In Fact, There Is No Bubble, Part 4

 | May 12, 2014 | 3:00 PM EDT
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Note: This is part four of a four-part series. Please see parts one, two and three.

Aside from software-as-a-service and 3-D printers, discussed in part three, there are other areas going through this incredible-shrinking exercise. Tableau Data (DATA) and Splunk (SPLK), for example, had prided themselves in being fast-growing big-data plays. You can tell now that the market has no idea how to value Tableau, at $3.8 billion with 80% growth, nor the fast-growing Splunk, with its $5 billion in market capitalization. All the market does know is that the insider selling is so heavy, it wants nothing to do with these.

So the stocks go lower.

Nowhere has this been more egregious than with the poster boy of the moment: FireEye (FEYE). This company, with its gigantic insider selling, has now seen its shares fall from $97 to $26 in pretty much of a straight line, even as the company has given the market the revenue growth it wants. In a week's time, another 90 million shares will come off lock-up, and we don't know whether these insiders would sell. But if you look at the last few transactions in the Internet-security space, you know the stock will not be able to get north of these levels. In fact, this $3.8 billion stock could go down another 25% before it gets to the average price for acquisitions in its space. Because it has no earnings to speak of, it might not be done going down.

Now, in defense of all of these companies, they do have fast-growing revenue and can be praised for that.

That's not something you can say about Twitter (TWTR), however. Here's a company that embodies pretty much the worst of the era: a declining rate of revenue growth, coupled with gigantic insider selling along with a stock that management tells us should be valued by timelines and monthly average user growth, as well as tweets per television event. That's right out of the 2000 playbook, which is why I think it is so hard to value this stock.

Twitter is worth more to others, namely an outfit such as Facebook (FB), or Google (GOOG), or Yahoo! (YHOO). But it can't be bought at these heights. That's just too costly. I feel the same way about the fast-growing Yelp (YELP) and LinkedIn (LNKD). These stocks are still valued high to be bought by acquirers and earnings-per-share seekers alike. They are very, very hard to value -- which means, again, that they will most likely go down, not up.

Still, though, it is easier to value the aforementioned companies than it is to values those that had been growing at the fastest pace of all: the Internet-commerce plays, ChannelAdvisor (ECOM), the Rubicon Project (RUBI), Rocket Fuel (FUEL) and Millennial Media (MM). These are four companies that compete with Google in the arena of helping customers get the best bang for their advertising buck. The problem is that there are about a half-dozen private companies that want to come public that are well-funded. Plus, Google is putting immense pressure on them with deals that it is cutting right now.

I have no idea how to value these companies at all. I am letting the insider selling dictate them. They all feel like falling knives to me.

The only stocks that are worse than these? Every single tech initial public offering from 2014, especially the software-as-a-service plays. I think these stocks, which snuck in under the wire when the window was closing, seem almost like a carbon-copy of 2000 IPOs. I bet many will meet the same fate over time.

Now, I know that all of these companies aren't going to pull down the rest of the market. They are too small. But they are succeeding in pulling down two of the best companies out there: Google and Facebook. Unlike all of the other companies mentioned here -- with the exception of Oracle (ORCL) --these two are immensely profitable, and their shares are selling incredibly cheaply when it comes to earning-per-share growth.

Did you know that Google sells below a market multiple on 2015 earnings even if you don't back out the cash? Did you know that Facebook sells at only a slight premium to the market on 2016 earnings? This is all despite the obvious dominance that these two companies have.

Now I know that they, as well as Amazon (AMZN), are soon to be pressured by Alibaba's upcoming IPO, which has faster growth and, perhaps, more profitability than either company. But, given that the multiples are already so low, it makes little sense to me that all of these revenue-per-share companies should collapse the earnings-per-share companies.

It doesn't matter, though. They aren't viable short candidates, unlike so many of the hard-to-value earnings stories. But they are real hard longs to own.

Now, this identical exercise that I have done here for tech can be done almost exactly for the biotechs. The difference is that these names weren't being valued by revenue per share -- they were being valued by early-stage pipelines and the need for the big pharmaceutical companies to buy them in order to get new drugs.

But they have suffered in similar fashion to the techs, because the stock market no longer has a taste for its biggest biotech members: Regeneron (REGN), Gilead (GILD), Celgene (CELG) and Biogen Idec (BIIB). Instead, the big pharmas, because of all of the mergers, have taken center stage.

I think the pendulum will swing back toward the big four biotechs. But the mid-tier ones others -- such as Biomarin (BMRN), Alexion (ALXN), Pharmacyclics (PCYC), Jazz (JAZZ), Isis (ISIS), Seattle Genetics (SGEN) and NPS Pharma (NPSP) -- can't seem to get their footing. That's because they, too, are now being valued on earnings per share, and many of these don't have a lot of earnings with which to value. But they are a heck of a lot better off than the 26 early-stage biotechs that have come public just this year alone. Don't worry, though. These have already shrunk so much in the last few weeks that collectively they are only worth $6.2 billion.

Now, away from the techs and the biotechs, you will find an astounding uniformity among stocks. Shares of the companies that we would describe as U.S. companies, with worldwide businesses, all tend to sell between 18x and 15x earnings. That range is heightened if the dividend yield is near or above 3%, even if they are soft- or hard-good related. It's incredible how lockstep things are.

The only variables above these companies are a handful of high-growth stocks and the aforementioned utilities and real estate investment trusts, whose stocks seem very overvalued to me. I guess there aren't a lot of values in those value plays.

I just can't fear a market that's being valued on traditional metrics like earnings per share, especially when interest rates on U.S. Treasuries are so low that they're making dividend stocks sell at a premium. Sure, if dividend yield is the only way stocks are being valued, that's hazardous -- because, if rates turn higher, there will be some real bloodletting. This explains my aversion to the real estate investment trusts in particular, whose shares are already way too high and barely buoyed by their dividend yields.

But most stocks are trading up these days, because these companies' earnings are accelerating and they also have a modicum of revenue growth. The best of these companies have revenue and earnings growth, as well as dividends and share buybacks.

So, here's my bottom line: If you think the "market" is overvalued, you are just plain wrong. If you think there is a bubble that's inflating, you are obtuse. If you think that the bleeding from the revenue-per-share stocks is going to hurt the earnings-per-share stocks, you are simply not doing the homework. It is having the opposite effect.

Finally, if you want to bottom-fish in the stocks where valuations are difficult to find, all I can say is, good luck. Until you see takeovers and insider buying, I think the path of least resistance for that ever-shrinking cohort is in one direction: down.

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