The Magnificent Seven

 | Feb 04, 2014 | 3:49 PM EST
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This market has turned into one very demanding animal. The reason so many days have been so tortuous is that the market has changed its tune since the year began. Gone are the days when if you beat the bottom line it was enough to send your stock higher. Gone are the days when you beat the top line and your stock goes up. Gone even are the days when you beat the top line, beat the bottom line and raise guidance, and the stock goes up. Now you have to best the earnings numbers, top the revenue numbers, guide dramatically higher and have a stock that's got low expectations or is heavily shorted going in.

That's right, the gauntlet is as demanding as I have ever seen it.

Let's go over what has worked this year, what is having a terrific move higher and what's emblematic of success as we know it.

Let's go over Under Armour (UA), Netflix (NFLX), Wynn Resorts (WYNN), Facebook (FB), Google (GOOG), Chipotle Mexican Grill (CMG) and Michael Kors (KORS), because those are all stocks that flew to new highs during this period, defying the gravitational pull that so brought so many other stocks crashing to earth.

We knew a bunch of things going into Under Armour's quarter. First, we knew that apparel has been a terrible place to be, miserable, just the weakest of the weak. Second, we knew that Under Armour traded at more than 50x earnings, a ridiculously high multiple. Fifty times earnings for gym clothes! The sharks were circling on this one, betting that when, not if, the shortfall occurred, the stock would be cut in half.

Oops, turns out the company delivered earnings and sales that were substantially in excess of even the highest analyst's estimate, and it did so with what I have been calling "stealth tech," simply better clothes that keep you warm no matter how cold, and clothes that keep you from sweating no matter how hot -- technological marvels. Plus, it's expanding internationally, aggressively in China by the way, with a management team that makes the Seattle Seahawks look like sissies with their take-no-prisoners attitude. I went to hear Kevin Plank, the CEO, speak the other day, and I wanted to run through a brick wall for the guy in the name of a sweatshirt!

Oh boy, were the long knives out for Netflix. Going into the quarter, there were outrageous expectations for sign-ups and sales and talk of the company actually losing money. So when it reported sign-ups at an accelerating rate and guided up from there, those who were betting against the company had no case. That meant they had to buy it back, just a total spoiled short. There wasn't a thing wrong with that quarter. Nothing. It was pure as the driven snow, a textbook entry in this library of stocks that can go higher.

So it soared, and it can keep soaring, as the $25 billion market cap, like the $11 billion market capitalization for Under Armour, is too small for the opportunity.

Wynn Resorts was supposed to blow up this quarter, not blow the estimates out of the water. Wynn did it by sticking it right in the faces of the China doubters with huge Macau numbers, as massive numbers of Chinese came to gamble. How many? Enough for Wynn to announce huge expansion plans. Wynn was supposed to be the poster-buy short for China. Instead it was the poster-boy long, as it announced a gigantic expansion plan to meet the needs of all of these Chinese gamblers.

You had a quadruple whammy of hurdles Wynn had to jump: better earnings, better sales, a large guide-up, gigantic expansion plans and a chart that looked like it was about to roll over big time. Every box had to be checked, and it was. It was almost as if the great Steve Wynn looked at everything that can make a stock go higher and nailed each one and therefore gaffed the bears with a machete.

What did Facebook do with that quarter? How about substantially exceeding earnings and sales, guiding well beyond levels thought possible and explaining that there is accelerating revenue growth to come from the implementation of a bunch of new programs that both advertisers and readers love? Plus Facebook is one of those companies that fit my holy trinity of dominating social mobile and the cloud, and it is looping in connectivity. I still think the stock has much further to run.

Google is no different. You go over that call, ex the sale of that laggard Motorola division, and you hear about a company that continues to separate itself from the pack of all other web companies, save Facebook. I think Google, after this quarter, can write its own ticket. If it wants to be the fifth network after ABC, NBC, CBS and FOX, it can in a moment's notice. If it wants to buy the entire NFL football package, it can. If it wants to charge a nice chunk for watching YouTube, it can. If it wants to raise rates, it can. If it wants to become the stock exchange for the world, wiping out all of the others because it would be more efficient, it can. After that quarter, I don't know what Google couldn't do if they set their mind to it.

Most restaurants this quarter struggled mightily to show positive comps, meaning that their same stores grow business year over year. We cheered when Costco (COST) and Starbucks (SBUX) made it to the magic 5% level.

And then Chipotle Mexican Grill reported that it had 9.3% comparable-sales growth. When I saw that, I thought it was a typo. Maybe 0.93%, or 3.9%, something inverted? Accelerating same-store sales growth -- no one that I follow had such a thing. Not only that, the company did this largely because of more people coming to the stores, at a time when its only real marketing is the brilliant "Farmed & Dangerous" YouTube programing featuring my new Tweet-mate Buck Marshall. Chipotle is riding the health-conscious consumer wave that I write about in Get Rich Carefully, and it can charge much more if it wants to, and I am convinced it would lose only a handful of customers. Needless to say, it obliterated the shorts.

But not as many as were obliterated by the amazing numbers that Michael Kors put up this morning. We thought that handbags and accessories were losers this holiday season. We thought that high-priced handbags, such as those from Coach (COH), had been a shrinking category. But U.S. retail stores can't run at a plus-24% same-store rate and European stores at a 73% pace unless you are executing brilliantly, which Kors most certainly did.

Now, the mere fact that this market requires that you overcome such a high bar -- better earnings, better sales, better guidance, a high short position filled with hedge funds betting against you -- tells you that many more companies' stocks will be snared at lower levels unless they can reach this pantheon. But here's what we now know. This market is very oversold. I fear that this bounce is nothing more than a bounce, because the data are so corrupted.

Nevertheless, the next time we get hammered, I want you to think about these companies, I want you to bet on these Magnificent Seven stocks that survived and thrived when other stocks are dropping like flies. I still don't trust this market. I still don't trust the sellers who seem to have very little conviction after this huge run, but Under Armour, Netflix, Wynn Resorts, Facebook, Google, Chipotle Mexican Grill and Michael Kors are now the best of the best, and if there is to be a snapback rally, these will be the new leaders. 

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