Momentum Tech Stocks Stage a Revival

 | May 19, 2014 | 3:15 PM EDT
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Prices matter. When a stock gets hammered, it becomes cheaper. When a stock does nothing, a CEO might be motivated to do something. These factors are dominating the action in the momentum stocks today, as the bounces are strong and seem very real. These highfliers that had been the bane of so many managers are skyrocketing all over the place.

Why is it happening? I think it's being fueled by a combination of price, takeover talk, the charts, a cessation of new deals, a lack of insider selling and, at last, a fear of being short.

Let me explain each.

First, stocks do get cheaper as they come down, even stocks that are outrageously overvalued. When you see Yelp (YELP) fall from $101 to the low $50s, you know that stock is being put on sale and has some intrinsic worth. Sure, you would have to pay some premium to the current $4 billion market cap, but it would be nowhere near where the stock traded just a few months ago.

That means that when you are at Yahoo! (YHOO) and you are about to get a ton of money from the sale of some Alibaba, the Chinese online giant, then you can debate the notion that owning Yelp might be exactly the kind of high-profile buy that would change perceptions of your company.

When I was searching for something that might have happened that triggered today's rally, I heard that Tableau Software (DATA), one of the stocks that had also been cut in half, is now the subject of takeover chatter. I have no idea if that's the case, but Tableau has a very good analytics business that could be a terrific fit for IBM (IBM) or SAP (SAP).

For the longest period, these kinds of stocks have been free-fire zones where the owners bailed and the short-sellers feasted. But what happens if there is a takeover? The shorts would be killed in these stocks. So you can see why a Tableau rumor could spread like wildfire, sending up the whole cohort. I have my eyes on Concur Technologies (CNQR) the $4 billion company that reported remarkable sales numbers recently -- again, not earnings but sales. Concur owns the travel space. Nobody has a better travel and entertainment records business. The company has made your handheld device your travel agent, and it could be integrated with (PCLN), TripAdvisor (TRIP) or Yelp.

This company is a natural for Oracle (ORCL) to buy if it keeps going down. You own this company, and you own a huge segment of an indispensable portion of the enterprise. Here's a stock that traded at $130. It's down to the $80s. Who knows how long it can stay down there if the momentum stocks put on a real show here?

It's not just a fear of takeover that's driving the move. Tomorrow, (CRM) will report, and from what I am hearing from Wall Street research firms, this company is going to blow away the numbers and give us a nice guide-up. Here's what I mean when I say "price matters." It is now obvious that at $67, where it stood after the last quarterly report, buyers weren't enticed, and shorts were emboldened. But at $52, that's a horse of a different color. Now I am acknowledging that the stock is expensive no matter what. I am stipulating that the market likes dividends and buybacks, and won't give them to you. Still, I think there are money managers who want to get some exposure to software-as-a-service, and at a substantial discount to where it was two months ago is mighty intriguing to many.

I have always said that this is an emotional group. Almost every stock in this cohort, with the bizarre exception of Zillow (Z), has traced out a gigantic head-and-shoulders pattern, and right now we are operating at the right shoulder of the chart. This is a very important juncture, because the right-hand side can be appear to be a deceptive plateau. Think of it like this: A stock is pretty much in free fall when it is tracing out the head. The right shoulder, though, produces stabilization and a tantalizing prospect that the move down is over. We are right there. I think lots of people believe this could be a launching pad. Remember, I only care about the fundamentals and valuation. However, those who don't know these stocks and just know the charts are certainly going to take a stab right here.

For the longest time, we have been inundated with initial public offerings that looked like the incumbents I talk about all of the time. That led to massive dilution and the need to sell the old to get the new. But when the deals started bombing, those who were putting in for the new ones and selling stock in the more established ones to fund the IPO purchases stopped selling. Then the IPOs themselves dried up to a trickle, right where we are now. Many that we had been expecting were put on hold.

With supply tapped out, and investors having no need to sell because there weren't new deals, the stocks stopped being diluted by new issues. Plus, the insider selling that had brought huge secondaries into the market dried up, too. Now I don't know how long that is going to last. We hear about a resurgence in deals beginning this week. Right now, though, the supply is in balance with the demand, and that makes for a much better environment.

Finally, some of the majors in the category started catching some bids for the first time in ages, namely Google (GOOGL) and Facebook (FB). Ever since the Twitter (TWTR) lock-up fiasco, there's been a drumbeat against the web. But Twitter has stabilized, albeit at a lower level, and I think that has contributed to a more benign environment for the long-term winners in the category.

How long will this era of good feeling last? I think we will know on Wednesday morning when we see the reaction to the quarter that unveils. If the stock goes higher on the quarter, I believe you are going to see a huge surge in all of the usual suspects: Concur, ServiceNow (NOW), Tableau, Workday (WDAY) and Medidata Solutions (MDSO). It could extend to the beaten-up biotechs, 3D printer names and the highly speculative fuel-cell plays

Sometimes you need to let the tape, or the action in the market, tell you what to do. Right now we don't know. I think that the best way to play it isn't to double down ahead of but to scale back into the short-covering and takeover speculation. I still believe that this market likes earnings per share, buybacks and dividends. As expensive as these stocks are compared with the rest of the stocks out there, the collapse didn't hurt the market. Now they are bouncing, and I think that if you like the stocks, you can hold tight. But if you are at all nervous, I'd trim right into the strength. 

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