3 Mad Money Picks Where Cramer Has More Confidence Than Company Insiders

Includes: LULU, PRGO, WFM
by: Bret Jensen

This momentum driven market seems to be getting a bit longer in the tooth by the day, but continues to grind higher. It has been an impressive march given the backdrop of negative news; higher gas prices, Middle Eastern turmoil, European Debt issues, accelerating inflation, etc. However, I feel it will end before the cessation of QE2 as I believe the excess liquidity this program enabled fueled a good portion of the gains in these high beta, richly priced stocks. Good solid blue chip stocks paying good dividends with reasonable valuations like MSFT, ABT, XOM, TEF, and INTC should hold up much better than the market overall when the summer correction comes.

I call this momentum driven equity surge “The Cramer Market” as noone epitomizes momentum investing more than the Great One. I was looking through his 15 picks on the 04/14 Mad Money recap yesterday. All but one or two were princely valued, high beta stocks that have had a huge run since QE2 began. Here are three that are richly priced by a variety of measures (P/E, P/S, P/CF, etc.), have heavy insider selling and seem poised for a significant pullback should the market hit any turbulence.

Whole Foods Market Inc (WFMI) - Whole Foods Market, Inc. engages in the ownership and operation of natural and organic food supermarkets. The company offers produce, seafood, grocery, meat and poultry, bakery, prepared foods and catering, coffee and tea, nutritional supplements, and vitamins. Whole Foods is priced at over 35 times this year’s earnings and close to 33 times next year’s consensus.

Insiders have sold over 30% of their shares over the previous six months. Given the impact rising gas prices are likely to have on consumer sentiment and spending, and higher food prices, WFMI looks vulnerable to a selloff at some point over the summer.

Perrigo (NASDAQ:PRGO) - Perrigo Company, through its subsidiaries, develops, manufactures, and distributes over-the-counter (OTC) and generic prescription (Rx) pharmaceuticals, nutritional products, infant formulas, active pharmaceutical ingredients (API), and pharmaceutical and medical diagnostic products worldwide. It operates in four segments: Consumer Healthcare, Nutritionals, Rx Pharmaceuticals, and API. The Consumer Healthcare segment offers OTC pharmaceutical products, including analgesics, smoking cessation, gastrointestinal, cough/cold/allergy/sinus, first aid, and feminine hygiene products. The Nutritionals segment provides infant formula products, infant and toddler foods, oral electrolyte solution products, and vitamin, mineral, and dietary supplement products.

Perrigo is selling at 22 times this year’s earnings and roughly 20 times 2012’s consensus. Perrigo is valued at the very top end of its five year range when measured by P/S, P/B, and P/CF. Insiders have sold almost 95% of their shares over the last six months.

Lululemon (NASDAQ:LULU) - Lululemon Athletica Inc. engages in the design, manufacture, and distribution of athletic apparel and accessories for women, men, and female youth in Canada, the United States, and Australia. LULU is a solid retailer, but its valuation is stretched at 50 times this year’s earnings and 40 times 2012’s projected earnings. Insiders have sold approximately 18% of their shares over the previous six months.

I believe LULU is priced to perfection and any slowdown in consumer spending caused by higher energy prices would leave high priced retailers like this one particularly susceptible. During the gas price run up in the first half of 2008, LULU lost over 50% of its value.

Disclosure: I am long MSFT, INTC, TEF, XOM.

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