Since quite a few retail investors watch CNBC and particularly Jim Cramer because his theatrics make his opinions more fun to watch and perhaps more credible too. In past few days he mentioned a fun word, Candies (basically it's an acronym for Chipotle, Apple, Netflix, Deckers, Intuitive Surgical and Salesforce). These are all growth stocks that have given some good returns until now. So I thought it will be a good idea to put these into some perspective for investors and followers here. Growth stocks are good because they provide good returns as the underlying company is in the growth phase and their earnings are increasing at a fast pace. As analysts align their expectations with real earnings, these stocks tend to go up. However, investors should keep in mind that growth stocks are much more volatile too and any one event can totally wipe out gains in these stocks. In fact high returns are a result of much higher risk in these stocks. The risk is even higher for those investors who try to play the catch on role and missed the initial up moves. Also these stocks are highly dependent on the economy and consumer buying power.
Lets start with Chipotle (CMG). Stock is already up almost 70% for the year-to-date. I believe at this point all the earnings growth is already priced into the stock. Unless company opens a lot of new restaurants and can operate them profitably, stock will have significant resistance going forward. Also competition from similar concept chains like Qdoba (a unit of Jack-in-the-Box, JACK) and startups like Burrito Beach is bound to take some traffic away from Chipotle.
Apple (AAPL) is a little complex story. Its biggest problems are that it's already too expensive and almost every analyst has buy recommendation on it. It's a very crowded trade. It has launched innovative products but the bigger problem is that most of these concepts seem to come from one father figure in the company, namely, Steve Jobs. I wish him good health but investors might be in for the biggest disappointment if he retires or is simply unable to actively participate in the company. Then AAPL will be like RIMM or HP or may be even both combined. Current valuation of the company might not seem too rich based on recent products but it is too overvalued based on the success of one person. Now Apple's ardent followers will vehemently contest it but Apple's history tells me that it's like any other device manufacturer without Steve. Considering the highest target for stock so far is around $370/share. That represents a 30% gain from current level of $275/share but any disappointment on the way may be too costly for those investors who are trying to get on the ride at this point.
Netflix (NFLX) is a good stock which has enjoyed no-competition environment so far. But returns on this stock going forward will depend on the actions of the competitors rather than the company itself. Recently services like Redbox and Hulu are trying to take some market share. But it's too early to tell the outcome in digitally delivered subscription based content.
Deckers (DECK) is a pure consumer play. And I don't think that majority of US consumer is going to be in a comfortable spending situation anytime soon. Though earnings multiple is not too high for this one, but any downside in net earnings itself may change that multiple drastically.
Both Salesforce (CRM) and Intuitive Surgical (ISRG) are B2B plays and their earnings are the result of many factors including ease of credit, macro-economy and overall business conditions. As we know, economy is not out of woods yet and there may be significant pressure on discretionary spending in businesses also similar to the household situation.
All of these stocks have gained more than 40% year-to-date and I believe that at this point these particular growth stocks reflect a balance of their growth potential and sales environment. Any downside in economy may get reflected with bigger downside in these particular stocks. So instead of getting into these names at current levels, I would advise investors to stay away until a pullback in these names. Any new positions should be opened only as a pure speculative plays rather than a long term investment.
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