We have all heard the saying, “Buy low, sell high,” but the mystery still remains as to what that “high” or “low” really is. That’s something that people could argue to their grave, but we will likely never know the answer until we see the results through a pair of spectacles known as hindsight. These next few companies have all increased by impressive amounts YTD, but will they continue in that direction long-term?
As you can see, most of these companies have more than doubled the S&P 500 so far this year. Tiffany & Co. (NYSE:TIF) is a company that has firsthand knowledge of the ups and downs of the market. It was founded in September of 1837 and went public in 1987. With a market cap of $8.8 billion, the company has seen revenues increase eight of the past ten years for a total of 213%. In 2012, the stock was down nearly 12%, and it currently shows a P/E of 21. Its free cash flow (FCF) yield of .4% doesn’t seem very appealing for bargain investors. Growth investors may find Tiffany slightly more appealing, however I wouldn’t expect to see growth like we have so far in 2013 continue for long.
Signet Jewelers Ltd. (NYSE:SIG) jewelers shows very similar revenues to those of Tiffany & Co. (NYSE:TIF), however its market cap is $3.8 billion smaller. The last time the stock decreased over the period of a year was in 2008 when it lost 68.92%. Since 2003 Signet’s revenues and FCF have increased approximately 42% and 234%, while its gross margins have increased from 17.2 to 38.3. It’s always good to see three metrics increase over time. Although its P/E could be lower, it’s a solid 15.1; the forward P/E is 13.8; and its 3.7% FCF yield offers a much better bargain than its competitor. With a fair P/E, a reasonably average FCF yield, and revenues increasing consistently, I would be much more likely to invest in a company like Signet than Tiffany.
Electronic Arts Inc. (NASDAQ:EA)’ decision to work on a narrower game slate may bode well for the company if these games are successful. However, they are in a very competitive market with companies such as Nintendo, Sony Corporation (ADR) (NYSE:SNE) and Microsoft Corporation (NASDAQ:MSFT). Revenues have increased 67% in the past decade, but its earnings per share have been in the red for four of those years. EA’s outrageous P/E of 32.6 may raise concerns for investors while its 4.7% FCF yield is the cheapest deal yet.
Electronic Arts Inc. (NASDAQ:EA)’s 23.5% YTD stock increase is yet to make up for last year’s loss of 29.5%. Caution is the one word I would use for investors when describing this stock. When we know a little bit more about the success of EA’s narrower game slate, we will know more about its investment opportunities.
Will The Walt Disney Company (NYSE:DIS) make my “dreams come true”? It appears they offer the best opportunity for an investor like me. Its market cap of $102.4 billion is the largest of any of these companies. Revenues have increased nine of the past ten years for a total of 56%. Its gross margins have more than doubled in the same time, while earnings per share have the same track record as revenues. The stock has increased 107% since its last decrease of 28.6% in 2008. Morningstar shows Disney’s P/E 6.6 lower than the industry average, and its FCF yield is 4.1%.
I would like to think that Disney would continue its upward trends. While it may not make my dreams come true, I would be more comfortable investing investment dollars here than any of the previous companies.
Pandora Media Inc (NYSE:P) has increased its revenues by 2,247% since 2009, but that probably isn’t the whole picture. Its earnings per share have decreased annually since then, and its gross margins are nearly half of what they were at that time. For investors looking for a high risk, high reward investment, this might be their type of deal. For investors like myself, there appears to be too small of a track record and too much competition in the industry. It’s a new company with only about a quarter of the users that Apple’s iTunes currently has. For me, there simply isn’t enough reward for the amount of risk in this narrow-moated company.
The Foolish Conclusion…
Now, I understand there are different types of investors in the world — and I am not the best. However, there is really only one company we have discussed that I would seriously consider buying into. Disney seems to present the best opportunity for investors, followed by Signet. The other three are simply too risky or have too many unknowns about them for my liking. The figures for Tiffany & Co. (NYSE:TIF), Electronic Arts Inc. (NASDAQ:EA), and Pandora just don’t add up to comfortably invest in them.
The article Will YTD Success Bode Well Long Term? originally appeared on Fool.com and is written by Tyler Wofford.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
