More specifically, for each of his picks, we'll let you know analyst ratings, how they measure up from a fundamental perspective, and whether they're undervalued according to a discounted cash flow valuation using a 15% discount rate.
Below are some of Jim Cramer's most recent "Buys" as of this past Friday. Some of them are definitely worth a look and some not so much. We hope that you'll use this as a starting point for analysis. Without further ado, here are 5 Jim Cramer picks:
1. Jabil Circuit (JBL)
JBL provides electronic manufacturing services and solutions in the Americas, Europe and Asia. JBL is currently trading at $19 with a $3.9B market cap.
Jim has company on this recommendation. Wall Street analysts give this stock an average target price of $28.64, suggesting a potential upside of 50.7%. Vuru's Growth Price is a little more conservative with a target price of $18.87. This assumes an annual free cash flow growth rate of -3.9%, whereas Wall St. is assuming at least 13% annual growth. Somewhere in the middle of those two is probably a fair value for JBL.
The biggest weaknesses for JBL lie in their miniscule profit margins (hovering around 0-2% over the past 10 years), and their high capital intensity. As a result of this, their ability to deliver positive free cash flow and net income can be unpredictable at times.
2. Oracle Corp. (ORCL)
ORCL is an enterprise software company that develops, manufactures, markets, distributes, and services database and middleware software, applications software and hardware systems worldwide. ORCL is currently trading at $27.06 with a $136B market cap.
Wall Street analysts have put an average target price of $33.93 on this stock, suggesting an upside of around 24%. Vuru lands on a similar target of $33.50. They both assume 15% annual free cash flow growth rates.
In terms of its numbers, ORCL is a strong business. However, it is in the technology sector and the rapid speed of advancement can often render big players obsolete (E.g. RIMM or NOK). That's probably it's greatest weakness.
3. Target Corporation (TGT)
TGT is a big box retailer in the United States. It's currently trading at $58.58 with a $38B market cap.
I don't know if it's a coincidence that Wall Street analysts seem to be consistently in line with Cramer's thinking, or not. In this case, they've set an average target price of $63. To us, that's ludicrous. That assumes an annual free cash flow growth of over 30% over the next 10 years. Pretty aggressive. Vuru's assumed 13.1% growth, putting a target price of $41.52 on TGT. This suggests this stock is overvalued by 29%.
Moreover, Target's valuation isn't its only weakness as a potential investment. It also operates in a highly competitive industry (Wal-Mart is a competitor) and has to expend significant capital on property and equipment just to stay competitive.
4. Coach Inc. (COH)
COH designs and markets accessories and gifts for men and women in the U.S. and internationally. COH is trading at $60.81 with a market cap of $17.5B.
Again, Cramer and Wall Street are at one, with analysts having an average target price of $81.73. Vuru's Growth Price pegs the fair value of COH at $41.93, suggesting it's overvalued by 31%. Cramer is way off the mark here. Even with Vuru's valuation, it's assuming the company will double its free cash flow every ~5 years. Wall Street is assuming it will consistently double every ~2.5 years, over 10 years.
Overall, Coach is a pretty good business: 20%+ net profit margins; 70%+ gross profit margins; and only medium capital intensity. As far as we can tell, the only concern is slowing department store sales.
5. AT&T Inc. (T)
T provides telecommunication services to consumers, businesses, and other service providers worldwide. Trading at $35.70 with a market cap of $209B. In this case, analysts and Cramer actually diverge. Wall Street put the average target price at $33.62, suggesting a sell. We actually happen to agree with Cramerica here in terms of valuation. Vuru's Growth Price pegs the fair value at $46.67, suggesting an upside of 30.76%.
Nevertheless, AT&T has a significant weakness as a business. They have to expend large amounts of capital to ensure their infrastructure is top notch and as a result, keep their competitive edge. This can be detrimental if they are unable to cover this cost through debt. It should be noted that this isn't unique to AT&T. The capital intensity of telecom companies in general is high.