Fad Stocks Vs. Fab Stocks

What’s the difference between a flash-in-the-pan fad and a game-changing business? That was a question Cramer addressed during Thursday’s “Mad Money.”

To find an answer, he looked at Netflix , OpenTable , Priceline.com , Deckers Outdoor and Skechers U.S.A. , all of them hot stocks that the shorts expect to cool down in short order. But will they? Cramer seems to think that these three have all the best qualities of any trend-setting company—weak competition and high barriers to entry for the industry—which means we should expect continued growth going forward.

For Netflix, Cramer remains extremely bullish on Internet video streaming for the way it has changed consumers' TV and movie-viewing habits. Subscriptions for the company are up huge, with next year expected to grow another 40 percent. And there’s the potential for 150-percent growth by 2015. As for competition, no one else offers a low-cost streaming service on as many platforms as Netflix. That’s why Cramer still likes the stock, especially on Thursday’s pullback.

While Netflix has seen exponential growth, OpenTable has barely started. The company, which allows people to book restaurant reservations online, controls just a 30-percent market share in the U.S. But according to the latest research from Oppenheimer, that number should hit 67 percent by 2014—and 75 percent by 2015—leaving plenty of room for this stock to run.

OpenTable also has first-mover status in this business, meaning it blazed its path before the competition, building out its network earlier and offering more value-added services than competitors. Now when consumers think of booking a reservation online, they immediately think of OpenTable. And as more restaurants use the service, the more available it is to consumers and the more those consumers will use it, making it more valuable to restaurants. It’s a virtuous circle at the center of which is OpenTable.

Cramer thinks the stock is still priced right, too. Sure, OPEN is up 250 percent since its May 2009 initial public offering, and it trades at 47 times 2012 earnings estimates, but keep in mind the long-term growth rate is 50 percent. So if Cramer’s theory that a stock trading at or near one times its growth rate is cheap, then OpenTable qualifies. This is still more proof that the share price could go higher.

Priceline.com, meanwhile, is up 5,000 percent over 10 years—no fad here. Cramer said the company changed the way people book their flights and hotel stays, allowing them to comparison shop for the best deals online, hence its success. Admittedly, there’s competition from Expedia , Orbitz and other Internet bookers, but this story is more about the shift to online from off. And Priceline is still growing its bookings at a tremendous rate: up 47 percent in the most recent quarter. The stock’s cheap, too, trading at just 12 times 2012 earnings with a 20-percent long-term growth rate.

But what about the shoe companies, Deckers and Skechers? For this business, Cramer added two more qualities that they need to survive: execution and brand power. And only one of these two has both—Deckers.

This company’s popular UGG boots and shoes are always in style, but they’re never in direct competition with anyone else. Deckers has virtually built its own niche, which is why Cramer thinks the stock, trading at 20 times next year’s earnings with a 29-percent growth rate, is still cheap. And that’s after a 47-percent run just since Nov. 2 when he reiterated his call on DECK.

Skechers, though, has fallen far short of Cramer’s expectations. This name, along with Deckers and Netflix, had been one of his original high-growth C.A.N.D.I.E.S., but he threw it in the “Sell Block” back in September. Why? Partly because of a lawsuit that questions the claims Skechers has made about its special toning shoes, but also because Nike has launched some toning footwear of its own. Skechers can’t compete with Nike. Cramer’s not expecting a good fourth quarter from SKX, so investors should continue to avoid the stock going forward.

“And I apologize once again for getting it wrong,” he said.

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