3 Stocks That Scream Buy Despite What Analysts Say
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In 1995, one of my favorite stories of all time aired on ABC: The Langoliers. The basic plot of the movie, based on the novel by Stephen King, is that an airplane full of passengers flies through a rip in the space-time continuum and results in the surviving crew traveling about 15 minutes into the past. The news anchors I see on TV, author’s opinions I read about online, and the consensus about investing in certain companies among the general public remind me of the people on the plane in the movie. Analysts everywhere flip-flop daily about popular stocks, and overall seem like they are always a little behind and living in the past.
This past weekend, I finally had Chipotle Mexican Grill (NYSE: CMG) for the first time after being asked repeatedly for months by coworkers and friends to try the popular fast food joint. Yes, I am extremely late to the party. Yes, I am planning on going there again because I thought the food was fantastic for the price. Yes, I think this stock is a great opportunity to get in now after dropping from over $430 per share in April of 2012 to under $300 per share today.
Supposedly some of the reasons for Chipotle’s recent demise as a stock are due to predictions from those in the industry calling for a decline in growth. This was further fueled by Chipotle not meeting market expectations last quarter and early sales numbers the most recent quarter. Rising food costs are just icing on the cake to make for a great downgrade saga.
I must say, though, I hear so much negative but I see so much positive. I told you I went to eat at Chipotle this weekend. What I didn’t say is that I had to go to 2 different locations because the first one had a line that wrapped around the entire restaurant and out the door, creating easily an hour-long wait. The other one had a line about 20 minutes long. If Chipotle is really on the way down, I’d like to see what these analysts think about places with no lines and no cars in the parking lot. There is talk that Qdoba from Jack in the Box is the competition, yet everyone I talk to says they prefer Chipotle. Then there are the popular fitness YouTube channels that show other people bragging about what they are eating at Chipotle. Can you say free advertising?
Lastly, the numbers don’t lie. Chipotle might be in a temporary slow down now, but instead of focusing on manageable recent events, look long-term – past and future. Chipotle is up almost 600% since it went public in 2006. Net income has gone up from $126.8 million in 2009 to $214.9 million in 2011. EPS, margins, and comparable restaurant sales continue to increase on a year-over-year basis. Yet analysts are downgrading it because it isn’t growing as fast as they originally thought? What I know is this: there are only around 1,350 Chipotle locations in the world and over 34,000 McDonald’s locations. No growth potential? Based on the ridiculous lines I saw this weekend, think not.
data by YCharts
More than 1 in 4 Americans has a musculoskeletal impairment, and the cost of these disorders in the United States is approaching $1 trillion yearly. Injuries to the popular anterior cruciate ligament (ACL) contribute to nearly 150,000 injuries yearly and account for more than half a trillion in health-care costs. Zimmer Holdings (NYSE: ZMH) is a great way to capitalize on these growing trends as they design, develop, manufacture, and market orthopedic reconstructive implants, biologics, dental implants, spinal implants, trauma products, surgical supplies, and instruments. Overall, Zimmer in my opinion offers the best exposure to all types of orthopedic implants and supplies – especially those related to knee and hip injuries.
Even going up over 31% the past 12 months in share price isn’t enough to prevent downgrades on the stock, though. Lazard Capital Markets, Deutsche Bank, and JPMorgan Chase are recent firms to downgrade the company. These downgrades are somewhat aided by the outlook in Zimmer’s latest earnings release, where they expected flat sales in 2012 compared to 2011. However, this past year Zimmer was still investing in research and development as well as streamlining the business. Recently, for example, they introduced a new V2F Anterior Fixation System, which is a new implant system for the treatment of thoracolumbar burst fractures, tumors, and disc degeneration of the anterior spine.
Then there is the overall trend I see in sports that I find to be bad for athletes but good for companies like Zimmer long-term. There is a growing belief in the sports world that you need to restrict movement on knees or the ankles, or both, to prevent injuries. This can be witnessed in basketball and football especially. Players will wrap their ankles to the point where there is no movement possible. While this prevents ankle injuries, any engineer like me can see where other injuries can potentially be far worse. The mobility formula in engineering mechanics counts the degrees of freedom (DOFs) of a mechanical system. A human arm is considered to have 7 DOFs, for example. So when you restrict movement of the ankle, you remove DOFs, and as a result, reduce mobility. During movements where your ankle would otherwise do the rotating or bending, the next joint in the body is now responsible for that, and it is the knee. That is why over 70% of ACL injuries occur when no outside contact to the knee even occurred.
data by YCharts
If any group of analysts following a particular stock can be said to be on the plane in the Langoliers, it is those that follow Apple (NASDAQ: AAPL). Based on how much heat Apple has been receiving recently in the news about so-called lagging iPhone 5 and iPad demand, rising production costs, and growing competition in the smartphone market, one would think Apple might be heading toward’s bankruptcy or something. It was just a couple of months ago when analysts were giving their ridiculous calls for Apple to hit $1000+ per share. These same ‘experts’ are now saying Apple is doomed. In the past three months, analysts’ profit predictions for Apple in fiscal 2013 have declined 7.5 percent to $46.3 billion, or $48.84 a share. Here are some recent downgrades:
What I find odd is that Pacific Crest Securities, the latest joining the Apple Hate Train (after once being on its bandwagon in 2010), upgraded Texas Instruments to $39 per share in April 2011. Since that time the stock has fallen 2% and never come close to that prediction. In November of 2011, Pacific Crest Securities slashed Nokia Windows Phone 7 sales from 2 million to just 500,000 for the 4th quarter. It turns out that Nokia not only sold nearly 1 million units for the quarter, but they became the largest Windows Phone 7 vendor at the time (although puny in comparison to the 37 million iPhones sold in that same quarter). These are just 2 examples, but it goes to show that the experts like those at Pacific Crest Securities really aren’t fortune tellers by a long shot.
Instead of trying to analyze all the financial statements and trying to make sense of all the numbers, focus on the number 1. The power of 1 is the only thing that matters at Apple in my opinion. All it takes is just 1 idea to take Apple to new, unimaginable heights. This isn’t a biotech company pipe dream we are talking about that hasn’t done anything for decades and we are betting on something unlikely. Apple has created the ‘1 idea’ several times already.
People said the iPod was getting old for years. The iPod Shuffle and Nano came out in 2005 and then the iPhone shocks the world a couple of years later. People thought there was nothing left for Apple after the iPhone, outside of their traditional computer business, and they again surprise with the iPad less than 3 years after the iPhone was released. Whether it is an iTV, iWatch, or iEverything, if there is one bet to not go against in this generation of stocks, it has to be Apple.
data by YCharts
Don’t Be Another Passenger in the Langoliers
Warren Buffett has famously said to be greedy when others are fearful and vice versa. Perhaps he knew early on that most investors lag in their decisions. Maybe it is because the analysts we are supposed to get some advice from lag in their own opinions. This just creates one big delayed reaction, and in some ways creates an investment system where every decision is done in the past – almost as if in a rip in the space-time continuum. Maybe if people tried to invest for the future, they just might be able to catch up to the present.
mikecart1 has no position in any stocks mentioned. The Motley Fool recommends Apple and Chipotle Mexican Grill. The Motley Fool owns shares of Apple, Chipotle Mexican Grill, and Zimmer Holdings. 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!