by Larry Gellar
While CNBC’s Jim Cramer is usually spot-on with his stock picks, things haven’t gone perfectly lately. Cramer favorites such as Baidu.com, Apple and Citigroup have gone down, mostly due to a market-wide pullback. Qualcomm and Wal-Mart have performed better though. In fact, a strong holiday season could give companies like Wal-Mart even more of a boost. My analysis of Cramer's picks concludes that investors should go for these names due to their international growth opportunities. Particularly, investors are missing key moves by these companies, especially Wal-mart's move towards specific higher-end products. Here is my analysis from a contrarian perspective:
Baidu.com (NASDAQ:BIDU) – Recommended at $135; now trading at $127. Despite the price decrease, Baidu did report some impressive earnings recently. In fact, Baidu executives have attributed the 85% year over year revenue growth to three factors: traffic growth, improved monetization, and increased spending on the part of Baidu’s largest accounts. Indeed, Baidu is benefiting as many of China’s more traditional industries take their business online. E-commerce-- as well as mobile products-- have also fared well for Baidu, as the company continues to pull in new customers.
On the investment side of things, the company also announced that it would continue to increase network infrastructure and office space. Another important story for Baidu is the Chinese economy overall. China is expected to ease monetary policy a bit, seeing as the export-oriented economy is suffering from a global slowdown. Asset bubbles in markets such as real estate also have some investors worried. Other interesting China plays include Sina (NASDAQ:SINA) and Sohu.com (NASDAQ:SOHU). While Sina’s price to earnings ratio is currently incalcualbe, Sohu.com trades for about a fourth of the price to earnings ratio that Baidu does. Additionally, Baidu’s price to sales ratio is 23.28, while the price/earnings to growth of 0.92 is closer to average. Gross margin of 80.53% and operating margin of 52.53% are both quite high.
Investors should look overseas for growth. BIDU fits this thesis well, given its EPS growth of 105% due to increased avertising rates and penetration. In my opinion, BIDU's growth is still in its infancy given the large numbers of inland Chinese mainlanders that are still increasing their time on the internet and use of sites with more advertising space. On this note, BIDU is a buy.
Apple (NASDAQ:AAPL) – Cramer recommended the stock at $420, and it is now trading at $375. Clearly, Apple has taken a fall recently, partially due to a somewhat disappointing earnings report. Meanwhile, the patent wars rage on, and an important ruling in Germany could have some serious implications for Apple and Motorola Mobility (NYSE:MMI). The technology in question relates to e-mail synchronization, specifically MobileMe and iCloud. Meanwhile, Apple is actually asking Motorola Mobility to post collateral in case Apple loses the case but then wins in an appeal. The court doesn’t seem too thrilled with that idea, however, and it appears that Apple may lose the case outright.
Another important story for Apple is that its App Store will not accept payments of Chinese yuan. This could be a crucial way for the company to slow down piracy in China, as many customers were reluctant to make their purchases outside the home currency. Besides Motorola Mobility, Google (NASDAQ:GOOG), Hewlett-Packard (NYSE:HPQ) and Research In Motion (RIMM) are all important competitors for Apple. Apple boasts the lowest price/earnings to growth ratio, although price to earnings and price to sales are about average. Gross margin of 40.48% and operating margin of 31.22% are also about average. As for cash flows, $1.446 billion flowed out during 2011, but most of that was due to investing activities.
Apple's growth will be in international markets. The company's fastest growth is coming in from the Asia-Pacific region, with 57% in the third quarter. Demand is strong and largely unmet in inland Asia where supplies and competition are limited. Carrier partners should grow in the region from a current 22%.
Citigroup (NYSE:C) – Recommended at $27.93; now trading at $26.28. Although the Occupy Wall Street protests continue to rage on, Citi Community Development just received the Community Impact Award from Wolters Kluwer Financial Services. Here’s what Bob Annibale, Global Director of Citi Community Development said:
“Citi views our CRA obligations as more than just requirements, but as motivation to develop innovative and collaborative programs that expand financial inclusion. The Kindergarten to College program is a new integrated approach to building assets through universal youth savings to support future college education.”
