by Lawrence Meyers | February 19, 2014 10:51 am
I admit it. After the dot-com bubble burst and I got my head handed to me on a silver brokerage platter, I have diligently avoided momentum stocks.
The closest I’ll get is to sell naked puts that are way out of the money to try and capture a few bucks from their soaring prices.
But what happens when you find a stock that not only has a head of steam behind it … but remain attractive on a value basis? Here’s a look at three such value stocks that have moved up big in the past year or so and still aren’t overpriced.
I have really gone back and forth on Chipotle Mexican Grill (CMG) as a value stock. I thought it was once outrageously overvalued and considered shorting. Then it seemed fairly priced. And now?
I have to admit that Chipotle is executing incredibly well, and I think it’s actually a value stock despite having almost doubled off its 52-week low of $307.
Take a look at CMG stock’s recent earnings. In Q4, revenue increased 21% to $844 million. Net income was up 29.8%. Same-store sales were up 9.3%. That last stat in particular is just outrageous for any industry, much less restaurants. For all of 2013, EPS was up by 19.7%, revenue by 17.7% and comps by 5.6%.
These numbers are fantastic.
With $30 a share in cash, CMG stock effectively trades at $515. I tend to do quick-and-dirty PEG ratio valuations, so here’s one for CMG. With $12.91 expected EPS in FY14, and a 22% long-term growth rate, I might normally put fair value at $286. However, a company in the midst of sustainable hyper-growth, with no debt, fantastic FCF and investors that continue to bid up the stock … that number frankly goes out the window.
It becomes an issue of what the market will pay, and the market is paying a premium, as it always has for CMG stock. I consider Chipotle a value stock until something truly awful happens.
I view Amazon (AMZN) a bit differently as a value stock. While AMZN stock has struggled in past weeks, it’s still about 40% above its 52-week low and 14% below its 52-week-high. All told, Amazon was up 60% in 2013, so it had a bit of steam to give off anyway.
With AMZN stock, traditional valuation also goes out the window. Amazon is, quite simply, the greatest retailer on the face of the earth with a model nobody can beat. Everything can be purchased at Amazon. If you have Amazon Prime, you get it in two days with free shipping. The number of Amazon Prime customers is in the millions, and the company is going to raise the price for the service — and while surveys are showing that not all customers are happy about the potential change, I think you’ll find things to be much different when push comes to shove.
Amazon is single-handedly going to be the downfall of Best Buy (BBY) and Sears (SHLD) … although the latter is doing itself no favors in execution, and Amazon will be here forever. The company is willing to grow revenues without concern for profitability, and it can do this because it has nearly $9 billion in net cash and can enter virtually any market.
With $18 in cash on hand, AMZN stock is trading at an effective price of $335. But it’s really less the actual price that makes Amazon a long-term value stock, and instead the way it conducts business and the way investors view it.
Now we come to Priceline.com (PCLN), maybe the best value stock of the lot.
It seems hard to believe that a few years ago, PCLN stock was trading for next to nothing. It did a reverse split, and its business took off around the same time. PCLN stock was up 80% in 2013 and is ahead another 8% this year.
PCLN is all about cash, cash, cash. It has $6.6 billion in cash and short-term investments, or about $128 per share. It has almost no capex, so free cash flow is crazy good, with about $1.7 billion in the trailing 12 months. Plus, PCLN continues to grow earnings at 20% per year.
On $51.56 in FY14 earnings, a 20x estimate gets PCLN fair value to $1,031. But I add a 20% premium for stocks with cash hoards and lots of FCF, so to me, at the effective cash-included price of $1,160, it’s still undervalued.
As a note: Priceline reports earnings after the bell Thursday.
As of this writing, Lawrence Meyers owned shares of AMZN and has sold naked puts against PCLN. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.
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