Growth test: Cramer’s exclusive 10 point system
Cramer believes every investor should put money to work in a growth stock. But since a diversified portfolio should also include a high yielder, a multinational, a spec stock and some gold, chances are you can't buy each and every growth stock that catches your fancy.
You simply have to choose. But how?
Cramer understands the conundrum. And he's developed a 10-point litmus test to help individual investors determine which growth stock could have more upside than rivals.
Test #1: Is there potential for multiyear growth and can we put a value on that growth?
"The Container Store believes they can ultimately expand the store count to 300 locations, more than a four-fold increase from where they are now, which means the Container Store can keep growing its square footage by 10% per year for as far as the eye can see," Cramer said. Also the Mad Money host noted that The Container Store is a regional to national expansion story, a theme he often cites as a bullish catalyst in a growth stock.
Meanwhile, Zulily leverages another theme that Cramer often talks about; the worldwide shift to online shopping. "You know that e-commerce as a category is on fire, as more and more people shop online. In the first nine months of last year, Zulily more than doubled its revenues. Right now the company has 2.6 million active customers, and I think they could get up to over twice that, to 5.8 million, in 2015."
Score: I give The Container Store 7 points here, and Zulily gets 8.
Test #2: Is the total addressable market big enough for the growth to be sustained?
"The Container Store is by nature limited. It operates in a $15 billion industry that's growing at a 4% clip. That leaves this $1.7 billion company plenty of room to expand, but it's nothing to get really excited about," Cramer said.
Conversely, Zulily has a huge addressable market. "There are 39 million mothers in this country, and Zulily's currently only selling to about 7% of them. So this could get much bigger."
Score: I give The Container Store a 5 here because it's market is somewhat niche, while Zulily gets a 9 because they're tapping a gigantic and underserved market.
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Test #3: Can the company stay competitive?
Cramer worries that The Container Store may be somewhat compromised in this category because traffic was down last quarter. "You can find storage and organization products at tons of other mass market retailers," Cramer reminded.
"As for Zulily, there's a lot of competition online, but these guys have a brilliant model, with flash sales that let customers buy boutique brands for 50 to 70% off, and website that has a fun, window-shopping feel."
Score: Here I give The Container Store a 5 because of the quarter while Zulily gets a 7.
Test #4: Can the company return capital to shareholders, or does it make more sense to plow the profits back into growing the business?
Because The Container Store and Zulily are both in early stages of growth, Cramer says the Street wants to see money reinvested in the business rather than used for buybacks or a dividend.
Score: Both stocks get an 8.
Test #5: Can they expand internationally?
"The Container Store is still focused on going from a regional to national story in the United States," Cramer noted. Although the "Mad Money" host concedes in time they could make a big overseas push, currently, "this is a domestic play," he said.
Conversely, Cramer says Zulily already has a very aggressive overseas strategy. "They already have a small operation in the UK, and management intends to move into continental Europe, too. And because this is an online retailer, growing overseas should be relatively cheap for them."
Score: The Container Store gets a 5, and Zulily gets an 8.
Test #6: How's the balance sheet?
"The Container Store was taken public by a private equity outfit, so it has a fairly heavy debt load--$369 million in borrowings—although they're cleaning this up," Cramer said.
"Zulily's balance sheet is pristine, no debt and $200 million in cash."
Score: 5 points for The Container Store, 10 for Zulily.
Test #7: Is the stock expensive on the out years?
Cramer's crunched the numbers and found The Container Store trades at 40 times the 2016 estimates. "That's not exactly cheap," he said.
Looking at Zulily, Cramer added, "I could see it earning over $1 per share in a few years, which means it might only be trading at 42 times the estimates for 2017, which is not all that pricey for a stock with this level of growth."
Score: 6 points to the Container Store, 8 points to Zulily.
Test #8: Do they have the right management?
"I believe in the people running both companies here—the chairman and CEO of The Container Store co-founded the business back in 1978 and has been at the helm since 2006," Cramer said.
"As for Zulily, the CEO, who co-founded the company in 2009, came from Blue Nile, the online jewelry retailer that revolutionized the way people buy diamonds."
Score: 8 points to both stocks.
Test #9: Do they need macro-economic growth to make the numbers?
"The Container Store is sensitive to both consumer spending and also housing prices—so yes, they're somewhat cyclical," Cramer said.
"Zulily is more of a secular growth story that's focused on delivering maximum value to its customers, so I think they could actually do okay in a downturn."
Score: 5 points to The Container Store, 8 to Zulily.
Test #10: Can the companies grow their margins?
At The Container Store, gross margin increased by 60 basis points in the latest quarter.
At Zulily "the gross margin is rising, but the operating margin is just exploding higher," Cramer said.
Score: I give these two companies a pair of 7's.
The results: "When you add up all the results Zulily thrashes the Container Store, 81 points to 61. That makes Zulily the better buy. "The results are clear, Zulily is worth owning, although ideally you should wait for a pullback before you buy."
*The preceding insights are discussed in far greater detail in Jim Cramer's new book Get Rich Carefully.
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