Jim Cramer likes these 5 “pretty” rated shares within the S&P 500

CNBC’s Jim Cramer on Wednesday offered investors a list of stocks he thinks could be great additions to portfolios.

“We only want … stocks if they’re reasonably valued because this market has very little patience for expensive stuff,” he said.

Here is his list:

Earnings season kicks off on Friday with reports from big banks and airlines in full swing, and Cramer said he’s concerned analysts’ earnings estimates for 2023 look overblown given the state of the economy.

“My bet is that many companies will be making conservative forecasts and analysts will have to trim their full-year estimates if they are worried about a Fed-induced recession caused by multiple rate hikes,” he said.

As a result, he decided to focus on the price-to-earnings-to-growth ratio of stocks when compiling his picks. “That tells you whether a stock is cheap or expensive relative to its own growth, and that’s what really matters,” he said.

Cramer’s stock screen methodology

To create his list, Cramer first took all the stocks in the S&P 500 and eliminated those that didn’t have meaningful analyst coverage. Then he took out the companies expected to lose money or post negative earnings growth in 2023.

From this consolidated list, he eliminated companies expected to post earnings growth of less than 5%. Stocks with nosebleed price-earnings multiples were also eliminated.

“This market hates anything with a high price-to-earnings ratio, so anything that’s trading at more than 30 times earnings — out,” Cramer said. He also trimmed stocks trading below 10 times earnings as “a low multiple is a signal that Wall Street just doesn’t believe earnings estimates.”

Then, after getting rid of all the stocks with a dividend yield of less than 2%, he was left with 77 names. Finally, he ran a PEG ratio screen on the stocks, crossing out stocks where the price-to-earnings ratio was more than double the earnings growth rate. With 40 names left, he picked his top five.

Disclaimer: Cramer’s Charitable Trust owns shares in Morgan Stanley.

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