Another Look at Cramer's CANDIES

by: Bret Jensen

Back in early June, 2010, Cramer created an index he called the CANDIES. It was the typical over-the-top marketing hyperbole that Cramer excels so well at. It was, however, a creative and effective way to focus on seven high beta, fast-growing momentum stocks that The Great One specializes in touting. The CANDIES consist of: Chipotle Mexican Grill (NYSE:CMG), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), Deckers Outdoor (NASDAQ:DECK), Intuitive Surgical (NASDAQ:ISRG), Express Scripts (NASDAQ:ESRX) and Salesforce (NYSE:CRM).

So how has this Index done since it was formed? The short answer is: very well. If you would have put equal amounts in all seven stocks, you would have a gain of 65.5%, with six of the seven stocks gaining more than the S&P’s 20% gain over the time period. Neither figure includes dividends. Some would say these picks are the results of Cramer’s brilliance. My opinion is this outperformance reflects the fact all of these stock are part of the fast growing, high beta sector that has done so well since Bernanke announced Quantative Easing [QE2]. Given QE2 is about to run out at the end of quarter, what is the outlook for these stocks going forward?

Chipotle Mexican Grill – CMG has run up 81% since inclusion in the CANDIES. It is selling at forty times this year’s earnings and 32.5 next year’s consensus earnings. It is selling at over 4.5 yearly revenues, a PEG over 2, and revenue growth predicted to be the 17-18% range over the next two years. I would be extremely cautious on this stock going forward. It is facing rising food costs and is likely to hit hard by the impact to consumer spending rising oil prices are having. In addition, the last time energy prices ran up so sharply in the first seven months of 2008; CMG lost 53% of its value. AVOID

Apple – AAPL has increased in value by 27% since the CANDIES Index was announced. The stock is selling at less than 15 times this year’s earnings and 12.5 times consensus earnings for 2012. Given the consistent ability to beat estimates and stellar success of the rollout of Ipad 2, these estimates are probably low, leaving Apple’s valuation in even better shape. It also has $29 per share of net cash on its books. I have Apple as a buy despite losing 21% of its value when energy prices rose in the first seven months of 2008. I would consider selling a covered call against any position to lower volatility and collect premium if you hold this in your portfolio. I would also move to a STRONG BUY if the stock sold off 10-20% in any pullback. BUY

Netflix – NFLX has run up 110% since early June 2010, and is second best performer in the CANDIES Index since its creation. It is selling at 53 times this year’s earnings and a slightly more reasonable 37 times consensus earnings for 2012. Given the increasing competition from Amazon, new competitors like Google, and the rising costs of acquiring premium content, I can’t justify buying this stock at the current price. AVOID

Deckers Outdoor – DECK has had a solid gain of 74% since the CANDIES Index was announced. It sells at approximately 20 times this year’s earnings and 17 times next year’s consensus. Its revenue is growing smartly, and it holds $11 per share of net cash. It seems reasonably valued, but not a screaming buy. I would not initiate a new position here, as consumer sentiment and spending are being impacted by fast rising gas prices. The last energy run up in 2008 had DECK dropping 26% by the end of July 2008. If stock drops 10-20% in pullback, I would up rating to a buy. HOLD

Intuitive Surgical – ISRG is the worst performer of the CANDIES, gaining only 9% over the course of the last ten months. It sells for 33 times this year’s earnings and 28 times next year’s consensus earnings. It has $23 per share in net cash on the books, a PEG of 1.5, and a price to sales of over 10. I believe this company is on the forefront of a very exciting surgical trend, but given my outlook for the market over the next six months and ISRG’s valuation, I cannot put a Buy on this equity. HOLD

Express Scripts – ESRX has been the best performer of the CANDIES, gaining 117% since June. It sells at 17 times this year’s earnings and 14 times 2012’s consensus. Stock has reasonable valuation, but it has slow revenue growth and a large amount of insider selling over the last six months. HOLD

Salesforce – CRM has gained 41% over the last ten months. It sells at an astronomical 106 times this year’s earnings and 72 times 2012’s earnings estimates. It consistently has high insider selling, poor cash flow and sells at close to 11 times sales. There are a myriad of other reasons that show CRM to be deeply overvalued. AVOID

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.