Since early November Cramer has touted his new acronym in support of certain large-cap “fad” stocks. His successful gambit with F.A.D.S. C.A.N. was spurred by his success explaining the C.A.N.D.I.E.S. stock picks to the viewers of his popular show, Mad Money on CNBC.
"F.A.D.S. C.A.N." consists of F5 Networks (FFIV), Apple (AAPL), Deckers Outdoor (DECK), Salesforce.com (CRM), Chipotle Mexican Grill (CMG), Amazon.com (AMZN), and Netflix (NFLX). Shares of each F.A.D.S. C.A.N. member represents a potential short opportunity based off of valuation.
We identified F.A.D.S. C.A.N. stocks with a lower shares short figure as a percentage of float. It is a crowded field shorting NFLX (31% short), CMG (9.1%), CRM (9.7%), and DECK (13%). While the overvaluation story may ultimately be compelling, these stocks are more prone to margin calls from short squeezes for inexperienced shorts in these relatively high-beta plays.
From most overvalued to least overvalued:
Amazon.com (AMZN) is a well-run operation with excellent customer service and a low-cost structure selling commodity retail items. Average annual revenue growth will likely average as high as 35% over the next several years and free cash flow should increase steadily. Both gross and operating margins should expand on the backs of supplier pricing over the breadth of products and product categories offered by Amazon. These generous assumptions still do not warrant a price that has gotten ahead of fundamentals. Around 2.6% of shares are sold short. Shares are overvalued by as much as 35% in our opinion and have a good chance of under-performing the market by a significant margin for patient investors.
F5 Networks (FFIV) released first quarter numbers last Wednesday, reporting a lower-than-expected revenue number and providing lower revenue guidance for its second quarter. F5 is an incredibly well-run company and has beat out its larger rival, Cisco (CSCO), in the applications switch market. The company still has tailwinds from delayed orders in 2009 and early 2010 and should easily grow revenues in the 20% range, and, on top of that, dominate market share to maintain its 80% gross margins. Operating margins are also headed higher. Nonetheless, investors are pricing the company for perfection and are forgetting that the company does have competition and revenue growth may be slowing after 2010's uptick. We estimate stock in this stellar company is overvalued 25-30%. 5.3% of the company's shares are sold short, making this a less crowded play.
Apple (AAPL) needs no introduction as the seller of iPads, iPhones and iPods with a host of complementary services to its retail business. iPad sales will accelerate, and we anticipate next-generations of the product will produce sales over 30 million just 3 years out. Iphones may constitute north of 20% of the global smartphone market in 2014. Finally, the Mac and iPod mp3 market in subsequent generations should also continue single-digit growth instead of potential declines in iPod sales over the next few years as Apple's other devices cannibalize sales. We see a price on Apple that fails to recognize the limits to its lofty past growth rates in this $320 B . The company is highly dependent on Steve Jobs' health which has unfortunately taken a turn for the worse. You can read his advisory here. The only 0.7% of the float is short. We estimate that AAPL shares are overvalued by 20-25%.