Jim Cramer explains how to pick out a solid retail growth stock

CNBC’s Jim Cramer told investors on Thursday how to pick a solid retail stock for their portfolios, listing six factors to consider before making an investment.

“I want to spend some time tonight on what it means to buy the stock of a great franchise into weakness, not some software as a service company or a red-hot semiconductor equipment stock or the life sciences business, all of which are endless ragers until they aren’t,” he said. “But of a really, very good growth retailer that we all know, with a terrific reputation that can take a licking and keep on ticking.”

Growth can come in many forms, Cramer said, and one of them is retail. He said he looks for stable, well-managed companies that can perform well in different environments — even if their success is not immediate. He named Home Depot in particular, saying that the home improvement retailer fits his framework for a company to own for the long term. He noted that the stock weathered losses but has recently seen success.

To Cramer, it’s important that investors actually shop at a company’s stores — and like the merchandise — before they buy shares. A healthy balance sheet is also essential, Cramer continued. Since retail is a cyclical business, the companies can’t afford to have weak balance sheets, he said.

A good retailer’s management team shouldn’t be the type “that refuses to sit still and wait,” Cramer added. For example, when Home Depot saw the weakness of the housing market, management tried to expand its reach beyond consumers, he said. The company decided to acquire businesses that work well with professional contractors, Cramer continued.

Company scale is also essential to a retail stock’s success, according to Cramer. He said scale gives companies power to “have such a large footprint that you can manhandle your suppliers – they all need your shelf space — and not vice-versa.” He indicated that Home Depot is positioned well to deal with developments like tariffs because of its size and reach.

A strong retail stock also has to have a good yield, Cramer continued, saying if an investor decides to “buy quality, you can let it compound for the rest of your life.” These kinds of stocks also shouldn’t need lower interest rates to succeed, Cramer added. But he noted that rate cuts from the Federal Reserve usually boost the retail sector broadly.

“When the Fed starts cutting, your slow-growing retailer stock gets turbocharged as all the so-called smart money comes flying in,” he said.

Sign up now for the CNBC Investing Club to follow Jim Cramer’s every move in the market.

Disclaimer The CNBC Investing Club Charitable Trust owns shares of Home Depot.