor equipment if you paid someone besides yourself and same thing for publicly traded businesses. we try to figure out the cost of goods sold, whether they're going up or down, that's the inflation and deflation component and how much the labor costs, very important in a rising salary environment and how much leverage there is meaning if you have all of the labor and costs accounted for how much business can you do? the one that i always like to think, there is not a lemonade stand but it is well known, chipotle. chipotle has fabulous gross margins in each store. they have labor and food and customers. the more customers they can serve per hour, the more

leverage they have. the key to the gross margin are the cost of the guac, the cost of the labor and most importantly the number of customers they can push through in a given day. of course there are dozens of other inputs advertised and need to have as little turnover as possible because the cost of training new employees is tremendous. it is a huge obstacle to making a lot of money. that's something a former ceo of costco made clear to us on many occasions on this show. in fact, senegal was legendary for paying his employees the most and treating them with the best of benefits because it is so important to keep them happy so that the firm doesn't constantly have to train new people. new people are not known to regular customers and like to see the same old hopefully smiling faces and new people cost too much money. same for chipotle where the most talented are quickly given promotions and opportunities to run more stores. mcdonald's, similarly, often praised for gross margin improvements because it has the best market muscle, can get low cost goods and good leases and also because it has the technology and innovation on a quick scale and does not

befuddle the often lesser skilled employees. they get huge leverage per hour. gross margin comes into play in every industry i follow always in different ways. often the key is less to do with the cost structure of the company 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 making as many chips as they can 24/7 but at times end demand wanes and the supply chain is overwhelmed, okay, it gets glutted and then they often have to cut price which then lowers the gross margin and often makes the earnings too volatile to predict and therefore too volatile to give them a high-priced earnings multiple. that's when you see preannouncements with too much inventory. we like companies with consistent growth and pay higher multiples and we don't want the inconsistent growth that tech gives us and pay lower multiples for them. no one can handle the inventory glut that happens once or twice a year and same for companies like steel and aluminum.

they used to be lumped in with tech. at times they produce too much. at times the product from other countries cause a glut in the system and prices are slashed and future earnings per share get crushed. i listen closely on the commodity calls to get a sense if inventory is building anywhere in the system. because if it is, i can tell that the gross margins are coming down, and i got to get you out of the stocks quicker than i do. aluminum, steel, copper, i have to work faster. don't you believe for one moment it is just the commodity producers affected by these. i listen to every single major pharmaceutical call and hear about generic competition. a drug coming off patent that will plummet in price scares me and i tell to you get out. because i think that it will trade at a low multiple to future earnings even if it traded at a high one in the past. until a stock discounts that, i have to keep you out of it. few drug companies are immune from this. i steer clear of them as best i can until everybody knows about the patent cliff and then i can go back. finally, there are gross margins

in the oil service companies. these are the hardest. they're difficult because you often have to figure out several numbers for the gross margins, how much it costs to drill, get it out of the ground, ship it, refine it. these are complicated companies. many companies in the industry have tried to break themselves up to make it easier for guys like me to figure out their gross margins instead of being a blend i have to unwrap. i care about finding costs and about end market prices. that's why the natural gas companies, for example, traded at discount to the pure oil companies because the end market price of natural gas has just been so low for so long and the end market price of crude has been so high for so long. that's what draws me towards an eog or continental with cheap refining costs for oil and they have expensive prices when they get it out of the ground. the bottom line, the key component after figuring out the earnings per share trajectory and its growth related to the cohort is figure out the future gross

margins. something that is uniquely calculated only by listening to the conference calls, can't get that in the headlines or any of the press reports. if you don't know the direction of the gross margin, believe me, you won't know the direction your stocks are about to take in your portfolio. it is an integral part of the homework. if you don't calculate yourself, you have to get it from somebody. read from the analysts who do. go to brad in ohio, please. brad. >> caller: boo-yah from girard, ohio. >> got to get there. i haven't been there. i will get there. i promised myself. >> caller: thanks for taking my call. my question is as an investor interested in specialty retail, i understand that the fourth quarter is definitely the quarter with the most significant earnings. >> right. >> caller: but how should one evaluate these companies' first quarter earnings? >> go back to the rules that i give in the hedge fund. i frankly don't care about the first quarter for retail. it is only the fourth quarter i care about. first quarter is just not meaningful enough, doesn't move the needle. don't have valentine's during that because my dad sells gift wrap. gift wrap is one of those things

