Jim Cramer warns investors: Get used to shrinking valuations for once high-flying stocks

CNBC’s Jim Cramer said Tuesday investors need to confront a “new formula” for identifying winning stocks as long as Wall Street remains worried about the Federal Reserve tapping the brakes on the hot U.S. economy.

“We have to get used to shrinking valuations for fast growers, especially the ones that trade on a price-to-sales basis,” the “Mad Money” host said, referring to a valuation metric that’s often applied to unprofitable companies.

“Sooner or later, I think this sell-off is going to run its course, and I’m still looking for a Santa Claus rally. That hasn’t changed,” he added. “But you’ve got to beware of multiple contraction … in a market that wants rock-solid earnings to apply a P/E to, not shaky sales to create a price-to-sales multiple for.”

Cramer pointed to Dutch Bros to illustrate his point that investors should favor companies with earnings and return some of them to shareholders. The Oregon-based coffee chain, which went public in September, is growing fast, but it’s not yet generating a profit.

That wasn’t a concern for many investors earlier in the fall, he said, evidenced by the fact Dutch Bros’ shares got as high as $81.40 on Nov. 1. It closed Tuesday’s session at $49.69. Over the past month, the stock is down nearly 20%.

While Cramer acknowledged Dutch Bros may continue on its growth trajectory, adding many more stores across the U.S. and reaching sustained profitability, he said it’s simply not top of mind for many investors at present.

“When we’re worried about a Fed-mandated slowdown and nobody’s willing to pay up for the phantom, possible earnings more than a decade down the road, well, good luck,” Cramer said.

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