Cabot Oil & Gas and Intuitive Surgical were the top two performers of the S&P 500 in 2011, excluding companies that were taken over, “Mad Money” host Jim Cramer said Tuesday. But which of the two is the winner in his book?
Cramer used a number of factors to make that determination and assigned points to each one.
1. PEG Ratio
Cabot Oil & Gas 4 points; Intuitive Surgical 2 points.
Intuitive Surgical , which makes a robotic surgical system called the Da Vinci, sells for 33 times forward earnings, with a 20 percent growth rate. That gives it a PEG of 1.7. Cabot Oil & Gas , an independent oil and gas play, sells for 31 times forward earnings with a 34 percent growth rate. That gives it a PEG of just 0.09. Cramer’s rule of thumb is never to pay more than two times growth for even the best companies. ISRG is on the high end and COG is extremely cheap.
While both companies have growth opportunities ahead, he thinks there’s more risk that Intuitive Surgical will slow down once its Da Vinci saturates the market. Cabot Oil & Gas has some infrastructure issues to contend with, but should be able to sustain its rapid growth rate.
2. Take-out Potential
Cabot Oil & Gas 2 points; Intuitive Surgical 1 point.
Another important factor is the likelihood that the companies could be bought for a big premium, Cramer said. ISRG has an expensive valuation and is a big company, with an $18 billion market capitalization. Cabot, on the other hand, has a $8 billion market cap and hot shale properties, and is similar to other recent takeover targets in this space.
3. Prospective Homeruns in the Pipeline
Cabot Oil & Gas 3 points; Intuitive Surgical 1 point.
Cabot has some of the biggest acreage in the business and will continue to drill new wells. While ISRG has some new products coming, Cramer said none of them are game-changers.
Cabot Oil & Gas 0 points, Intuitive Surgical 2 points.
Both names have negligible dividends right now, but Cramer thinks as ISRG matures, it should be able to return a lot of cash to shareholders. Cabot, however, will likely use any extra cash for exploring for more oil and gas.
The bottom line—Cramer’s S&P winner is Cabot Oil & Gas.