where you realize what the seasons are and valentine's doesn't move the needle like christmas. i like the holiday season. it is all that matters. i wait to hear the quarters and make my judgment for what the next year will bring. mike in illinois, mike. >> caller: this is mike in the wind yi chicago with the chicago bears. ba-ba-ba-booyah. if i short a stock how long do i have to cover ha short? >> forever. that's one of great things about shorting. they may ask you to put more money up and that's where people get squeezed. okay. you have to dig deep if you want deep profits. gross margins will guide you in figuring out the direction of a stock. some things you will only find on the conference calls. not the headlines. gross margins, that's on the call. stay with cramer.

>> nobody is more passionate about the markets than i am. >> caller: i wanted to thank you. you have saved my retirement. >> you are why i come out here and do this show. thank you so much. >> caller: the stuff you're doing for us is important. i want to say thank you. >> caller: my husband and i watch every day and we count on your help. >> put cramer's 30 plus years of experience to work for you. "mad money" weeknights on cnbc.

taking control of your financial destiny is smart but why would you go it alone? >> something that has a much larger bearing on you in the stock market as a whole. >> let cramer be your guide. your sounding board. >> caller: i'm having a hard time with my favorite stock. >> i know you can beat these. >> and your coach on the road to financial independence. "mad money." weeknights on cnbc. you're hearing tonight for the first time not how to figure out what's a better or worse expected earnings report, a good trade, seems to be a dominant way of thinking but how to put these reports to work for you, select the best stocks and prune those that need to go. talking this that perspective. we figured out how to compute the growth rate of a company and whether it's too expensive based on the growth rate, something jim cramer on twitter and i keep getting that question. now it is answered.

we explained sector analysis as part of the earnings report and learned how to focus on gross margins, something that can only come out of the conference call and now we must address two more pieces of the earnings puzzle, and these are really important, dividend growth and home run potential. from pretty much the time since i first bought stocks in the late 1980s until fairly recently dividends were an after thought, okay, ever since i had my hedge fund. companies became enamored of buybacks as a way to return money to existing shareholders. and to me it is oxymoronic. the only real winners with shareholder buybacks except in extreme cases in auto zone, novellous are the executive that is 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're really supposed

to do, that is, make it so there are far fewer shares and something that can drive a stock higher if the earnings are excellent. the buyback that accomplishes that goal, i have to tell you, count them on one hand. all right. most buybacks turn out to be a huge waste of money is companies that spend a giant amount of cash buying stock when prices were higher because they don't know about stocks. what should they do? what are the good companies doing? what should they be doing? what do the good companies do? often more and more bountiful dividends. buybacks are indefinite. cable being reined in and dividends are from long-term confidence. now that low rates seem to be upon us for some time, dividends can provide a rate of return that certificates of deposit and you keep trying to make money with can't. of course, stocks present more risk than cds and they can go down and they can also go higher. that's often the case with companies that continue to boost their dividend year after year. and if you reinvest

those dividends, you can augment your return to the point where you are far exceeding a return on bonds. dividends are so important, they have been responsible for almost 40% of the s&p 500's return the last ten years and also the main reason the dow jones average with the above average dividend yield far out performed the s&p 500 in 2011 and 5.5% return, how about making a total of 8% if you reinvest the average dividend and the only thing you should be thinking of is reinvesting dividends and cash in your pocket, safety net during the bad times and a trampoline in the good. so what do the earnings have to do with the dividend component we so often seek? simple. we listen for calls that tip management's hand on the dividend, that tell us there is enough excess cash available to boost the dividend. perhaps several times in a short period of time. hey, that's what we heard from general electric in 2011. that was signaled -- it's signalled every -- it was on every conference call they mentioned. conversely if they single a desire to buy back more and

