Cramer: The Value of Overvalued Stocks

 | Aug 10, 2017 | 4:22 PM EDT
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Is the market overvalued? Is the market dangerous? Is there too much complacency? Are various hedge fund managers right when they tell you there is too little fear and too much greed and uninformed buying?

It seems every few weeks someone surfaces, some old-timer or hot hand comes on and yells "Fire!" in the theater.

I get that, but you know what? The theater isn't crowded, although those who hear it certainly run out. Who wouldn't? The statements about the market being too high roll off the tongue so easily. I find them so easy to say myself.

I am not any more comfortable than you are with North Korea. I don't want them appeased and the president's rhetoric, which keeps stepping up, indicates no appeasement. That's frightening. I worry about the debt ceiling not being lifted because of such bad blood between the president and Senate Majority leader Mitch McConnell, which grows worse by the tweet.

But let me give you some conventional fear gems that I always hear. The market is so overvalued, look at Tesla (TSLA) . It's valued at a much higher price than Ford (F) or General Motors (GM) .

The market is so overvalued, look at Amazon (AMZN) : You can't even begin to make sense of how much people are paying for this stock. The darned thing sells at 243 times earnings.

The market is so overvalued, look at Netflix (NFLX) , which Disney (DIS) is backing away from. What happens if everyone backs away? That could be disastrous.

The market is so overvalued, look at Apple (AAPL) , which is up in a straight line.

The market is so overvalued we even have a funny name for the stocks that are too expensive, FANG, and everyone owns them.

The market is so overvalued that Jim Cramer has named his dog Mr. Nvidia, a sure sign of a top.

OK, let's deal with these head on.

First, is the stock market overvalued? I certainly think some stocks are. I can make a strong case that the big consumer-product companies are way too expensive. Many sell at 20 times earnings or more. That's very expensive for companies that are proud to be growing at 1%-3%.

But their dividends are much higher than Treasuries and Treasuries give you no upside, so what are we supposed to do? What is a buyer who wants income supposed to do? If you chose to hide in Treasuries while these stocks, stocks like Clorox (CLX) and Procter & Gamble (PG) , frolicked higher, should you say you were smart to take no risk and they were dumb to take the risk even though they made more money than you? How is that wise?

Some of tech is overvalued, of course. There is always a group of stocks that are overvalued, though. Always. At times, we have seen the biotechs be overvalued. At times it's been retail -- although not lately given the presence of Amazon.

At times we have seen the semiconductors overvalued. Other times it's been the software stocks. Or it could be the cloud stocks. They have all taken their turns at being overvalued.

But are they now? Most of the drug stocks I follow sell at about 15 to 17 times earnings. I don't think that's so outrageous given their growth. The semiconductors? It is case by case. Micron (MU) sells at five times earnings, which usually means the earnings won't be there next year. Lam Research (LRCX) sells at 11 times forward earnings. Intel's (INTC) at 12 times earnings. Expensive? I guess, if earnings collapse. Not otherwise.

Yes, the cloud stocks, Adobe (ADBE) , Workday (WDAY) , Salesforce.com (CRM) and now Microsoft (MSFT) are all expensive. But they have been expensive for years and years and years. At this time last year, the stock of Adobe was at $100. It is now at $145. Was it expensive at $100? Yes. Is it expensive at $145? Yes. Does that mean the 45 points you could have gained are unfair? Illegal? Stupid?

Are you a sucker to get those?

Or take Facebook (FB) . It was at $98 two years ago today. One year ago it was $126. Today is it at $167. Expensive two years ago. Expensive last year. Expensive this year. Let's do the exercise with Amazon. Two years ago today, it was expensive at $478. Last year it was expensive at $790. Today it is expensive at $959.

Were those points foolish and stupid? Should we regret making them? Should we have shorted the stock two years ago to show we are rigorous thinkers?

See, here's the issue. The most disciplined thing you could do with all these stocks was to stay long through all of the jeremiads by the graybeards to get out of them. You would have had to tune out all of those who said at each level that they are too expensive. You would have to ignore all the old-timers who came on and said these were dangerous. You would have had to hold your ears when someone said you can't touch them because of single-stock risk.

Yet somehow people who hated these stocks back then and hate them now -- and believe me, they did then and they do now -- tell us we are being too glib and too foolish and fanciful to own some of these stocks.

What do they want us to do? Own really cheap stocks like the department stores or the oils? Is that what we are supposed to be doing? Are we supposed to have been in Treasuries the whole time? Let me tell you, I am not allowed to own stocks and I own a ton of Treasuries. You think I am smart? You think I am a genius for sitting this out? If I listen to these stock blasters, I guess I am supposed to feel smart.

But I can tell you, I feel like a total idiot. I have loved many of the stocks I have just mentioned but I can't personally profit from them. So technically, I am just like the managers who come on and trash these stocks. I have a portfolio that is totally risk-averse and super-cautious by design. And because of that I have had to sit out Apple and Facebook and Amazon and Alphabet (GOOGL) , and let me tell you if that had been by design and not by contract, then shame on me. What's the point of avoiding these stocks? It's really what investing is about?

You can say wait a second, we know the market is overvalued, so get out now.

But we don't know when it will be cheap again. Maybe it won't be. In many years, the entire gains that occur happen in just a few days' time. What if those are the days we are out?

Or let's look at it another way. What about all the stocks that have gotten bids? Were they all overvalued? Was NXP Semi (NXPI) overvalued before its bid? Time Warner (TWX) ? White Wave (WWAV) ? Heinz (KHC) ? Reynolds American (RAI) ? Monsanto MON? Mobileye (MBLY) ? Would Charter (CHTR) be overvalued if it got bought by Altice (ATC) ? (Apple, Facebook, Alphabet and NXP Semi are part of TheStreet's Action Alerts PLUS portfolio.) 

I can go on and on and on but I keep coming back to one major issue.

Almost every winning stock I have mentioned is overvalued or was overvalued before its run. Perhaps the most overvalued stock of all time, at least by market cap, was Apple at $93. I can show you analyst report after analyst report about how this stock was going to be crushed as earnings would be down huge in 2017.

Instead they weren't and the stock went to $160.

Years and years ago, when she was running the trading desk at our hedge fund, Karen Cramer, who had no formal training whatsoever and didn't go to Harvard Business School or Wharton or Stanford or whatever, taught me something really important. She said that sometimes you needed the discipline to hold on to the stocks of great companies. The hardest money, she said -- and she was a tremendous short-seller, tremendous -- was the kind of money made when the big-time hedge fund managers told you to sell or short the stocks of companies that were about to have fabulous runs because they had invented something great or reinvented themselves or had become better or were run by geniuses who figured out how to make more money and execute well.

Or to put it another way, because she was pretty profane back then, "You listen to those rich people who come on air and tell you everything is too expensive because they have already made their money. We have to find winners and stick with them. So shut them down and listen to yourself. And if these stocks go higher and you listened to them, you should be fired."

So, listen to yourself. Do your own work. But understand that it takes a ton of discipline and conviction to own a Facebook or an Amazon or an Apple through these runs, and you aren't an idiot if you did. You're smart. In fact, I have one word for you. Congratulations. 

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