Cramer: High-Growth Stocks In An Asset Class of Their Own
As high-growth names like Netflix, Chipotle or Apple continue to climb, Cramer said Monday investors should evaluate these names differently.
Traditionally, he explained, stocks are judged on a price-to-earning multiple. On that basis, however, these momentum stocks are too expensive. High-growth names can't be thought of in that way, he said.
Unlike other stocks, Cramer said high-growth names aren't propelled by news. They don't need a news event, like an analyst's upgrade or a change in management, to send the stock higher. These momentum stocks are in an unique asset class, which is drawing a lot of money into the market.
To Wall Street, the influx of money is more important than what these companies say or do, Cramer explained. In turn, money managers are willing to pay up for what they perceive as high-growth stocks. In fact, the hedge fund managers would do anything to get a piece of the growth these names offer.
Chipotle , for example, has been downgraded several times on valuation recently. Trading at 40 times earnings with a 20 percent growth rate, some analysts are worried about price-to-earnings multiple. After all, the company is facing escalating food and labor costs. McDonald's, however, is 10 times larger than Chipotle. Considering Chipotle's stock is worth just one-fifth of McDonald's, money managers aren't dissuaded by the valuations.
Meanwhile, buyers aren't concerned that Netflix is expensive at 37 times next year's earnings with a 37 percent growth rate. After all, social-networking site Zynga is worth more than $8 billion and it has nowhere near the number of subscribers Netflix has. Therefore, Cramer thinks Netflix could be worth twice as much as Zynga, meaning another $4 billion in market capitalization. Investors see that, too, and continue buying.
"You see, you aren't really buying stocks of companies when you buy these momentum names," Cramer said. "You are simply anticipating what the hedge funds and mutual funds with the big guns crave. That's what matters."
When this story was published, Cramer's charitable trust owned Apple.
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