it's ineffective reducing the share count by much -- you have to look at the year before, year before, year before and you should presume it is about management enrichment until proven innocent. they're just seeking to contain the damage from the shares and options offered to management. a lot of tech companies do it, and i regard that as disgraceful. no one else thinks that. i don't care. i know what i see. these days if they don't indicate they'll boost one on a dividend call, you can count me out. a la apple that i'm willing to overlook it. we also need to listen for something breakout, something new on a conference call, something the company is going to do differently or going to announce soon that can serve as an upcoming catalyst. i always talk about catalysts in the show. you need a catalyst to buy a stock. i scrutinize not so much for what happened, that doesn't interest me, but something that will happen and if i hear something that sounds like it could propel the stock in the future, i am anxious to buy it. and if there is a sell-off because someone is disappointed the company didn't beat the estimates by enough or didn't guide high enough to please the

momentum funds of the stock, i got my opportunity. all right. so what are the examples i look for? pharmaceutical companies, they often telegraph what might be going into stage 3, okay? meaning what drugs might be near final approval. they often tell you about expanding usage on the labels for drugs. allergen, one of the best over the years, has told you more about the future on the call than any other and it has been a terrific buy. every time it sells off after earnings because of the upcoming catalyst. it constantly -- by the way, celgene, same thing. they give you a call telling you what's coming up and tech companies often tip their hands and there are product initiation that can make a huge difference in future earnings and pipeline companies, creators of dividend wealth, they tell you about upcoming expansions that could be additive to earnings. and the exploration production companies almost always tell what you prospects they're looking for and when you might hear really good news on these calls.

i always file those comments away and wait for the futures to go down. that's what happened last year. clr gave you a chance to get in before it raised guidance from new finds later in the year and we had gone out to the bakken and they were talking about how the storms kept the drilling down and storms ended -- nobody cared. then the stock took off when they told you business is big and booming. the bottom line, we look for signals about the future of the calls and particularly about upcoming catalysts that will move the stocks later on making them solid buys on short-term decline because it wasn't better than expected. we try to measure confidence about cash flow that can ultimately trigger rising dividends. the best source of wealth 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 than to listen in on the earnings calls. stick with cramer. >> from our family to yours, happy holidays, cramerica. peace and prosperity in the new year from all of us here at "mad

money." then i read a book while teaching myself how to play guitar; ran ten miles while knitting myself a sweater; jumped out of a plane. finally, i became a ping pong master while recording my debut album. how you ask? with 5-hour energy. i get hours of energy now -- no crash later. wait to see the next five hours. i have a cold, and i took nyquil, but i'm still "stubbed" up. [ male announcer ] truth is, nyquil doesn't unstuff your nose. what? [ male announcer ] it doesn't have a decongestant. no way. [ male announcer ] sorry. alka-seltzer plus fights your worst cold symptoms plus has a fast acting decongestant to relieve your stuffy nose. [ sighs ] thanks! [ male announcer ] you're welcome. that's the cold truth! [ male announcer ] alka-seltzer plus. ♪ oh what a relief it is! ♪ [ male announcer ] to learn more about the cold truth and save $1 visit alka-seltzer on facebook.

sitting on the sidelines because of all the uncertainty in the market. >> caller: thanks for taking my portfolio from mean to green. >> with over 25 years of experience in bull and bear markets let coach cramer show you how to play to win. >> caller: you and your staff are keeping up in the game. >> "mad money" weeknights on cnbc. earnings season doesn't have to be a gun for unforth that willable

numbe numbers for existing only for hedge funds to profit from. tonight we showed you how you can look for signs of what to do with your portfolio over the long run because the earnings reports and the subsequent conference calls, the crucial thing, look, here is the deal. they don't have to be shoot first, ask questions later experiences. actually the opposite. conference calls are ask questions, ask questions, and 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 maybe other stocks in the market as a whole usually regarded as being the s&p 500. we want questions answered about gross margins and whether they're going to be increasing allowing us to judge if earnings estimates might be beaten in the future. we are looking for signs that dividends, these days the most important indicators of a company's health might be boosted and looking for catalysts that can propel it higher and something big that will happen. that is so born in a time when many stocks

stocks sell off in knee-jerk fashion and specifically because some company didn't beat an estimate that may not have been informed any way. there are two more items to be gleaned from these and they are new ones that i've had to add to the equation because of structural changes in the stock market over the last few years. the first is geopolitical risk. never really cared that much about it because following american companies america was king. geopolitical risk, linked exposure, not just to the rising price of oil. that can be jostled by the middle east, that's always been an issue but linked to the sovereign debt and banking debt issues of europe. we need to ask how much exposure for a given company to the chinese economy. for example, for most of 2011 it was impossible to own banks, right? proceed to have linkage to the troubled euro and its accoutremes and away from the italian bond market or overstressed french and spanish counterparts and got our heads handed to us. similarly, owning tech when tech is often considered

