An Analysis of Jim Cramer's CANDIES

by: Gold Digger

Since quite a few retail investors watch CNBC and particularly Jim Cramer because his theatrics make his opinions more fun to watch, and perhaps more credible too. In the past few days he mentioned a fun word, Candies (basically it's an acronym for Chipotle (NYSE:CMG), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), Deckers (NASDAQ:DECK), Intuitive Surgical (NASDAQ:ISRG), Express Scripts (NASDAQ:ESRX) and Salesforce (NYSE:CRM)). These are all growth stocks that have given some good returns until now. So I thought it would be a good idea to put these stocks into some perspective for investors and followers.

Growth stocks are good because they provide good returns as the underlying company is in the growth phase and its earnings are increasing at a fast pace. As analysts align their expectations with real earnings, these stocks tend to go up. However, investors should keep in mind that growth stocks are much more volatile too and any one event can totally wipe out gains in these stocks. The risk is even higher for those investors who try to play the catch up role and missed the initial up moves. Also, these stocks are highly dependent on the economy and consumer buying power.

Let's start with Chipotle. The stock is already up almost 70% for the year-to-date. I believe at this point all the earnings growth is already priced into the stock. Unless the company opens a lot of new restaurants and can operate them profitably, the stock will have significant resistance going forward. Also, competition from similar concept chains like Qdoba (a unit of Jack-in-the-Box, (NASDAQ:JACK)) and startups like Burrito Beach are bound to take some traffic away from Chipotle.

Apple's story is a little complex. Its biggest problems are that it's already too expensive and almost every analyst has a buy recommendation on it. It's a very crowded trade. It has launched innovative products but the bigger problem is that most of these concepts seem to come from one father figure in the company, namely, Steve Jobs. I wish him good health but investors might be in for a big disappointment if he retires or is simply unable to actively participate in the company. Then AAPL will be like RIMM or HP (NYSE:HPQ) or maybe even both combined.

Current valuation of the company might not seem too rich based on recent products but it is too overvalued based on the success of one person. Now Apple's ardent followers will vehemently contest it but Apple's history tells me that it's like any other device manufacturer without Steve. Consider the highest target for the stock so far is around $370/share. That represents a 30% gain from the current level of $275/share but any disappointment on the way may be too costly for those investors who are trying to get on the ride at this point.

Netflix is a good stock which has enjoyed a no-competition environment so far. But returns on this stock going forward will depend on the actions of the competitors rather than the company itself. Recently, services like Redbox and Hulu are trying to take some market share. But it's too early to tell the outcome in digitally delivered subscription based content.

Deckers is a pure consumer play. And I don't think that the majority of US consumers are going to be in a comfortable spending situation anytime soon. Though the earnings multiple is not too high for this one, any downside in net earnings itself may change that multiple drastically.

Both Salesforce and Intuitive Surgical are B2B plays and their earnings are the result of many factors including ease of credit, the macro-economy and overall business conditions. As we know, the economy is not out of the woods yet and there may be significant pressure on discretionary spending in businesses, similar to the household situation.

All of these stocks have gained more than 40% year-to-date and I believe that at this point these particular growth stocks reflect a balance of their growth potential and sales environment. Any downside in the economy may get reflected with a bigger downside in these particular stocks. So instead of getting into these names at current levels, I would advise investors to stay away until a pullback occurs. Any new positions should be opened only as a pure speculative plays rather than a long term investment.

Disclosure: No position currently. Will open a short position in some of these names if valuation become too high.

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