If a stock has a high trailing price-to-earnings multiple, that generally indicates that it is a growth stock- that the market expects its earnings to grow quickly enough over the next several years to justify buying the stock at its current price. We’ve looked at the disclosure from television host and former hedge fund manager Jim Cramer’s charitable trust to see which high-P/E stocks it owns. Here are five of the stocks recently reported in Jim Cramer’s charitable trust which had trailing P/E multiples greater than 20:
Lam Research Corporation (NASDAQ:LRCX) saw its earnings drop in its first fiscal quarter (which ended in September) compared to the same period in its last fiscal year. It did beat expectations, however, and the stock is up 17% in the last month. The manufacturer of machines which in turn produce semiconductors trades at 52 times trailing earnings, but Cramer has the analyst consensus on his side here: forward estimates imply a P/E multiple of 11, and the five-year PEG ratio is 0.8. We looked at Lam Research last month (read our article on Lam Research) and didn’t think that it looked particularly attractive.
Cramer also liked Bristol Myers Squibb Co. (NYSE:BMY), the $55 billion market cap pharmaceutical company. Revenue dropped 30% in the third quarter of 2012 versus a year earlier, and that bad quarter has contributed to pushing the trailing price-to-earnings multiple up to 30. Wall Street analysts expect a rebound- it trades at 18 times consensus earnings for 2013- but that seems like a high multiple as well. While it doesn’t seem like a good choice on a value basis, and we’re skeptical of the Street’s optimism, we would note that there is a dividend yield of 4.1%. Its peers might be better stocks to buy.
The trust also reported a position in Broadcom Corporation (NASDAQ:BRCM), a semiconductor provider which currently carries a trailing P/E of 25. As with Lam Research, the sell-side is highly bullish on Broadcom as their projections for the next several years have the stock trading at 11x 2013 earnings and at a five-year PEG ratio of 0.9. With earnings actually down in the third quarter compared to Q3 2011, we don’t think that this is a good time to invest in a stock that is so dependent on delivering better earnings numbers.
One of the newest additions to the trust’s portfolio was The Home Depot, Inc. (NYSE:HD). Is this how Cramer is choosing to play a recovery in housing? The rest of the trust’s holdings seem to be underweight that theme, and Home Depot has risen 64% in the last year as investors anticipate demand from new homeowners and people who have moved. In its most recent fiscal quarter, which ended in July, earnings were up 12% from the same period in 2011.This places the stock at 23 times trailing earnings and 19 times forward earnings estimates- perhaps a bit high. See our analysis of Home Depot and similar companies.
NIKE, Inc. (NYSE:NKE) was another of Cramer’s picks, and with a trailing P/E of 21 it also qualifies as a stock which needs to deliver good growth in order to prove fairly valued. Nike certainly has a number of growth opportunities in international markets, and at a forward P/E of 16 it seems to be creeping towards a reasonable valuation. However, earnings fell 12% in its most recent quarter compared to the same period in the previous year despite moderate growth on the top line. We plan to look at the stock in more detail and see just how much better we’d like it to do; it doesn’t look like a buy to us right now.