CNN Money commentator Paul La Monica tweeted the following at StockTwits July 22:
“If $Cmg stock is too rich your blood, you might want to check out $Jack. Up 3% today. Owns Qdoba. P/E about half of what Chiptole’s is.”
Paul, I like the way you think!
I suggested the exact same thing in March 2012. How’d my recommendation turn out? Chipotle Mexican Grill (CMG) gained 56% through July 23 compared to 141% for Jack in the Box (JACK). It made sense then, and I think it still makes sense today.
I bring this up because there are plenty of other examples of “momo” stocks out there where the “it” stock is super expensive while another peer, although operationally sound, is valued at substantially less — providing a potentially larger margin of safety like JACK does.
Here are three cheaper alternatives to high-priced momentum stocks:
Forget VIPShop (VIPS), Buy Lands’ End (LE)
Only recently given its freedom by former parent Sears Holdings (SHLD), LE stock has been on a good run since it announced Q1 earnings June 12. Land’s End is up 37% in the subsequent 29 days of trading.
However, that pales in comparison to the run China-based VIPShop Holdings (VIPS) has been on so far in 2014. It’s up 152% year-to-date through July 23 — and up 438% over the past 52 weeks.
VIPS has taken a leading role in the discount retail market in China by operating flash sales like the Gilt Groupe does, rather than using the traditional e-commerce model employed by most retailers where the goods are available indefinitely. In just two years, its top-line revenue has grown 650% to $1.7 billion quite naturally, creating a whole lot of excitement around VIPS stock.
Before you throw VIPS on the top of your stock to buy list, it’s important to be wary about its growth.
Lauren Sherman, a contributor to The Business of Fashion — a website totally dedicated to the world of fashion, and a must-read if you want to keep up with this industry — wrote a very interesting article about flash sales in May and the questions about their sustainability. While she doesn’t discuss VIPS by name, it’s safe to assume that she’s including it in her assessment of the entire flash-sale business model.
Essentially, Sherman sees flash sales as flaming out because ultimately the Ralph Laurens (RL) of the world want to sell as much of their merchandise at full price as they possibly can. Sure, when excess merchandise needs to go, they’ll go this route but if they do it too often they’d be out of business.
It’s for this reason that I believe Lands’ End stock is the better choice for the long haul. In the first quarter, it had net income of $11 million on $331 million in revenue. Meanwhile, VIPS had net income of $27 million on revenue of $702 million. Their net margins are almost identical, yet LE stock has an enterprise value of $1.6 billion (10.5 times EBITDA) compared to VIPS stock, which has an enterprise value of $11.5 billion, (132 times EBITDA).
LE stock isn’t the sexiest option among stocks to buy, I’ll grant you that. But its future without SHLD makes it a much cheaper alternative.
Forget UBIC (UBIC), Buy EPAM Systems (EPAM)
Let’s say you’re given the choice between two stocks to buy, the names of which you didn’t know. One is valued at 99times sales while the other at just three times sales.
Which would you buy?
While I’m not a psychologist I imagine most people would say, “That depends on who the two companies are.” Well, the first is EPAM Systems (EPAM) and the second is UBIC (UBIC), a Japanese company that uses behavioral informatics to help companies understand all the data that exists within their walls. Big data is huge these days. Google those very words and you get 838 million results.
But is a company that expects to generate $58 million in revenue in fiscal 2015 with operating profits of just $7 million really worth $3.7 billion?
Investors have pushed UBIC stock up 279% year-to-date not based on what it currently is but rather what it can become. Investors Business Daily’s Pete Barlas recently discussed UBICs contract it secured with a major Asian smartphone manufacturer. UBICs Lit i View product uses artificial intelligence software to dramatically reduce the auditing process — in this case it was four days instead of two months — while speeding up the ability to detect fraud. This a major improvement that will save company’s both time and money. It’s not something you can easily dismiss.
But that doesn’t mean you should pay today for the privilege of what might or might not happen in the future. The potential here is tremendous, but like first-round draft picks in sports, that doesn’t always translate into game-day success.
EPAM, on the other hand, has grown revenue and operating income by 35% and 33% respectfully on an annualized basis over the past three years. It finished 2013 with $555 million in revenue and $76 million in operating income. Yet it’s the one whose valuation is stuck in neutral.
Up 21% over the past three months, EPAM stock is a much cheaper alternative that’s still actually growing. Its focus providing software development services might not have the sex appeal of artificial intelligence, but it definitely has a leg up on the rest of its competitors.
Forget UBIC stock and go with EPAM instead.
Forget Greenbrier (GBX), Buy Trinity Industries (TRN)
Do a screen of railroad stocks at FinViz.com and you’ll come up with 15 alternatives, including TRN. While TRN stock is up 68% year-to-date according to FinViz, it’s not the top-performing stock in the group of 15. That distinction goes to Greenbrier Companies (GBX), a manufacturer of railroad freight cars and marine barges. It’s up 104% year-to-date and 191% over the past 52 weeks through July 24.
I’ve got no axe to grind with the Oregon-based company; in fact, I find the Pacific Northwest to be a lovely part of the world. Greenbrier itself is benefiting in a big way from the move to shipping oil by rail. Revenues and orders are growing at a tremendous rate and GBX stock has gone along for the ride.
However, Trinity also manufactures railcars and barges. But it doesn’t stop there. It also makes guardrails, crash cushions and structural towers for windmills, not to mention the fact that it provides railcar management and fleet leasing. It’s one of my favorite conglomerates.
So what puts TRN ahead of GBX on our list of stocks to buy?
One reason and one reason only: valuation. You can pay 9.1 times EBITDA for GBX stock or you can pay 6.3 times EBITDA for TRN. The choice is yours. Frankly, I prefer the added diversification of TRN’s other businesses.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.