Although the markets were all red on Friday, this week was a pretty good one, especially after the disastrous Q3. Services healed itself the most (3.3%), followed by basic materials (3.2%), industrial goods (3.2%), and technology stocks (2.4%). Jim Cramer, the Mad Money host, is giving some tips to unsophisticated investors on how to shape their portfolio. Recently, he made calls on seven stocks including Apple(AAPL), General Mills (GIS), and ConocoPhillips (COP). Four of them were bullish this time, and three were bearish. I have examined all of his stock mentions from a fundamental perspective, and added my opinion about them. I have applied my O-Metrix Grading System where applicable, as well. Here is a fundamental analysis of the first seven stocks from Cramer's Mad Money:
Stock Name | Ticker | Cramer's Suggestion | O-Metrix Score | My Take |
Apple | (AAPL) | Buy | 8.07 | Top Pick |
Chipotle Mexican | (CMG) | Wait for Pull Back | 2.63 | Avoid |
Sara Lee | (SLE) | Avoid | 2.33 | Hold |
ConAgra | (CAG) | Avoid | 4.24 | Buy |
General Mills | (GIS) | Buy | 3.99 | Long-Term Buy |
Ulta Salon Cosmetics | (ULTA) | Buy | 3.16 | Hold |
ConocoPhillips | (COP) | Buy | 7.76 | Buy |
(Data obtained from Finviz/Morningstar, and is current as of October 7 close. You can download the O-Metrix calculator here.)
Cramer commented the following about Apple (AAPL):
Even though Steve Jobs is gone, the company he built is still with us, and I have to believe this story isn’t over, not by a long shot.
Apple was trading at a P/E ratio of 14.6, and a forward P/E ratio of 11.4, as of the October 7 close. Five-year annualized EPS growth forecast is 21.00%, which is conservative, when its 57.78% EPS growth of past five years is considered. It has no dividend policy, while the profit margin (23.5%) is way above the industry average of 12.9%.
Apple is trading 12.55% lower than its 52-week high, whereas it returned 25.7% in a year. Target price is $490.04, which implies a 32.5% upside potential. O-Metrix score is 8.07. Apple had a 122.15% EPS growth this quarter, and 66.91% this year. Sales rose by 81.98% this quarter. Institutions own 70.41% of the stock, while it has no debts for since 2006. Cash flow is awesome. Debt-to equity ratio is 0.0, which crushes the industry average of 8.0. Operating margin is 30.4%. While ROE is 41.99%, ROA is 27.53%. PEG value is 0.6, and Morningstar gives a four-star rating to Apple. I believe the recent pullback was due to the disappointment in the new iPhone (4S), as everyone was waiting for a newly-designed iPhone 5. Now that Steve Jobs gone, and Tim Cook failed at his first test, Apple may struggle for a while. However, it is still a great buy at this level. My fair value estimate for Apple is $430 per share (full analysis, here).
Cramer recommends homegamers to sell Chipotle (CMG) at this level, and buy again after a pullback. Chipotle shows a trailing P/E ratio of 48.8, and a forward P/E ratio of 34.6, as of the Friday close. Estimated annual EPS growth for the next five years is 22.0%. With a profit margin of 9.4%, it offers no dividend policy.
Target price is $330.39, indicating a 12.1% upside movement potential. The stock is currently trading 15.05% lower than its 52-week high, while it has an O-Metrix score of 2.63. Chipotle returned -33.2% in the last twelve months. Insiders hold 1.70% of the shares, whereas PEG value is 1.6. Gross margin and operating margin are 26.1% and 15.2%, respectively. P/B is 9.8, and P/S is 4.6, both of which are well above their industry averages. Moreover, Chipotle has a one-star rating from Morningstar. Chipotle is among my high fliers list, and it can end up in a position worse than Netflix. Stay away from it.
Cramer rather prefers General Mills (GIS) instead of Sara Lee (SLE) and ConAgra (CAG), as General’s numbers are too low. Here is a brief comparison of these stocks:
Current as of October 7th close. | Sara Lee | ConAgra | General Mills |
P/E ratio | 30.5 | 13.9 | 14.9 |
Forward P/E ratio | 15.6 | 12.8 | 13.5 |
Estimated EPS growth for the next 5 years | 8.0% | 7.5% | 8.2% |
Dividend yield | 2.80% | 3.84% | 3.15% |
Profit margin | 14.8% | 6.0% | 11.4% |
Gross margin | 32.4% | 22.8% | 38.7% |
Upside movement potential | 20.9% | 6.2% | 7.7% |
I eliminate Sara Lee at first, as it is the poorest in terms of O-Metrix score, average P/E ratio, and dividend yield. ConAgra is currently trading 5.07% lower than its 52-week high, while General Mills is trading 2.04% lower. O-Metrix scores of ConAgra and General Mills are 4.24 and 3.99, respectively. ConAgra returned 14.4% in a year, and General Mills returned 4.7%. Both of them are profitable buys for me. General Mills is a nice stock to go long.
Cramer said the following about Ulta Salon Cosmetics (ULTA):
This is a rapidly growing retailer with a great concept and a ton of momentum.
The Illinois-based Ulta Salon, as of October 7, has a P/E ratio of 44.8, and a forward P/E ratio of 30.3. Analysts estimate a 23.8% annual EPS growth for the next five years. Profit margin (5.7%) is above the industry average of 3.8%, while it pays no dividend.
Ulta Salon has an O-Metrix score of 3.16, whereas it is trading 11.38% lower than its 52-week high. Target price is $70.29, implying a 7.1% increase potential. Ulta Salon returned 126.5% in the last twelve months. Beta value is 1.61, and insiders hold only 2.54% of the shares. Operating margin and gross margin are 9.5% and 34.2%, respectively. P/B is 8.4, and P/S is 2.6, both of which are hopeless red flags. PEG value is 1.3. Moreover, it has a one-star rating from Morningstar. Holding is OK, but I wouldn’t recommend buying.
Cramer likes ConocoPhillips (COP):
Conoco's paying you to wait, not just for the economy to rebound, but for its turnaround to bear real fruit. And as the company executes on its plans, it will be able to pay you even more by boosting the dividend.
It shows a significant trailing P/E ratio of 8.1, and a forward P/E ratio of 7.5, as of the October 7 close. Analysts expect the company to have an 8.0% annual EPS growth in the next five years. Although profit margin (5.1%) is lower than the industry average of 7.4%, it offers an attractive dividend of 4.11%.
Earnings increased by 28.09% this year, and institutions own 73.20% of the stock. Target price is $80.00, which implies a 24.6% upside potential. The stock is trading 20.14% lower than its 52-week high, whereas it returned 7.6% in a year. Yields are great. The debt-to assets ratio is falling for the last three years, and the stock has a five-star rating from Morningstar. ConocoPhillips has an O-Metrix score of 7.76. Debt-to equity ratio is 0.3, better than the industry average of 0.6. ROE is 17.02%, and PEG value is 0.9. I wouldn’t ignore such a stock.
Disclosure: I am long AAPL.
