In Cramer’s experience, there will always be naysayers for a stock. The naysayers will usually be proven right, and that means hot stocks will implode. Cramer saw this happen in stocks ranging from Chipotle to cloud stocks or smaller biotech stocks.
When Cramer refers to a hot stock, he means hot speculative stocks. Those are stocks of companies that have a low market capitalization and have very little research coverage from major Wall Street research houses. Sometimes, these 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 may die down for the stock, Cramer said. That’s because it is about to be too big and too well known, and the stock cools 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.