A Deeper Look into Cramer's Nov. 28 Lightning Round
Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For Jim Cramer, the host of CNBC's Mad Money show, Cramer wants to help stock traders make some “mad money.” How? By presenting market facts and explaining the rules of the Wall Street game. During the Lightning Round, Cramer makes a call on viewers' picks. He needs just a few seconds before deciding on a bullish or bearish call. However, we should take some time digging deeper into his rates. Here, I review three stocks discussed on the Nov. 28 Lightning Round:
First on the list is Polycom (NASDAQ: PLCM). Cramer decided to make a bearish call on it mainly because it competes directly with the giant Cisco (NASDAQ: CSCO). With a market cap close to $2 billion, Polycom is a leading provider of video and voice communication equipment. It derives about half of its revenue stream from personal and group conferencing solutions. The rest of its revenue is derived from network systems infrastructure. The firm's products are used in several businesses including health care, education, entertainment, finance, and manufacturing.
Fundamentally, Polycom has many positives. EPS this year followed an upward trend of more than 90%. Also, over the past five years, the company has achieved a solid sales growth rate of 17%. Most importantly, Polycom demonstrates financial discipline. With its profit margin standing higher than the industry's median, it shows sound control of expenses. Moreover, for the third quarter of 2012, the balance sheet demonstrated an almost $700 million differential between current assets and current liabilities. This means that the company has enough cash to pursue an aggressive growth strategy.
At the moment, Polycom is making a shift away from low-margin hardware-based solutions towards profitable software-based products. Thus, its operating efficiencies are expected to improve in the medium-term. Nevertheless, competing directly with market leaders such as Cisco is never easy. As of August 2012, Cisco claimed a 42% share in the Videoconferencing and Telepresence market, while Polycom's share stood at 32.5%. Overall, even though I believe Polycom is worth watching for upside trends, I think that its short-term growth prospects are limited. Currently, the company is in the middle of a transformation process. Although this process may prove to be lucrative over time, it is very likely to negatively impact earnings for 2013.
When a caller mentioned Starbucks (NASDAQ: SBUX), all Cramer said was “buy, buy, buy.” Starbucks is clearly one of Cramer's favorites, and for good reason Throughout 2012 the stock performed nicely by returning more than 20%. At the moment, Starbucks is trading with a 16% distance from its 52-week range of $61.31. Its valuation metrics are not so attractive when compared to the industry's average metrics. However, I think that Starbucks will maintain its leading position and keep rewarding its shareholders. Out of 30 analysts tracked by the Wall Street Journal, seventeen indicated a “buy” rating while 5 suggest an “outperform” rating.
The company's first coffee store opened forty years ago in Seattle. Since then, Starbucks has evolved into a premier retailer of specialty coffee with more than 17,000 stores in 55 countries. The firm's latest earnings release demonstrated a robust financial performance driven by its impressive business and brand strength. Total revenues were up by 14% reaching a record $13.3 billion. EPS also increased by 10% compared to last year. The company benefited significantly by its expansion in Asia. Starbucks aims to strengthen its penetration in the Chinese market. Overall, I am very optimistic about the company's growth prospects.
Recently, Starbucks announced its decision to acquire Teavana Holdings (NYSE: TEA) for $620 million. Founded in 1997, Teavana offers more than 100 varieties of tea-related merchandise through a network of 300 stores. This is the latest of a series of acquisitions, which are going to elevate Starbucks' presence in the tea industry. Last year the company dropped the word “coffee” from its logo, signaling a dynamic approach of alternative revenue sources. Together with Teavana, Starbucks aims to jump-start the next wave of growth in the tea business. I expect Starbucks to keep providing fruitful returns for its shareholders as it keeps expanding in the very promising Asian markets.
Last on the list is Red Hat (NYSE: RHT). Cramer identified this stock as a potential winner. Red Hat is trading at 66 times trailing earnings and more than six times sales. At current price levels, it might be quite expensive. However, over the past few years, the stock has followed a steady upward trend and returned about 150%. Also, investor sentiment is positive about Red Hat. Analysts' average mean target price of $61.06 implies the potential for appreciation of at least 23%. For 2013, EPS is estimated to grow by almost 20%, indicating enhanced profitability prospects.
Red Hat is a leading provider of enterprise-class open source software solutions. Over the past three years, the company has seen annual revenue and operating cash flow increase at a nice clip. In its latest quarterly earnings release, Red Hat reported an increase in total revenues of 15% compared to the prior-year. For the same period, cash flow provided from operating activities was up by 35%. Overall, even though competition remains stiff within the industry, I think the company's business model could offer significant growth opportunities.
ecofinstat has no positions in the stocks mentioned above. The Motley Fool owns shares of Polycom, Starbucks, and Teavana Holdings and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Polycom and Starbucks. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!