Why's It On Sale?

By James J. Cramer

When your favorite department store holds a big one-day sale, I'll bet you look closely to see which items are on sale because they've gone out of style or out of season, and which ones are damaged goods. And that's just how you ought to shop when there's a clearance sale in the stock market, like the one that knocked the Dow down 207 points last Monday. But there you have to inspect the goods especially closely. Stocks aren't vacuum cleaners; if they break when you get home, you can't take them back to your broker for a refund.

You should, like me, have a shopping list of stocks ready for whenever they go on sale. And, like me, you should regularly check back on those stocks to make sure that their fundamentals--their sales, earnings and business plans--are still on track.

You can't judge these issues without knowing the basics of who and where a company's most important customers, suppliers and competitors are. Yet I find that many investors don't have a clue. One guy might have Ford on his stock-shopping list because he likes his Explorer and sees his local dealer moving lots of iron. Then he sees Ford stock pull back hugely on Monday, and his mouth waters. But did he consider that Ford's business plan could be derailed by a weakened yen, which amounts to a giant coupon for discounts on Japanese cars? Or did he not think about it and just hope to get lucky?

Others might have been tempted last Monday to buy stocks of companies that make semiconductors or computer chips, only to discover, once they got them home, that the stuff was priced to move because it was broken. A number of semiconductor companies announced later last week that because of weak demand from Asian customers, they would earn less than expected. So their stocks went further south.

Even the pros sometimes fail to do all their homework. Last Monday I bought stock in Steelcase, the largest maker of office furniture in the U.S., only to discover afterward that it had been decked by its Canadian business. Huh? What Canadian business?

It's easy to learn before you buy that Steelcase sells in Canada or that semiconductor companies do an inordinate amount of business in Asia. Just read business publications or the many investing features now available online for free or for modest fees. (See time.com for a selection of websites.) Once you know where and how a company does business, you can quickly find the bargains when the market throws a sector sale.

For example, on Monday we saw selling in stocks of many retailers. That may have made sense in the case of luxury-goods exporters like Tiffany, which has a large Japanese exposure. But a strong dollar and falling prices in Asia are windfalls for K Mart (a stock that I own) and the Gap, both of which import products from that region.

If you put money in mutual funds, it's just as important to know in which countries and industries they invest. Many so-called U.S. funds are heavily exposed to Asia. You can usually find out where a fund invests by tapping into its website or calling its 800 number. If the fund can't tell you, don't buy it.

Finally, know this: when the stock market throws a sale, I buy hundreds of thousands of shares, and the price often goes lower before it goes higher. But if I've done my homework, I usually profit by being patient, and so will you.

Jim manages a hedge fund on Wall Street and writes for thestreet.com an investing website. Nothing in this column should be construed as advice to buy or sell stocks.