Beware of Your Stock's Co-Shareholders

 | Mar 24, 2014 | 2:16 PM EDT
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We have met the enemy, and the enemy is ourselves, or at least our fellow shareholder. That's what is playing havoc all day with the markets, and it's impossible to pin down the end of the run, at least for now.

Before I explain why that is, I have to note that, once again, I do not like "the action" in the stock market. I don't like that the initial public offerings are happening fast and furiously. I don't like the anger with which any cautious comment is being met. I have been on the defensive for days on end about my view on the frothy market.

On @JimCramer this past weekend, my Twitter feed became a free-fire zone for people who blame me for the reversal in the stocks of companies such as Plug Power (PLUG) or Fuel Cell Energy (FCEL) or the 3D printing stocks. Believe me, I couldn't care less about those. I want every stock to go higher, because I want home-gamers to make money. But I have a two-fold job, to help you make money and to help you lose less money when things turn bad. That's why I emphasize being diversified, something that we know is an anchor to leeward when some stocks in real hot areas are running wild.

And it is one of my missions to show you what has worried me before. Keep in mind that not much has worried me during the historic run. It might be painful to the haters, but the show has been pro-bull-market for a very long time. But I recognize certain qualities of the market that are a threat to that bull, and we have a ton of them right now. First, we are ignoring some actual earnings events. One of the key underpinnings to my belief that long-term growth may be returning to the world is a sense that China and Europe are getting better.

We lost China about six months ago. It continues to get worse. Now, while President Obama is in Europe, we have the possibility of some real sanctions cutting into European growth. That was not in the cards for me, but it sure is now, especially when earnings season beckons. We know that the Russian standoff may have nothing to do with the price-to-earnings ratio of Bristol-Myers Squibb (BMY), but Russia is a big market for many of the industrial companies and even the consumer products companies, so unless tensions cool, numbers for those companies could come down. That matters.

And then there's what ails this market right now: your co-shareholders. Or more accurately, your co-renters, because I am not seeing a lot of owners staying in their stocks if they are falling. I am seeing them walking away from their deposits and moving on as quickly as they can. They are skipping rent and heading out of town before the edifice collapses.

One of my most cherished themes in all my writings and on television is that stocks, at times, have nothing to do with the underlying business. The companies can get totally lost in the shuffle of the maw, what gets thrown in and spit out of the market. What's dumped and what's kept.

Most investors, particularly most of the commentators who come on air, do not want to deal with the divergence. They want to regard everything as being in synch. So if there is a big decline in one of the cloud stocks or in a biotech or in a data management and analytics company, they claim that something is wrong with the company.

I have tried to demonstrate that this is empirically false, saying, for example, that nothing is wrong with (CRM) the company, even as the stock has been pounded relentlessly from its $67 top. I have tried to defend Gilead (GILD), saying that the sales for its hepatitis C drug are good and that we should not be concerned about congressional meddling in the pricing of the drug, because the insurance companies are probably thrilled to pay it, rather than not treating the disease successfully. It's done no one any favors, even as the stock did bounce, at last, today.

But right now, this market is about renters fleeing, so let's pick a real neutral stock, one that reported a quarter that was among the best of any company I follow, a company that is in one of the hottest areas. The stock is Splunk (SPLK), which makes web application software. The company's software collects and analyzes data that is generated by websites, desktops and, most important, handheld devices. No one doubts that it is among the best companies out there and that it is in the sweetest of sweetest spots: big-data analytics, which is growing by leaps and bounds.

Splunk has also got incredible revenue growth, 52%, and licensing growth of 47%, ensuring that future numbers will be made. That's among the fastest growing of any company I follow. Of course, it's not making money yet, but I take it as a given that that's because the opportunities are too great, and it has the Amazon model of grabbing share of a $160 billion total addressable market, the biggest and among the fastest-growing of all tech applications.

The stock is up 9% for the year. That's reasonable, right, given that growth?

But what is it doing today? It's down almost 12%. Why? Several reasons. First, there has been relentless insider selling, relentless, and that has been scaring the heck out of people. Second, the gains are still gigantic: This stock was in the $50s four months ago, and it's still at $75 after this pasting. That says, "It's not too late, you can still get out." Third, the chart has gone from a relentlessly positive pattern of higher lows and higher highs to one that looks like Everest, as do so many others, meaning even after this horrendous decline, it has much further to fall. Consider us at Basecamp Three out of four basecamps on the way up.

So all of your fellow shareholders just want to get out before they give up their gains, because they don't care about valuation. They just cared about momentum, not just of the earnings but of the stock. The problem now for the analysts is that they can't come up with a multiple to anything that makes it cheap after this decline. They can only talk about how big the opportunity is, and when a stock like this is in free fall, with no buyback, no dividend and no earnings, there's nothing to break it until the sellers are exhausted.

Now let compare Splunk with another company that has similar analytics, some would say superior: IBM (IBM). Here's a company that sells at 10x earnings, with a 2% yield and a voracious buyback that is flat for the year. It was at $213 a year ago. Now it is at $188. Warren Buffett is its largest shareholder, and he likes it because of its buyback and bountiful cash flow to continue buying. The revenue growth is nil or even negative, but if you get a turn in the world's economy, you might get 1% to 2% percent revenue growth that could cause earnings to crush the estimates. How's it doing? It has held up better than just about any other stock, and it is up nicely today.

The contrast is simple: IBM's shareholder base is happy and confident. The Splunk shareholder base is on the run. I would say that Splunk may not be a good buy until you see the shareholder basis stabilize, and we don't know when that will be. IBM? It's stabilized right here.

Yep, it's all about you co-shareholders, the renters and the owners. The former are restive and scared, and the latter are comfortably and patient. If you own Splunk, the former are your enemies. If you own IBM, the latter are your friends. 

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