Back to My Old Refrain

 | May 29, 2013 | 7:30 AM EDT  | Comments
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fe

The move in Treasury rates Tuesday was pretty breathtaking -- as any move is, percentage-wise, when it starts from such a low base. The action reversed a very strong morning -- perhaps stronger than it should have been, because end-of-month markups have been taking place three or four days before the end of each month, and I think the market had been in the process of a big one.

When we see a back-up in rates, we recall all other back-ups and remember that they are horrible for all stocks. I get that. It's what you should be thinking: The bubble in bonds has been popped, which spells the end of the rally in everything.

In fact, for now I don't even feel like disagreeing with that argument. I like being part of the fray for a moment until the market gets its bearings.

Because the truth is that the conventional wisdom has meant nothing since the Great Recession, and since the takeover of globalization and world fund flows. Everything that we have learned has been pretty worthless.

Lets just take the curious case of Bristol-Myers Squibb (BMY), my go-to equity that's meant to mock all of those who think they understand the way the market works, when they actually do not.

Here's a stock that has put on 15 straight points since writing off a $2.5 billion acquisition of Inhibitex, a company it purchased eight months prior. Inhibitex was thought to have a cure for Hepatitus C, a scourge that could be affecting tens of millions of people.

That write-off should have crushed the stock. But it didn't get hit for more than $2 because, at that point, its dividend yielded 4.5%. So it switched from being a growth stock to being a bond equivalent, and stopped in its tracks at $31 so people could use it as a CD with growth.

Then it started showing some leg for its new anti-cancer pipeline, and the stock climbed to $43. We sold it there for Action Alerts PLUS because we feared that it would have a terrible quarter and that the stock would sell off.

It did have a terrible quarter, and then it did sell off -- only to immediately run up another 20%. That wasn't because it was a bond equivalent, as now it yields less than 3%, but because business got better due to its pipeline. It was re-ranked as more of a biotech than a big pharma.

Throughout this period, I have continued to rail against people who have considered this market doomed with this simple admonition: "What's Greece, or Cyprus, or Japan or you-fill-in-the-blank have to do with the price-to-earnings ratio of Bristol-Myers?" I say Myers with a ridiculous twang because a southern broker first turned me on to the stock about 25 years ago and I never forgot the way he said it. I loved it!

Now, let me just say that my railing about the P/E of Bristol is repulsive, lightweight, totally lacking in rigor and completely in the face of the intelligentsia, the hedge fund honchos, the black-swan long-tail guys, the random walkers and everyone else who is 10 times smarter than I will ever be.

But I have one big advantage over them. I am right.

Which brings me back to the bond bubble. I think that if a company has good earnings growth and good revenue that might be improving, this bond-bubble pierce is going to be much less eventful than you think.

FirstEnergy (FE), which was annihilated Tuesday, does not have good earnings or good revenue growth. The real estate investment trusts that were crushed don't have great revenue or earnings growth, either. They just have stable distributions going for them, and those distributions are way too small right now vs. their stock prices.

But if you have a stock like Bristol-Myers that is getting a higher P/E because of something good happening at the company, that's going to matter.

Now, some people will take this squib as an endorsement of Bristol-Myers Squibb. I say, "Give me a break" -- and focus. That's not the point. I am saying that if you can find stocks of companies that are doing things right, they can be bought when this market comes down because of the panic over the bubbles. That's what it means when I say, "What does fill-in-the-blank have to do with the P/E of Bristol-Myers." It's not, "Go buy Bristol-Myers." (Excuse my tenor. I am sick of being misinterpreted in pretty much every article and many tweets and such, and it was a nice break for four days not to read the critics.)

So, here's my bottom line: Fret and sell everything if you want. That's what people will want you to do who are behind the averages or fearful of everything or falling back on dogma that stopped working a long time ago, yet who cling to it because they can't adjust. Do some solid panicking based on the bizarre spike in 10-year interest rates. Please do the obligatory freakout when some media person quotes some Fed official saying this must all end.

But remember that stocks do occasionally move because of direct actions taken by management. They do move because business can improve or get better. They can advance because people are fired and better people are moved in. The fundamentals do matter to all except for those who don't care to know them, or don't think they need to know them, or don't have the time to find out about them.

It is that troika of stooges I just mentioned that has been blown out by this rally a long time ago. They desperately need the market to go down in order for them to validate their positions, if not their existence.

So sell the market down for them. Let them be right for a change. Give them a solid chance to recharge their frayed or exploding batteries, and get some dignity.

Then we will look to see who is improving, what's gotten better, and what's gotten worse, and we will figure out how to value the future earnings of given stocks by their given prospects. Because I don't know what the heck all of that mumbo jumbo has to do with the price-to-earnings multiple of Bristol-Myers.

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