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One of These Growth Stocks Is Not Like the Others

Sunday - 4/7/2013, 8:11pm  ET

A fun way to find fast, emerging stocks is to review Fortune's annual list of the fastest growing companies. The list tracks both earnings growth and revenue growth. It is a great way to find smaller, speedy, lesser known growth stocks.They're risky and less proven, but the upside can be tremendous. 

But in looking at the most recent "top 20," one can't help but notice that one name on the chart seems a bit odd. Below I've compiled a few names from the list. See if you can guess which one of these is not like the other. 

Company Earnings Growth Revenue Growth Growth Ranking
Baidu  99%  72%   3
Lululemon Athletica  81%  45%   6
Apple  70%  52%   8
3D Systems  272%  26%  12

Wait a minute...Apple?

Yes, Apple is not like the others. It doesn't have the hype of Baidu, the small capitalization of 3D systems, and (honestly) the valuation of any of them. In fact, amidst stocks of any size and sector, Apple's valuation is very low.

Here's how our four companies stack up on valuation, compared to earnings. Both earnings of the past 12-month period (P/E) and forward estimates (PEG) were considered.

Company  P/E PEG Value Ranking
Apple 9.8 0.5  1
Baidu 18 0.5  2
Lululemon 35.5 1.3  3
3D Systems 65 1.23  4

Trying to rationalize non-sense

There must be some reason that Apple trades like a utility company while the three other companies trade like growth stocks, right? Perhaps things are just going so poorly at Apple, and there is so much negativity that the future must be much worse than today? After all, a fresh released survey showed that Apple was trailing Android in US smartphone market share again. So are things that much more rosy at Baidu, Lululemon, and 3D Systems?

In a word: no.

1. If we're to judge firms by market share, Baidu only has a 3.5%  global market share in the one market it operates in (search). Operating in one (very competitive) market also means that Baidu is much more dependent on that single market; it lacks the safety net through product diversification that Apple has.

2. Lululemon recently suffered a massive product recall (and PR nightmare) because their pants were see-thru. Yes, this was an eye-opening revelation (sorry). The debacle cost the firm $67 million and resulted in the departure of a top executive.

3. And for all the promise of 3D printing (and 3D systems) the company is experiencing a (slight) slow down of its own. Growth isn't expected to continue at the same pace, with next year's earnings growth projected at around 20% (less than its P/E multiple). 3D is a good company but with 30% short interest, a largely unpredictable market (3D printing), and a recent quarter that just "met" expectations--it carries some inherit risk.

So that leaves us with Apple. Apple, whose latest quarter saw 18% growth in revenue, 7% growth in earnings, and cash reserves on their way to a staggering $160 billion. Is it really declining? Is it really done? Over? And should we really be freaking out at the latest market share report, considering that another one (just days later) showed gains?

Again, in a word: no.

Troubling tea leaves

The point of this exercise wasn't to throw stones at Lululemon, Baidu, or 3D Systems. They're all strong, fast growing, companies of "tomorrow" and deserve high valuations. The point of this exercise was to add some perspective to Apple's valuation.

Apple has been hit by a wave of negativity and analyst downgrades. But that's the trouble in "reading tea leaves," at the end of the day these "predictions" are just opinions.

Analysts are human, they follow each other (on the way up, and on the way down). In the past month Apple has been downgraded five times (most recently from Goldman Sachs). Can you predict the future? If not, how can anyone else?

In fact, analysts get it wrong over 50% of the time. Since we can't tell the future, we need to bank on the recent past.

Apple is trading near its 52-week lows. Unless its future is dramatically (think 30% EPS decline) worse than its past, it's a value.

This article was originally published as One of These Growth Stocks Is Not Like the Otherson Fool.com

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