In other news, Citi will be renewing its relationship with Sunoco to provide private label credit cards. That’s a wise move, as consumers in the U.S. continue to enjoy using gas cards.
Citi is also selling the servicing rights to a $2.6 billion bucket of real estate assets. In fact, this is part of the bank’s new strategy of offloading non-core assets. Important competitors for Citigroup include Bank of America (NYSE:BAC), HSBC (HBC), and JPMorgan Chase (NYSE:JPM). Price to earnings and price/earnings to growth ratios put Citigroup in between HSBC and JPM, although price to sales ratio of 1.16 is somewhat low. On the other hand, operating margin at 22.19% isn’t great.
Nonetheless, if Citi managers can focus on international opportunities, growth and investors will return. Particularly, Latin American opportunities exist for the company as European banks pull back to domestic territories and deal with their continental crisis. This leaves an opening for Citi.
Qualcomm (NASDAQ:QCOM) – Recommended at $53.64; now trading at 55.67. A good overview of the factors currently affecting Qualcomm can be found here, and management remains optimistic about future revenues and earnings. Essentially, Qualcomm is benefiting from the adoption of 3G in the emerging markets and the adoption of 4G in first-world countries. Tablets like the iPad have also helped Qualcomm’s business tremendously. Many investors are excited about the company’s Snapdragon chipset, and it appears that the new technology will be featured to a great extent in Microsoft’s (NASDAQ:MSFT) upcoming products. Qualcomm is also trading ex-dividend now, as a $0.215 dividend will paid out on December 21st. Other important players in the communication equipment industry include Broadcom (BRCM), Nokia (NYSE:NOK), and Texas Instruments (NYSE:TXN). While Qualcomm has a whopping price to sales ratio of 6.34, price to earnings and price/earnings to growth ratios are closer to those other companies. Additionally, Qualcomm is quite strong in the margins department – specifically, gross margin is 68.31% and operating margin is 35.44%. As for cash flows, $1.915 billion have flowed in during the past 12 months. That can mostly be attributed to lots of cash from operating activities, although new stock has also been issued.
Snapdragon should be a hit. Demand for power is constantly increasing and, in my opinion, consumers and businesses will pay up for this performance. QCOM has done a solid job with R&D lately, and with bringing its ideas into commerce. Investors are likely to reward the company this time around.
Wal-Mart (NYSE:WMT) – Recommended at $54.78; now trading at $57.23. A new report says that Wal-Mart’s toy prices on Black Friday will probably be cheaper than Amazon (NASDAQ:AMZN) and Target (NYSE:TGT), so sales at the nation’s largest retailer could benefit accordingly. Wal-Mart’s prices weren’t so cheap a few weeks ago, so presumably this is a change intended to help the company on Black Friday.
Also notable for Wal-Mart is a move to open six new stores in Washington, D.C. This is part of the company’s new strategy of tapping into urban markets. Some D.C. politicians hope that Wal-Mart can provide some new jobs in addition to giving residents more shopping options. Another piece of news for Wal-Mart is that it will provide free shipping on electronics that cost over $45. Here’s what Joel Anderson, CEO of Walmart.com, said:
“With free shipping to home on electronics gifts at Walmart.com, along with our free shipping to more than 3,800 Walmart stores across the U.S., we can save customers more time and money to help make Christmas even easier for their families.”
Besides Target and Amazon, Costco (NASDAQ:COST) is another important competitor for Wal-Mart. Costco is higher for both price to earnings ratio and price/earnings to growth ratio, although it is a bit cheaper using price to sales. Wal-Mart does boast the better margins though – those numbers are 25.17% gross and 6% operating.
Investors do not appreciate Wal-Mart's moves to increase the quality of its products. One key move has been towards buying hoice beef, rather than lower grades. Wal-Mart has quietly been moving towards more local sourcing and towards organic products. This should percolate through the income statement in the next two years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.