heavily dependent on europe. as much as 20% or 25% of the earnings of tech are derived from the continent and typically it is deadly. we know this because they don't dodge it on the conference calls. that's how you learn about it. the analysts won't let them get away with it. all you got to do is listen to the q&a. if you're in a company with european exposure you will hear one out of every two or three questions about europe. asia, about china. you want preventive earnings season medicine, go through the previous calls of the companies. if the plurality of the questions are about europe, you know you're probably going to be in for a bruising next time. that's what the analysts focus on and force the companies to talk about. as correlated with europe as many tech and bank stocks are, it is china that controls so many of the cyclicals. the smoketack companies. go listen to the earnings call of caterpillar, joy global, cummins, peabody, and owning these stocks is like owning a piece of the great wall of china

you want -- you don't want to be in them when the great wall is crumbling. it has to be such a pervasive worry i have seen down grades like yum because it has a huge chinese business and coach which has been expanding aggressively in china because of worries about a chinese slowdown. can you imagine kfc? similarly, owning a steel company without paying attention to what the chinese are dumping on the markets is like taking your financial life into your own hands. how do you find out all these issues? companies as diverse as corning, 3m, ppg also march to the beat of the asian drummer these days. you won't see it in the release. it is all in the pestering by the analysts so it's pretty simple. listen to the call and don't hang up until you heard the last question so you can read the transcript so you can tell how worried they are about the markets that didn't move the needle a few years ago. one final piece, the earnings season that you have to weather something that i have never talked about before. okay? we have to do this before we are done for the night. one that's become obvious to anyone that watching this show regularly -- i can't believe i

have to do this. i'm a it willalest. i am a fundamentalist. i am going to say it. you have to know the chart of the stock ahead of the quarter. so often with he have charters on the off the chart segment that trace out what a pattern might be and where it can break out and why is this so important? you have to recognize that the chart was the gauge of the expectation and looked at the chart. that tells you where the expectation is. often it rallies to a particular level and advances to the quarter, a level of resistance. if it's not up to snuff, it can go hammered. i don't want you to react to this but use it in your favor. that's why i saved it for last. an ideal stock to buy, rising earnings per share growth, a potential for dividend increase and good news on the horizon.

that gives you the chance to get in at a terrific price, one you wouldn't otherwise be able to get because of the chart. why is it so important? no journalist is ever going to attribute a decline to the chart. many hedge funds are reacting entirely to the chart and saying silly action because of it. i am not a chartist but i play like one when i have to. if the question and the answers on the conference call resolve around a crisis in europe or asia or anywhere else for that matter, be prepared for a hammering and if they go down big after a quarter you think should be going up later on, remember that it might very well be the chart talking. the chart telling the tale and gives you a chance to get in cheaper than you may otherwise not have the chance to do. now you are ready for the rest of earnings season. go get them and tell them cramer sent you. dean in california. dean. >> caller: hey, jim, how are you? hello from beautiful marin county. >> it is gorgeous out there.

how can i help? >> caller: i check my stocks at the end of the day and usually you'll see a little blurb on the news headlines that says, for instance, a particular stock has a close or buy imbalance at the end of the day. what i want to know is what exactly do these mean and do they have implications for the following day's trading especially to small-timers? >> i don't think you have to worry about it. a lot may be etf related or some market on close program. it is confusing to people. we care about the fundamentals. maybe it affects the chart. maybe it doesn't. i don't care about the chart that much and i know many people but we care about the fundamentals. that would matter only if you were a big broker working a 100,000 share order and trying to get 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. and -- well, call me. call cramer.

back after the break. >> you've done your homework. you're ready to buy but how do you know when the time is right? >> yes, that is a monster stock. >> just ask cramer. >> 'he the master of making money, cramer. ♪ alleluia >> "mad money," weeknights on cnbc. it's embarrassing! we can see you carl. we can totally see you. come on you're better than this...all that prowling around. yeah, you're the king of the jungle. have you thought about going vegan carl? hahaha!! you know folks who save hundreds of dollars by switching to geico sure are happy. how happy are they jimmy? happier than antelope with night-vision goggles. nice! get happy. get geico. fifteen minutes could save you fifteen percent or more. plays a key role throughout our lives. one a day men's 50+ is a complete multivitamin designed for men's health concerns as we age. it has 7 antioxidants to support cell health.

