Cramer: Don't get burned! My advice for when to sell a hot stock
Jim Cramer is passionate about giving investors the tools to know when the right time comes to make big moves with their portfolios.
"I want to talk about selling, which, along with when you buy, may be the most important and undervalued tool in your home arsenal," said the " Mad Money " host.
Investors can make a lot of money by owning a hot stock with a lot of momentum. The trick to making the most money is knowing when to get out.
In Cramer's experience, there will always be naysayers for a stock. Those naysayers will usually be proven right, and that means hot stocks can implode. Cramer has seen this happen with various stocks, from Chipotle (NYSE: CMG) to cloud computing plays to smaller biotech names.
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When Cramer refers to a hot stock, he means hot speculative stocks. Those are shares of companies with low market capitalizations and very little coverage from major Wall Street research houses. Sometimes, those stocks can catch fire and stay hot for years.
"The key to figuring out when interest has peaked and it is time to sell is by watching the analyst coverage," Cramer added.
Once a hot stock has at least six analysts covering it, then the love for it may die down because it means it has gotten too popular, Cramer said. Stocks tend to cool off when everyone who was interested in buying it has already done so.
"This formula has worked for me as long as I can remember. As far as I can tell, it works because the number of analysts on a stock is a good gauge of how much awareness and interest there is in a name," Cramer said.
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