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Who isn't a contrarian or a value investor today? How can a consensus be identified when everyone claims to be different? In today's world independent thinkers find it challenging to identify the beliefs of the crowd amid the noise.

Even though Jim Cramer's trades are not long-term recommendations, his picks can be a very useful barometer of investor and media attitudes. Contrarians can use his picks as an indicator of current market sentiment to selectively counter.

Of Cramer's 116 buy and sell stock opinions recently issued on CNBC's Mad Money (4.23.2012 to 4.27.2012), two sell calls and four buy calls can be challenged on a valuation basis. Chipotle Mexican Grill (NYSE:CMG), Starbucks (NASDAQ:SBUX), Equinix (NASDAQ:EQIX), and Amazon.com (NASDAQ:AMZN) are too richly valued to be buy picks. On the other hand, Guess? Inc. (NYSE:GES) and Cummins Inc. (NYSE:CMI) are too cheaply valued to be sell picks.

These picks are summarized below:


Ticker

Cramer's Call

Airdate

P/E

P/B

P/S

Insider Transactions

CMG

Buy

4.23.2012

57.69

11.36

5.53

-3.8%

SBUX

Buy

4.24.2012

34.6

9.06

3.55

-6.5%

GES

Sell

4.25.2012

10.18

2.23

0.97

94.8%

EQIX

Buy

4.26.2012

100.11

4.05

4.91

-51.1%

AMZN

Buy

4.26.2012

165.58

13.31

2.13

-0.1%

CMI

Sell

4.27.2012

12.39

4.14

1.26

-1.1%

After reviewing the price multiples of CMG, SBUX, EQIX, and AMZN it is clear that these stocks are richly valued according to static valuation metrics. Net insider selling of these picks over the past six months is also discouraging.

Sadly, even pleasant future growth scenarios are not much consolation for such richly valued stocks. What could an investor expect from these picks?

Total returns were calculated over a three-year holding period for each of these stocks. (I use a three-year holding period since above-average growth estimates are not reliable further out.) Giving these buy recommendations the benefit of the doubt, each stock is assumed to be sold at a generous growth stock price-to-earnings multiple of 17 and the maximum of historical and analyst estimate values for earnings growth are assumed. These assumptions are used to project an annualized total return over the next three years and terminal price-to-earnings ratios, that is, price paid today divided by earnings at the end of the holding period for each stock:

3 Years Growth

Ticker

Cramer

g (past)

g (future)

Terminal P/E

Annualized Return

CMG

Buy

39.6%

22.2%

21.2

-7.1%

SBUX

Buy

17.1%

18.8%

20.6

-5.9%

EQIX

Buy

52.7%

31.8%

28.1

-15.4%

AMZN

Buy

25.0%

26.0%

82.8

-41.0%

Even after incorporating optimistic earnings growth, these stocks are just too expensive.

Alternatively, GES and CMI were discovered as contrarian buy picks with attractive valuations by sifting through the week's sell recommendations. These contrarian buy candidates were evaluated using conservative assumptions. A bargain value stock price-to-earnings multiple of 10 and the lesser of historical and analyst estimates values for earnings growth are assumed. These assumptions are used to project an annualized total return over the next three years and a terminal price-to-earnings ratio, that is, the price paid today divided by earnings at the end of the holding period for each stock:

3 Years Growth

Ticker

Cramer

g (past)

g (future)

Terminal P/E

Annualized Return

GES

Sell

16.5%

11.8%

7.3

12.1%

CMI

Sell

21.9%

15.0%

8.2

7.5%

These projected returns ignore stories and current sentiment while using valuation and math to demonstrate how buying expensive stocks can cost investors dearly. They flip the script on these six stock calls.

Challenging the consensus is quite difficult and requires guts of steel. Sure, the attractive valuations of these stocks protect investors from tough scenarios, providing them with better odds for positive returns. However, they do not provide psychological comfort. Contrarians have to shut out the allure of stories, interviews in the financial media, and other distractions in order to focus on valuation.

Read the article disclaimer.

Source: Valuation-Based Contrarian Picks