one a day men's 50+. fight dryness. roughness. breakage. all 5 signs of damage with pantene. amazing pro-v formulas fight signs of damage for healthier, stronger, shinier hair. dare to take the pantene 5 signs challenge today. i took the dare. will you? pantene. daily moisture renewal. hair so healthy it shines. n pantene. daily moisture renewal. change your life. my fourth grade teacher mrs. hoffman encouraged me to fulfill my potential. she wrote in my yearbook, "one day you'll be the star of an award-winning show on nbc!" how did she know that?

the more you know. from our family to your, happy holidays, cramerica.

peace and prosperity from all of us here at "mad money." now, let's do some mad mail and, yes, mad tweets on twitter. hello, jim writes bob in nevada. you often encourage home gamers to do their homework. i dvr every episode of "mad money," and i don't recall you specifying what you suggest should be involved in doing our homework. my version is listen to every word on "mad money" and check price movements in charts. what else do you suggest we do? first of all, here is what you do with "mad money." i wrote a whole book on that. that's the starter. you hear a stock that you like. you decide you want to get to know it. you go to the website. the websites have almost everything these days. you read about the last few quarters. you know what i like? 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 how the dividend is. these are all part of the process long before i would ever think of pulling the trigger and

by the way i always like to think what would make me sell if if they miss certain things or did certain things and the stock went up and a lot of things for homework and it all starts with the website. here is one from trace. no doubt the -- 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 that the large amount of military personnel vis-a-vis contractors and other military support personnel will flood the job market and increase the demand for goods? no, trace. i don't think it will move the needle. by the way, the army and navy don't move that fast. if anything there could be a peace dividend if we ever got to that where we could cut the budget deficit. like in the '90s. i don't think you should look at this issue in a way to be able to make money off it. it is 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. all right. here is one from danny in new york. hi, jim. i have heard you say when considering playing the downside

of an equity that you would short the stock rather than buy or put. please elaborate on your reasoning for this. i favor puts to avoid the high risk of a short position. danny, i am so glad that you sent me this. if i created misperception i favor shorting stocks, it is completely out of character with my books and what i used to do at the hedge fund or before i had the hedge fund when i was working at goldman sachs or when i was trading for myself. i always do puts. i very rarely do shorts. as i write in "confessions of a street addict," i was a victim of horrible short squeezes that lost me a ton of money. use puts. i don't care if there is a premium. all right. let's go to tweets. here is one from kelly 019, @ jimcramer, covered calls allow me to print money out of large positions without having to sell. why do you hate them so much? here's the answer. i have to tell you something, i hate trapping my upside, i hate cutting off my supside. that's what writing a call is, you can't make more money than when you write the call. say something goes wrong. you sell the stock. you're really vulnerable doing takeover because you're 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 have 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 more than three decades. trust me on this. okay. here is one from jeff. boo-yah, jim. what is your strategy in looking at hospital stocks in general? how do you approach stocks like these at earnings season? jeff, all i care about is government fay. if the government is not in the mood to pay hospitals, i don't want to touch them. there is not enough hospital mergers that can be done without the government stepping in and saying we have to block that. so with hospitals, if the government is on your side, i could be a buyer. if the government is against you, stay away. but stick with cramer. >> keep up with cramer all day long. follow @ jimcramer on twitter and tweet your question, #, madtweets.

teaching myself how to play guitar; ran ten miles while knitting myself a sweater; jumped out of a plane. finally, i became a ping pong master while recording my debut album. how you ask? with 5-hour energy. i get hours of energy now -- no crash later. wait to see the next five hours. excuse me, sir i'm gonna have to ask you to power down your little word game. i think your friends will understand. oh no, it's actually my geico app...see? ...i just uh paid my bill. did you really? from the plane? yeah, i can manage my policy, get roadside assistance, pretty much access geico 24/7. sounds a little too good to be true sir. i'll believe that when pigs fly. ok, did she seriously just say that? geico. just click away with our free mobile app.