Stock Charm: LULU & GOOG
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Out of the 322 companies that I looked at this month, LULU (NASDAQ: LULU) had the 4th best fundamentals. I have developed a scoring system that takes into account certain financial metrics and LULU scored a 95/100, which is absolutely ridiculous (in a good way). I always look for two major characteristics, growth and profitability. If a company with high profit margins is generating substantial sales, chances are that something good is going to happen for investors. I hate to oversimplify things, but that is what it really comes down to. Why do you think Apple (NASDAQ: AAPL) has done so well? Whatever anyone says, Apple has done well because it has maintained high profit margins while continuously boosting sales. LULU is no different. Pick any growth metric and LULU dominates. Over the past five years LULU has been able to grow earnings at 87.36% per year. That is in the 100th percentile of the textiles, apparel, and luxury goods industry. This spectacular earnings growth is not surprising when you consider that LULU has grown sales over 46% per year over the past five years and also maintained a gross profit margin around 50%-60%. Over the next 3-5 years, LULU is expected to continue its growth story with projected earnings growth at 32.2% per year. Naturally, an investor would be concerned that LULU could not continue to attain this high level of growth. The company has to tail off at some point doesn’t it? After what LULU has done over the past five years, and even what it has done the past 52 weeks growing earnings over 44%, I wouldn’t bet against it. In fact, I am betting on it (I own shares).
The buying opportunity portion of the newsletter is always the trickiest part. Unlike last month’s picks that had been on an absolute tear before I recommended them, LULU has not been performing particularly well lately. If anything, I think this shows that I do not just recommend the same type of stocks every newsletter issue; instead I adjust to whatever the stock market dictates. Over the past three months, LULU has decreased in market value about 20% and underperformed over 70% of the S&P 500. So why do I think LULU shares are going to rise? Honestly speaking, predicting short-term share price movement is very subjective. Having said that, there has been an unusual surge in the volume of LULU call options. Call options are bullish, whereas put options are bearish. Combine the increase in call options with the fact that LULU shares have increased over 4% this past month, and I think it is reasonable to speculate that LULU’s drastic decline over the past three months is over. Lastly, I have always felt that LULU is an absolutely fantastic company. An old investor adage is that it’s always a good time to invest in a great company.
“Big” would definitely be a word I would use to describe Google. With a market capitalization of roughly $210 billion, Google (NASDAQ: GOOG) is one of the biggest companies in the world. However, as Apple has shown us, big companies can get even bigger. Traditional investment wisdom will tell you that mega large cap companies do not have as much room for growth as smaller to midsized companies. This of course is a huge over generalization. The growth of a company does not depend on its size, but rather on its ability to generate revenue and maintain profitability. Google has PLENTY of room to grow, so I would reject the idea that Google is too big to generate significant returns for investors. I believe that this is a very important investment concept that people should understand. Over the past five years, annual sales and earnings growth were 39% and 24%, respectively. Over the next 3-5 years, Google is expected to grow earnings at just over 15% per year. I believe this earnings projection is modest, but I will address this further in the “Buying Opportunity” section. As is the case with most internet-based companies, Google is very profitable. Google’s operating margin of 30.9% is almost twice that of the average company in the S&P 500, which I find quite impressive. I could go into greater detail, but I am not sure it would add much value. It is fairly common knowledge in the investment world that Google is a fundamentally sound company. In this case, the “Why now?” question is more important.
Google is what I would like to call a GARP stock. GARP stands for “growth at a reasonable price.” Here are a couple of fun statistics: the 5-year average PE ratio of companies in the same industry as Google (Internet, Software, and Services) is 38.16, while the current industry average P/E ratio is 50.55. In this case, the current P/E ratio for the industry is much higher than the 5-year average. This is NOT the case with Google. Google’s five-year average P/E ratio is 25.74 while its current P/E ratio is only 19.04. Usually I never use P/E ratios to justify an investment decision, but in the case of Google I find it appropriate. In general, I think the P/E statistics mentioned above in this paragraph represent that the market is not giving Google enough credit. Also, I find Google’s 5-year projected growth rate of 15.9% very conservative. Furthermore, its PEG ratio (P/E ratio divided by 5 year projected earnings growth) is only 1.2. This means that Google’s P/E ratio looks especially cheap even when you compare it to the modest growth projections. To put the cherry on top, Google is outperforming 82% of the S&P 500 over the past three months and looks to continue its positive momentum.
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Calinvestments has a position in Lululemon Athletica, but does not own shares in Google or Apple. The Motley Fool owns shares of Apple, Google, and Lululemon Athletica. Motley Fool newsletter services recommend Apple, Google, and Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.