Cramer's Candies have been on fire for the past two years, but which of these stocks could fall the farthest and the most quickly in a flash crash type of bear market? In this article, I will run down my price targets and fair value estimates for Cramer's former favorite sweet tooth momentum plays, and will explore some bearish strategies on these once high-flying darlings that will limit risk and offer big gains if stocks go down in the future.
With QE3 not likely in the cards, and with a real political backlash against the FED's market umm... accommodation, the risk of a large drawdown for the more speculative stocks is quite pronounced. I am not recommending investors rush out and short the following stocks. In the disclosure section of this article I admit to being "short" some of these names, but it should be noted that I normally "go short" by selling out of the money call options against stocks that I am bearish on, versus simply shorting a name that I feel is in a speculative bubble.
By selling calls instead of shorting I can limit my risk substantially, and even though the upside is lower, the risk mitigation is quite appropriate given the "levitation" of the stock markets due to the government's constant intervention and QE's push towards rewarding rampant speculation with cold, hard profits.
I do agree that when markets crashed, some monetary easing was needed. However, in my mind the QE2 policy was enacted as though Bernanke was simply "spiking the football" in an all out attempt to personally hurt bears or conservative investors. Whether it was out of some bend against fundamental analysts or commodity bulls or simply a deep seated fear about another crash, we will likely never know. One thing is for certain, the central bank's policies are surely welcome by Wall Street and corporate America, while well schooled economists and investment pros bemoan the lack of a free market for stocks, bonds, and commodities. In this latest period of stock market history, playing the hand correctly mattered very little, while guessing what the FED would do mattered immensely.
Here are those beloved CANDIES stocks that investors just can't get enough of. It is my view that once QE2 ends, the markets will crater to a large degree, as trading will resume on fundamentals and not on gaming our central planners, as it has for the past nine months. These CANDIES could end up being like a Mind Eraser shot, where they go down smooth but leave you with a nasty hangover in the morning!
CMG -- Chipotle Mexican Grill is a high growth name that has tripled over the past year and has exhibited outstanding growth. With that said, the stock is trading at 47.5X earnings and growth in earnings on a quarter over quarter basis has recently slowed to a standstill. The company was rocked with the latest illegal immigrant hiring scandal and has bounced back quite nicely. The problem for CMG shareholders is that often times a high growth business is best to own as quarterly earnings are rising Q over Q and on a YOY basis, and on both counts CMG has been slowing down to a large degree. Same store sales growth guidance for a mid single digit increase has to leave growth investors wondering if the expansion phase of this company's business model is nearing a saturation point. Personally, I would consider selling the September $300 calls and buying the September $330 calls to limit risk. CMG usually beats on earnings release day, so consider buying some stock or front month calls just prior to earnings to hedge your risk on those days.
AMZN -- Amazon is another darling of Cramericans which is trading for a PE that appears unwarranted given the company's slowdown in bottom line growth. The whole "grow now, earn later" concept being touted by the financial media is laughable, and is exactly why the internet bubble and the 2008 bubble popped. There simply is no historical precedent for owning stoks at 50X EV/EBITDA and 88X earnings when earnings growth has stalled and momentum in the core business is fading. In any event, the risk in AMZN shares is palpable and shares have had an incredible run, meaning that investors who are aggressive and bearish could consider selling a July $200 call option and buying a July $240 call option as a hedge.
NFLX -- Netflix is obviously the most adored media company on Earth, but to quote John Marmaduke who recently won a NARM achievement award, what "people from the tech world often do is confuse themselves with the entire marketplace". NFLX is a huge company, but it already sports a market cap that represents over half of the entire home entertainment market. The company's push for "streaming or bust" is confusing, considering that the DVD market is still a 12-14 Billion dollar industry and that movie studios earn a pittance with NFLX compared to what they earn selling to a Best Buy (NYSE:BBY), Hastings, or Target (NYSE:TGT). Although propaganda would make one believe that every welfare recipient and 80 year old farmer with three teeth are streaming like crazy, the reality is that a large segment of the population will simply never switch from physical media to online digital distribution. NFLX trades at a large premium to other companies in the space, and this premium may not be warranted if growth eventually slows in the streaming world.
DECK -- Deckers is actually not as overvalued as many of the Candy stocks at 22X trailing earnings and 16.54X forward earnings. At the current valuation, the shares appear reasonable from an EV/EBITDA perspective compared with the company's growth rate. Investors looking to buy the stock may be better off selling a December $85 put option for $10 per contract than buying the stock directly, or could consider buying near month deep in the money call options on the name as a way to buy the name with a built in stop loss order. Personally, I am not interested in the name as I think a retail business such as this ebbs and flows too much to make shares a reasonable long term proposition. Dillards (NYSE:DDS) is another example of a company in the space... Three years ago the shares traded at $4 and today they trade for $56 per share -- bottom line, retail related names carry risk.
ISRG -- Intuitive Surgical is a stock that Cramer backed away from early on during the fall rally, but from a chart perspective the stock looks a bit risky as the company appears to be putting in a double top on a one year chart going back to the May 2010 highs. The stock has been dead money over the past year, although the ride has come with some steep volatility. Shares are not unreasonably expensive given their growth prospects at 38X earnings, but investors should be careful buying the name at such a large premium to book value and cash flows. I do like the company but would want to own the stock at a price of $200 if it ever gets there instead of at today's prices. I think Cramer did a good job of getting people out of the stock early on and recommending the other names on the list, which outperformed the market to a large degree.
ESRX --At first glance, Express Scripts appears to be a decent value for more aggressive growth investors-- at a forward PE of just 15X with a growth rate well over 20% in the past year on both revenues and earnings. With that said, quarter over quarter growth appears to be decelerating, and I would be cognizant of the risks to an overall selloff in the equity markets with the end of QE quickly approaching. What really concerns me about ESRX is the net tangible deficit the company exhibits from a balance sheet perspective. With a negative $3.2 Billion tangible book value, I personally would never invest in the company and would not recommend investors buy the stock due to the increased risk that comes from buying stocks of companies with no money in the bank. If earnings slow for the company, ESRX could face rising debt financing costs, making the stock far more expensive on cash flow, earnings, and growth metrics.
CRM -- Salesforce.com is a true darling of Wall Street and a stock that has crushed short sellers along the way with its 300 PE ratio and seemingly lackluster earnings growth rate. Obviously, there are plenty of long term bulls in the name, but this stock exemplifies the current speculative fever that exists-- thanks to the government's backstopping of financial markets. CRM shares are quite obviously overvalued at current levels, insiders are selling shares at a rapid pace, and security concerns continue to arise from hackers who can easily crash the cloud and steal important corporate data as they see fit. The risks from aggregating data storage to the cloud has not really been examined closely enough, and as more and more of these Sony situations develop, companies will be weighing the cost saving against the risks to their IP portfolios and customer list assets. CRM is also battling several heavyweights in the cloud space including Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Cisco (NASDAQ:CSCO), etc... and the future is not as certain as many of the bulls would like to believe-- in my opinion. At a 300 PE, investors might consider locking in some profits. The stock is up more than 300% since 2008 and as Cramer says, "bulls make money, bears make money, but pigs get slaughtered."
Disclosure: I am short CRM, AMZN, CMG.
Additional disclosure: I may short NFLX on an intraday basis at any time...