I am a fan of Jim Cramer, who hosts CNBC’s Mad Money. I usually follow him on my XM radio driving home. Lately, Jim has been publicizing his FADS CAN portfolio. He said recently
With so many money managers lagging the benchmarks because they didn’t manage their portfolios well, the big boys are going to have to chase momentum going into the end of the year. That’s one more reason to buy the F.A.D.S. C.A.N. names.
FADS CAN is a list of seven stocks that have done well and will continue to do well in the future based on their value proposition and growth in today’s marketplace. The stocks are F5 Networks (FFIV), Apple (AAPL), Deckers (DECK), Salesforce (CRM), Chipotle (CMG), Amazon (AMZN), and Netflix (NFLX). All of these stocks have had huge run ups in the past year, but I thought I would compare them to identify any relative bargains. As a longtime Apple follower and owner, I was not surprised to see that Apple was the most undervalued compared to its peers on this list. I kept the analysis fairly simple, as each investor has their particular ratios and metrics to value a good stock. Below you can see the metrics chosen for comparison, all taken from Yahoo Finance to keep consistency.
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On a current P/E Basis, Deckers noses out Apple for the low P/E, though its growth rate is only one third that of Apple. But what is interesting is how high several of the P/Es have become with Salesforce at 260, Amazon, Netflix and F5 in the 70s. The S&P average is about 15, so clearly several of these stocks are demanding a very rich price. Forward P/E, which is dependent on earnings estimates by analysts also show some very rich pricing. But here is where Apple sticks out, at a 14 P/E, its very close to the average stock in the S&P, yet it sports the highest growth rate of the FADS CAN stocks.
I find the Price to Sales ratio useful as a metric on the value of a company for an acquirer. The sales or revenue number cannot be manipulated very easy. Though it traditionally is best useful comparing within similar industries. Here Amazon is the lowest, but retail with its lower margins traditionally has the lowest Price to Sales. Apple’s P/S is higher but compared to MSFT (3.3) and Oracle (ORCL) (4.7) not so out of line. In this metric F5 and Salesforce seem the most expensive.
Another interesting item is the price relative to the target price. The target price is an average of the predicted price for a stock by an analyst following that stock. Displayed here is the average of the target price by all the analysts paid to follow the stock. Six of the seven FADS CAN stock have exceeded their target price for the next year. The one lagging is Apple, which is 15.7% below its target price.
Most compelling on this chart though are the growth rates. All the companies on this chart are fairly young in their lifecycle with “hot” products, processes, or value propositions. Despite that, relatively mature Apple is still leading the pack in growth both in earnings and revenues. While I chose quarterly y/y comparison, the revenue growth rates are fairly indicative of the each of the companies’ normalized growth. Apple’s 68% earnings and 66% revenue growth dwarfs its FADS CAN peers, some of which are in their early growth cycle.
So what can we take away? While all the FADS CAN companies are very solid growth stories, some, especially Salesforce, F5 and Amazon, seem to have that premium built in to their current pricing. Nonetheless, they possess great value propositions and will do well in the future. However, its clearly evident Apple is not being awarded any FADS CAN premium. A forward P/E that is not much more than the S&P 500 and 1/3 of Amazon is astonishing. We have not looked at the debt ratios of these companies, but I would suspect no company can top Apple’s lack of debt and $51B in cash and equivalents. As for the future, news reports from this Christmas season and Apple’s current quarter indicate that the iPad continues to sell well with the announcement of additional production lines. The iPhone 4 and Mac also continue to gain share and high profits. I might also add that the analysts of Apple routinely underestimate revenues and net income, providing even more upward potential in the forward P/E. All of this means to say if you like Jim Cramer’s FADS CAN picks, the clear bargain is Apple.
Disclosure: Long Apple