There's Nothing Wrong With Your Company

 | Mar 21, 2014 | 7:43 AM EDT  | Comments
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"Jim, what's the matter with my stock? What's wrong with -- ?" And then fill in the blank.

That's what I am hearing right now about tons of the high-price-to-earnings-multiple stocks as the market takes a fancy for the cheap and expunges the expensive. It's all part of one of the biggest rotations I have seen in years, and you need to know that there's nothing wrong with your company -- there's just something wrong with your stock.

Right now, at this very moment, the consensus is shifting. There is a belief that the economy is getting better and that, therefore, it is time to rotate into the stocks of companies that are about to produce sharply better-than-expected results because they will be aided by a stronger economy.

This kind of move is age-old, except it's been so long since we have seen a genuine economic expansion that it's taking a lot of people by surprise. They cannot understand, for example, how come a name like Salesforce.com (CRM) or Workday (WDAY), two incredibly good companies, can have stocks that go down while companies with prosaic, unexciting and much slower-growing businesses -- like Hewlett-Packard (HPQ) and Microsoft (MSFT) -- can have such red-hot stocks.

I know this is a really hard thing for people to get their arms around, and it is one of the main reasons why I wrote Get Rich Carefully. I don't want people to panic and blow out of shares simply because of damage in the stocks, and not in the companies they represent.

It's so seductive, though. So, let's take Hewlett-Packard for a moment. As this stock goes up, we are getting snippets of good news that many think are driving the story. For example, as this stock has rallied from the $20s to the $30s, I have heard that there are some reasons explaining it that are particular to HP, such as the company's decision to boost its dividend or a brand new three-dimensional printing initiative.

While those can always play a role, believe me: These factors are totally subordinated to the simple fact that Hewlett-Packard is considered a gigantic play on the growth in gross domestic product, and this normally slower-growing company is about to have an acceleration in its sales and earnings.

Why do people think this could happen? That's complex, but ultimately many investors put their faith in the Federal Reserve, and Fed Chairwoman Janet Yellen has made it pretty clear that things are getting better. That, more than anything else, is what's driving this stock. If you get more business formation, and more growth at the enterprise, then more computers will be ordered and a slower-growth company will put up surprisingly better numbers.

It's not just Hewlett-Packard. Companies like Intel (INTC) and Microsoft are similarly positioned. If Hewlett-Packard is selling more equipment, then the chips inside will be more in demand, and those chips invariably come from Intel. We may think of Microsoft as a loser in the big battle against Apple (AAPL) when it comes to people buying personal computers. In fact, though, Microsoft's biggest cash cow comes from its enterprise business -- and if the economy's getting stronger, that business is going to grow more quickly than it has been. Even Oracle (ORCL), which was widely hailed as reporting a terrible quarter earlier this week, is now seeing its shares barely down because of this weak-company, good-stock phenomenon.

This kind of logic is popping up all over the place. You may have noticed this sudden jump put on by AT&T (T). That makes sense, too, if you use this identical prism, because one of AT&T's biggest businesses is in the irreplaceable landlines that still must be installed in corporate offices. As long as companies aren't being created, and as long as there's no additional hiring, demand for this prosaic business will remain in the doldrums. But if the environment gets better, than you are going to see a very big increase in a business, accompanied by very large gross margins. That's what's behind the move.

Now, how about the other side? What's ailing, for example, Salesforce.com? Here's the answer: nothing -- nothing at all. This company will grow in that same consistent 30%-plus category, one of the rarest of rare breeds. But at this very moment that kind of consistent growth doesn't have the appeal, say, of a company like Microsoft, with the episodic possibility of a big jump in orders. That's right: You must always remember that managers crave not just growth, but the fastest growth year-over-year, and the year-over-year growth at Microsoft might be much larger as a percentage than the year-over-year growth at Salesforce.com.

Remember, managers not only desire the big year-over-year increases in earnings per share that economic boosts can give their companies. They also like to buy that growth on the cheap -- and, right now, stocks such as Intel, Microsoft and Hewlett-Packard are much, much cheaper than names such as Salesforce.com. That's because they sell as a multiple to earnings, and not sales, and their multiples to earnings are much cheaper than that of the average stock. So these managers are getting super growth at a very reasonable price.

Now, this kind of rotation applies to all sorts of different stocks. Have you noticed the decline in the most highly valued biotechs? I know you think of these companies as healthcare entities, which is indeed correct. But for the purposes of the stock market, they are simply consistently fast-growing companies, similar to a firm such as Salesforce.com or Workday. Right now if we were to play, "Am I Diversified?" I would be tempted to tell you Celgene (CELG) is literally the same kind of company as Salesforce.com -- one that can "do the number" regardless of the economic environment.

But that's precisely what's not in demand right now. People want something that can have inconsistently strong growth and might end up looking cheap when that growth occurs. So consider the conundrum of the stocks of two cyclical companies, meaning companies tied to the economic cycle that can't "make the numbers" without worldwide growth: Caterpillar (CAT) and Nucor (NUE).

I got a call from a Mad Money viewer yesterday who asked a great question: How can Caterpillar shares possibly go up in the face of some truly terrible monthly inventory numbers that would imply that the company's going to have a weak quarter? Right now, though, everything is stood on its head. And if the economy heats up, like Yellen and company think it will, then that inventory will become manna from heaven.

It's the same deal with Nucor. Here's a company that issued a pre-quarter warning, and the stock actually went up on the day. Counterintuitive? Not at all, if you think like a portfolio manager who wants to play a cyclical leveraged to worldwide growth. It's the exact right place to be.

So when does this rotation end? We don't know. If the economy genuinely expands, it can go on for some time. But history dictates that eventually the consistent growers get too cheap to ignore, while the inconsistent industrials get too expensive. Then those industrials fail to deliver the big beats they are supposed to, either because the economy weakens or because the economy is so multinational that it's the wrong call to just look at the U.S.

Either way, please remember, there's nothing wrong with your company. Sometimes bad things happen to good companies' stocks. Right now just happens to be one of those times.

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